European supply chains set for test as COVID-19 spreads in Italy

supply chain COVID Italy

The last few days have seen a sharp rise in COVID-19 cases in Europe. This is most striking in Italy, where the number of reported cases has risen to over 500, the highest number outside of China and South Korea. Austria, Croatia, Greece, Norway, Switzerland, Georgia and North Macedonia have also recently reported their first cases. 

As explored by Ti’s CEO John Manners-Bell, the virus has already had substantial implications for Chinese supply chains. Due to its place in global value chains, the economic effects of this have already been felt in Europe. The port of Genoa, for example, is expecting a 20% drop in volumes over the next few months due to the shutdown and slowdown of production lines in China.

With the virus now growing at an alarming rate in Europe, the effects of the coronavirus on regional supply chains is beginning to surface. In Italy, there are quarantines in place in 10 towns in the region of Lombardy and 1 in Veneto. Road and rail travel to and from these towns is closed or controlled. It is understood that only critical freight transport into these areas is permitted.

Lombardy and Veneto are estimated to account for one third of Italy’s GDP. It is home to some critical suppliers involved in large European supply chains. The FT has reported that four major carmakers may be forced to shut down European production if electronics manufacturer MTA cannot re-start production lines in its factory in Codogno, Lombardy. Its 600 employees produce components that feed into the factories of Fiat Chrysler, Renault, BMW and Peugeot.

The issues in Italy have increased dialogue between EU member states on how to contain the outbreak. In particular, there has been speculation over the security of internal borders which are subject to Shengen arrangements, which allow for free and easy travel between countries. As yet, the European Union has said it is not planning to suspend the agreement. Instead it has pledged a €232m support package.

However, there have been murmurings around the introduction of tighter border controls. An Austrian diplomat has been quoted as saying: “There are no general border controls. Right now we don’t think that is the way forward. If we do have a confirmed case, then we will check that again.”

The re-introduction of temporary border checks is not uncommon. Since the migrant crisis of 2015, 12 countries have re-introduced checks at borders on a temporary basis.

In 2016, amidst the challenges of increased migration and security issues, a European Parliament study estimated that a one hour wait at the border can cost €50 per truck. It also found there were an estimated 7.4m truck border crossings at Italian borders in 2013. Given that Italy’s international road freight market has grown at a real compound annual growth rate of 2.6% from 2013-2019 (currently valued at €6.3bn*), it is reasonable to assume that there are now 8.5m-9m border crossings a year. This means controls around the Italian border that lead to 1-hour delays could theoretically lead to €425m-€450m in additional yearly supply chain costs. This includes aspects applicable to the carrier such as: driver’s wages, vehicle depreciation and insurance; but also includes secondary costs for shippers or the recipients of the goods, such as the cost of stock shortages.

As the virus spreads across Europe, it is clear the supply chain cost implications are likely to be significant. The halting, or reduction of output from suppliers could lead to shutdowns further along key supply chains. Any attempts to increase border restrictions could also have a significant impact on costs, which is worrying for low-margin businesses such as road freight. The preparedness of European shippers and carriers to deal with major supply chain risks is set to be seriously tested.

Source: Transport Intelligence, February 27, 2020

Author: Andy Ralls

*More information on the size and growth rates of European road freight markets can be found in the European Road Freight Transport Update 2019/2020