COVID-19: A stress test for chemical supply chains
Mutlaq H. Al-Morished, CEO, Tasnee, on the vulnerabilities that the coronavirus pandemic revealed in chemical supply chains; why China and the US are the next market players to watch in the move towards deglobalization; and how connecting to the ‘human aspects’ of the crisis defined the winners from the losers in these unprecedented times.
The COVID-19 pandemic presented great challenges to the regional chemical industry. What from your personal experience as the CEO of TASNEE were the key learnings because of the pandemic that the industry would need to abide by moving forward? How did the pandemic change the industry?
No one is safe until we are all safe! The pandemic has been a fierce teacher, but how do we apply the lessons learned? Undoubtedly the world post COVID-19 will not be the same as before. The onset of the coronavirus accelerated the digital transformation that languished on businesses’ “to-do” list for years. COVID-19 also exposed barriers to collaboration that most companies tolerate under normal circumstances. It increased awareness about investment into cybersecurity, IT tools and state-of-the art technologies. Agility helped companies to respond quickly and proactively to emergency events and uncertainties.
Chemicals has been a “critical” industry during this pandemic. It was therefore crucial to act decisively and focus on what you can control. Transforming the operating model to ensure financial resilience was of paramount importance. Businesses were forced to run operations remotely to deal with sudden challenges and respond to cash flows and global supply chain pressures. Ensuring cost discipline, effective procurement controls, mitigating discretionary spend, and rationalizing cost structures to as great an extent as possible were and continue to be an imperative.
At Tasnee, we realized from the early spread of the virus that there should be proactive measures put into place as quickly as possible to minimize the pandemic’s impact. We embraced the rule “don’t wait for things to get better and act proactively”. We effectively focused our priority on employee safety and then business continuity by implementing all our well-developed crisis management strategies and business continuity plans. Employee and team empowerment for joint decision making, encouraging creative solutions and mitigation plans has been a key factor in overcoming the pandemic consequences.
How were chemical trade and supply chains impacted from the COVID-19 crisis? What measures did TASNEE take in order to mitigate the impact from any disruption, maintain its trade flows and deliver its products on time to market?
Overall, resilient and robust supply chains do not guarantee protection from a global crisis such as COVID-19. But with increased transparency, a more stable supply chain set-up and advanced tools, chemical companies will be able to respond more rapidly and robustly to disruptions during times of uncertainty. The pandemic has been a facilitator for resilient and robust supply chains. More than any other stress test, COVID-19 has exposed the vulnerabilities and weaknesses in today’s chemical supply chains. At Tasnee, we focus on the key strategic focus areas critical for establishing more resilient supply chains:
- Supply chain risk management
- Global network optimization
- Collaborative planning and execution
- End-to-end visibility and sustainability
The supply chain industry has been severely impacted by the pandemic due to the huge imbalance of global supply and demand of various products. Like other organizations this imbalance resulted in a significant impact on Tasnee’s supply chain business as it caused delays in the raw materials and products transit time and increase in the shipping freight rates due to multiple shipping issues such as border restrictions, container shortages, vessels space issues, manpower & equipment unavailability, port congestions, etc. In addition, a general increase in e-commerce demand stemming from the pandemic coupled with seasonal effects increased global shipment demand which worsened the imbalance.
Trade protectionism and the deglobalization of supply chains have accelerated as a result of the COVID-19 pandemic. How do you expect these issues to develop and what would be the impact on the chemical industry in the region?
The trend of deglobalization was already on the rise ever since the global financial crisis in 2007-2008. The gap in growth rates between developed and emerging economies grew larger, and social issues arose within advanced nations caused by polarization and weak job markets. These developments fuelled political pressure to implement new forms of trade protectionism. Higher tariff and non-tariff barriers and higher uncertainty in international trade pushed up cross-border transaction costs. Global supply chains were rapidly expanding coming into the 2000s, but began to show signs of contraction following the global financial crisis. Emerging regions were transformed from production bases to consumer markets as their economies grew and labor costs rose.
Global economic depression and increasing inequality will likely exacerbate nation-centrism and unilateralism even further. Meanwhile, both advanced and emerging countries are preparing stronger trade remedies and other forms of protectionist measures.
The current global disruption to supply chains brought on by COVID-19 is an unprecedented shock. Governments around the world reacted to the coronavirus by bringing production and consumption to a full stop. The situation showed how vulnerable the current global supply chains are to communicable disease or natural disaster. This lesson is expected to prompt changes to the global industrial structure, in a direction where efficiency may be sacrificed to promote and secure production, reducing dependency on a few countries and re-aligning value chains around core industries.
The potential dangers of a value chain concentrated in China have become clearer, and the race to gain technological hegemony is intensifying between the US and China. We expect to see various efforts to reduce dependence on China. In particular, the competition for technology hegemony will likely have a significant impact on value chains in future technologies. China possesses an enormous and skilled labor force, and a giant domestic market.
Expect to see global value chains realigned into multi-polarized regional value chains, as production bases are relocated closer to markets and demand and supply lines of parts are diversified to promote safety. As a result, expect for value chains to be integrated into regional blocs in Asia, the EU, and North America, centered on nations which possess high technology or a giant consumption market, such as China, Germany and the US.
I believe that COVID-19 is the greatest disruptor of globalization in the history of the modern world and certainly represents an unprecedented threat to the international trading and supply chain system. With global lockdowns limiting travel of both people and goods in a way previously unimaginable, this could cause permanent shift trend to the cross-border flow of commodities and workforce.
It is said that what will define the winners from the losers amid this crisis is the way in which they manage risk, demonstrate strong leadership, and focus on their people. What are your views on this?
Strong and effective leadership is crucial for any ‘winning’ operating model – leadership drives effective risk management, development of human capital and stakeholder returns. Management of human capital with the required characteristics is the single most important element in the construction of a winning operating model.
Three key aspects for effective and winning leadership include communication, accountability, and performance management. Trust and empowerment creates a sense of belonging and fuels increased collaboration and initiatives by employees, accelerating both process and business improvements.
“What doesn’t kill you makes you stronger”. The global coronavirus pandemic has presented extraordinary challenges for today’s leaders. Governments and businesses alike are scrambling to cope with a highly uncertain and rapidly changing landscape. This pandemic is challenging leaders in a different way. Previously, leadership development programs tended to focus on things such as business continuity planning, disaster recovery and process and procedural areas. Organizations haven’t always done well on developing the behavioural elements and leadership style because programs tend to focus on strategy.
As such, leaders’ approaches to managing the impact of the crisis have varied but I believe leaders who have excelled are the ones who have advanced leadership skills not in traditional ways but have connected to the ‘human aspects’.
Are there any lessons that you can draw upon from your experience leading Tasnee’s restructuring and transformation several years ago?
The biggest sources of resilience and agility would be (i) cost leadership and (ii) proximity to customers. One of the key success factors in Tasnee’s transformation in 2015-20 was deep and comprehensive cost reduction across the business, reducing organizational layers and bringing leaders closer to the front line of operations. Tasnee has maintained its cost discipline over the years, and this helped Tasnee weather the storm in 2020 rather successfully.
Our proximity to our customers ensures that we are able to serve our customers despite challenging and unpredictable external shocks. Tasnee has been transforming its go-to-market approach over the past two years, including increasing its local presence in key markets as well as closer alignment and coordination with various distribution channels around the world.
How do you see developments such as carbon neutrality, reducing emissions, and investing in alternative energy sources progress in the near future and what will be the impact on the chemical industry in the region?
Before the pandemic, most of future oil demand growth was expected to come from jet fuel and petrochemicals. With the future of the aviation sector in question, petrochemicals has now become the single most important driver of oil demand in the coming decade.
We expect even greater interest from oil companies and Gulf countries in petrochemicals projects based on liquid feedstocks. So far, pricing regimes of liquid feedstocks in the Gulf have not been particularly attractive for petrochemical applications. However, with the advancement of new technologies and peak oil on the horizon, we may see more liquid feedstock-based projects in the coming years.
For big players who can afford long-term transformative investments in new technologies, green/blue hydrogen and ammonia may be interesting plays, although the current economics do not look attractive for such projects. Also, it is a question mark whether these are projects better suited for chemical companies or for power/energy companies.