We are in "unchartered territory" with the coronavirus, or COVID-19, according to the the World Health Organization's Director-General Tedros Adhanom Ghebreyesus.
The virus has been documented in more than 70 countries and territories across the globe — with over 90,000 documented cases — and is being blamed for more than 3,000 deaths.
The epicenter of the disease is the global manufacturing hub of Wuhan, China, a critical part of the world’s second-largest economy. The continued spread to other major hubs further impacts the global economy and supply chains in ways not seen since the SARS outbreak in 2003.
Factories in the affected regions are idled or working below capacity. Additional stressors include the increasing impact on both foreign and domestic travel. The Centers for Disease Control and Prevention has issued warnings and alerts regarding various affected countries, and recommends that all nonessential travel to China, Iran, South Korea and Italy be avoided. Likewise, certain travel restrictions have been imposed by many businesses, including manufacturers such as General Motors, Ford Motor Company, Fiat Chrysler Automobiles, Volkswagen, Amazon, Twitter and Nike.
Given the spread of the coronavirus and impact on manufacturers in affected regions, there is an increased threat of disruption to worldwide manufacturing supply chains across many sub-industries, including automotive, technology, solar, and fashion and apparel, to name just a few. The effects of the diseases extend far beyond the borders of China. According to Fortune.com, 94% of Fortune 1000 manufacturers are being hit with disruptions as a result of the coronavirus. If companies can’t get needed components to manufacture products, the affected supply chain quickly grinds to a halt.
As the outbreak continues to develop, manufacturers should consider actions to mitigate their risk and prepare for how they’ll deal with material shortages and other disruptions. The first step is to establish an interdisciplinary crisis-response team that will work together to identify, assess and manage the risk. The team should include, at a minimum, personnel from commercial (sales and purchasing), operations, quality, finance and legal. An effective response plan should address at least the following:
Supply-chain operations. When the response team identifies mission-critical materials and parts, companies should communicate with suppliers regarding inventories, parts banks, and the potential onboarding of alternative suppliers. They should also review their purchase and supply contracts to determine which force majeure rights and obligations may apply. Any party seeking to invoke force majeure provisions in its contract usually must show that there are no alternative means for performing under the contract, as increased costs alone will not be sufficient to prevail on a claim of force majeure. Companies should also evaluate, for those customers with a greater risk of nonpayment (for example, an end-customer who may suspend production under a certain program due to other parts or labor shortages), whether to enforce remedies available to a seller of goods under the Uniform Commercial Code, including demands for adequate assurance of payment or a change in payment terms.
Merger and acquisitions agreements. Companies that are parties to definitive M&A agreements should review any Material Adverse Change (MAC) clauses, and representations and warranties, to assess the potential impact of the coronavirus on their transactions.
Reporting requirements. Public companies should review and make accurate disclosures, in cases where affected business operations trigger a reporting requirement. All companies that are parties to credit agreements and other financing arrangements should review existing MAC clauses and financial covenants to determine whether disclosures are required.
Insurance. Companies should review insurance policies to determine possible coverage in the event of a business disruption, and comply with all applicable notice requirements.
Employment concerns. Under the Occupational Safety and Health Act (OSHA) and similar state laws, employers have a general duty and obligation to provide a safe and healthy work environment, even when the work occurs outside the employer’s physical premises. Furthermore, under these health and safety laws, employers must not place their employees in situations that are likely to cause serious physical harm or death. However, it’s also important not to overreact by implementing broad-based bans and making business decisions about employees that aren’t based on statistical realities, since that could invite liability for the employer under laws that prohibit discrimination based upon disability (perceived or real) and national origin, among others.
In summary, it’s important for manufacturers to take steps now to mitigate risk to their supply-chain operations, as well as the economic impact of the coronavirus. Prudent manufacturers will prepare — and not panic — to achieve the best outcome.
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