60 BriefingGlobalisation The EconomistMay 16th 2020
2 which typically requires three times as
much as retailers who sell in physical loca-
tions. Some is down to firms concentrating
on being near to the consumer, which in-
creases the amount of storage a company
needs. Prologis says that there has been an
uptick in pricier short-term leases in ware-
house space over the past few years, sug-
gesting that companies are happy to pay a
premium for flexibility.
Further evidence for buffering in the
system can be seen in figures on working
capital, which is calculated by subtracting
what companies owe suppliers from the
value of their inventories plus what they
are owed by customers. Reducing working
capital is the cheapest way for firms to get
cash, since they need pay no interest to do
so. Yet many companies are not making the
most of it.
A recent survey of 15,000 large firms un-
dertaken by pwc, a consultancy, divided
them into quartiles based on their work-
ing-capital performance. If each firm in the
three lower quartiles matched the perfor-
mance of companies in the quartile above
which were in the same line of business
they would liberate $1.4trn in cash, equiva-
lent to 55% of their cumulative capital
spending. But despite this theoretically co-
pious incentive, working-capital efficiency
has not changed since 2016. Part of this is
down to the increase in inventories seen in
recent years, but another factor is reduced
payables. Companies appear willing to
spend money on their relationships with
suppliers, which speaks to a sensitivity to
supply-chain management.
It may also speak to the fact that many
companies are already sitting on stacks of
cash. Few boast sofas as plumply padded as
Apple, Microsoft, Amazon, Alphabet and
Facebook, which have $270bn in net cash
between them, enough to finance many
countries’ covid-related fiscal stimulus.
But the total cash holdings of the world’s
2,000 biggest listed non-financial corpora-
tions increased from $6.6trn in 2010 to
$14.2trn today.
Diversified suppliers, spare capacity,
inventory and cash provide companies, es-
pecially big ones, with a certain degree of
security. But whether their current “portfo-
lios of resilience”, as Panos Kouvelis of the
Boeing Centre for Supply Chain Innovation
at Washington University puts it, can with-
stand the pandemic is another matter alto-
gether. With respect to supply chains, the
answer has so far been yes. But appetite for
most non-essential goods and services
among social-distancing consumers has
evaporated. For some things, like air travel,
ocean cruises or cinema, it may never fully
recover.
How, though, could business have been
better prepared? It might be possible, in
principle, to self-insure against a disas-
trous drop in overall demand by sacrificingmargins in order to build up buffers and to
keep open strategic options the company
will probably never willingly choose to use.
But good luck convincing investors of that
approach. Strategies which pay off hand-
somely in the event of even the worst worst
case are terribly expensive.
Consider the Eurekahedge Tail Risk
Hedge Fund Index, which tracks vehicles
that try to make money out of “black
swans”, highly improbable events that have
a very large impact. If you had bet on the in-
dex on January 1st this year you would have
seen a rise of 52%. But if you had bet on Jan-
uary 1st 2008 you would now be 25% below
where you started. Insuring against lots of
rare risks can never be cheap. Mr Kocsis
says that insurance policies against disrup-
tions caused by problems throughout the
supply chain, including insolvencies of
business partners, tend to cost 1% or more
of the turnover insured annually. That is
ten times what it would cost to protect the
same amount of stock sitting in a ware-
house from property damage.Straighten out
Another worry is that a company which
spends on resilience may end up at a disad-
vantage if others survive without making
such provisions, for example by extracting
concessions from suppliers or bail-outs
from governments, says Debra Dandeneau
of Baker McKenzie, a law firm. Such firms
would get the benefits of insurance with-
out having paid the premiums.
Today, having built up buffers that keep
things going looks smart. But in time the
attractions of cutting back will begin to as-
sert themselves again. Yes, long supply
chains bring some added risk. But as Man-
Mohan Sodhi of the Cass Business School
in London puts it, “Nothing in the opera-
tional world is risk-free.” An Americancompany that offloads capital-intensive
operations to suppliers in China is weigh-
ing the boost in value that provides against
the risks—though if the Chinese supplier
does a deal with one in Vietnam which then
does a deal in Bangladesh, the level of risk
may be hard to assess. Low inventories may
expose you to disruptions in supply, but
they save you from losses due to excessive-
ly rosy forecasts of demand, notes Sunil
Chopra of the Kellogg School of Manage-
ment in Chicago. The boss of a big Euro-
pean retailer doubts that his industry will
return to heavy stockholding. “We value
that efficiency because it keeps prices low,”
he explains.
In the age of covid-19 producing closer
to home is both an understandable urge
and smiled on by many national govern-
ments (see previous story), especially for
necessities like medicines or face-masks.
But a company’s home country is not nec-
essarily the least disruptive place for oper-
ations. Many factories in America are
closed or running at low capacity: on May
11th Elon Musk reopened the Tesla factory
in Fremont, California, in defiance of a
public-health order from Alameda county.
Meanwhile, Tim Cook of Apple, which con-
tinues to make most of its iPhones in Chi-
na—and sell millions to Chinese consum-
ers—recently told investors that “we have
been gratified by the resilience and adapt-
ability of our global supply chain.”
Mr Kouvelis expects companies mostly
to go back to their old ways of thinking
about the efficiency-resilience trade-off.
Firms “manage one shock at a time”, he
says. Having so far emerged from this one
relatively unscathed, Mr Cook and others
may well stick to Andrew Carnegie’s advice
to “put all your good eggs in one basket and
then watch that basket.” Until the next
black swan waddles along. 7