Supply chains need some love during the coronavirus pandemic

Companies should pull out the stops to support critical suppliers now and prepare to resume production

Brooke Masters

web_supply chains after Coronavirus
© Ingram Pinn/FinancialTimes

Continental, one of the world’s largest car-part makers, sits smack in the middle of many global supply chains. Geographically diversified and relatively well capitalised, the German-listed manufacturer is about as well positioned to survive the coronavirus pandemic as a company in its sector can be.

Yet its chief executive Elmar Degenhart warned last week that profit margins at its auto division will probably drop to zero and that smaller suppliers were in danger of going out of business.

History suggests he knows what he is talking about. A Case Western Reserve study of the US auto industry’s experience around the financial crisis found that the total number of suppliers fell from just under 15,000 in 2007 to around 12,000 in 2011. Individual businesses reported that their average number of direct competitors fell from eight to six in the same period.

So far, the sector’s big players have done very little to prevent a repeat, although no one wants to say so publicly. One carmaker told me that it was too soon for his company to step in, because most production lines have only been shut down for two weeks. Another executive said that his company was counting on state aid to keep its suppliers afloat because “we can’t let them continue producing for us if there is no demand from our customers”.

Although corporate leaders have been spouting platitudes about caring about their stakeholders, including suppliers, the story is similar in most other industries. UK retailer New Look has suspended payments for existing stock and cancelled orders. Swedish fast fashion group H&M has tried to do a bit more: while cutting back orders, it is taking delivery of already produced goods without seeking changes to payment terms.

“The suppliers, and their employees, are extremely vulnerable in this situation,” H&M said.

“We are in a close dialogue with several partners and industry stakeholders . . . with the aim of finding a joint industry solution.”

Supply chain experts warn that companies may find their level of detachment comes back to haunt them when they want to resume production. “It’s not a matter of just being able to say ‘we can start up again’, but rather finding out who can start shipping,” says Roger Dennis, author of a 2015 report on the impact of crises on supply chains.

He points to the experience of the 2011 floods in Thailand. Factories that had been built to withstand natural disasters, with their own power sources and storm surge protection, ended up becoming literal “islands of resilience because no one could get in or out”.

Companies should be talking to their suppliers to locate and alleviate potential pinch points ahead of a restart. They also need to rethink the way they view their suppliers, says Bindiya Vakil, chief executive of Resilinc, a supply chain data and management group. Rather than prioritising vendors with whom they spend the most money, they should concentrate on those that supply parts and raw materials that are critical to revenue generation.

Consider personal protective equipment. It is relatively cheap and abundant, so few hospital administrators previously worried about how and where their distributors obtained it. They now know, to their chagrin, that they cannot function safely without it.

For those critical suppliers, companies should pull out the stops — help them redesign their processes and give them a boost financially, Ms Vakil advises. “Pay early, improve your payment terms, loan money, buy the raw materials for them if they do not have the necessary credit,” she says.

Faced with an extraordinary surge in demand — an enviable problem to have when other sectors are mothballed — UK supermarket chains are already starting to do this. Morrisons has dramatically sped up payments to suppliers with turnover of less than £1m. They are receiving funds immediately, rather than having to wait up to 60 days.

For its part, Tesco is working with suppliers of key products — eggs, milk, sausages and toilet roll — to meet the increased demand from shoppers eating at home. The changes include increased production at farms and dairies all over the UK and simplified ranges.

Tesco has encouraged dairies to drop one-pint bottles of milk to boost production of more popular two and four pint bottles, and cut its toilet roll selection from 33 products to 10. The grocer is also ordering in quantities that fill entire pallets and trucks, to avoid wasting delivery capacity.

Meanwhile, it is also working with its main egg supplier, Noble, to take less popular white-shelled eggs that would ordinarily go to McDonald’s. “We are incredibly grateful for everything that our suppliers are doing to help our customers get the food and essentials they need,” says Andrew Yaxley, Tesco’s chief product officer.

It is obviously more financially rewarding to help suppliers boost output than to support them in crisis. But those smaller vendors will be vital if we are to have any hope of a rapid economic restart. They also can help solve our longer term sustainability problems.

Companies must seize this chance to rewrite the rules of engagement. This is not a time for penny-pinching.

Fears of a Chinese Global Takeover Are Greatly Exaggerated

Susan Thornton

It has been discouraging to see the war of words waged between China and the U.S. in response to the Covid-19 pandemic that is ravaging the globe. Now is the time for Winston Churchill’s “blood, toil, tears, and sweat,” not finger-pointing and gratuitous swipes. Our societies are resilient. We will get through this, but the opportunity to join hands and overcome this shared tragedy is evaporating with every Twitter barrage. 

The level of suspicion and mistrust between China and the U.S. is currently so high that each side sees the other’s moves as deliberately aimed at undermining, damaging, or usurping the other’s interests. This has included the U.S. casting aspersions toward Chinese efforts to deliver medical aid to other countries in dire need. Never mind that China feels a duty to help, manufactures large quantities of personal protective equipment and was the first to confront the disease. They now have enough PPE to send it elsewhere.

We are still in the throes of the pandemic, yet alarm bells have already been ringing in the U.S. and elsewhere over China’s possible gains from this crisis. Some worry that the crisis will shake the world order and put a new dog on top. These fears are greatly exaggerated; China will not emerge from this crisis as a dominant world power. It has much to answer for in its early handling of the outbreak, and it will come under enormous postcrisis pressures, as others have noted. But it will use the crisis to adapt and change, as it has in the past.

Some see in Chinese President Xi Jinping’s call for “turning danger into opportunity” a Machiavellian plot to gain advantage from others’ misfortune. This is a misreading of the oldest Chinese motivational aphorism, a reference to the fact that the Chinese character for “crisis” is literally composed of the characters for “danger” and “opportunity.”

Are there problems? Of course, and many, but this is an unparalleled situation and problems are to be expected. The thing to watch is how China learns and makes improvements.

I lived in Chengdu during the 2003 SARS outbreak, and while many others have made comparisons between SARS and Covid-19, few have highlighted that China learned from SARS. China failed to disclose the SARS novel coronavirus between its discovery in November 2002 and March 2003. Word leaked out slowly, until an infected doctor traveled to a wedding in Hong Kong and many others spread the virus around the world. But after SARS, China made many improvements to its disease surveillance and health systems, some with the advice of U.S. Centers for Disease Control counterparts.

Since SARS, China has confronted several avian flus, H1N1, MERS, Ebola, Zika, African swine fever, and others. It has been adapting. The Covid-19 response seems to have been marred by early misjudgments and misreporting. China’s CDC did not acknowledge that human-to-human transmission was occurring until well into the epidemic. But despite the fumbles that may have cost precious time, the response was thankfully much different than 2003. The response was much faster and the early lockdown of Hubei was dramatic and unexpected. And it is likely that China will get to the bottom of what happened and will make changes again.

Which brings me to China’s poor public diplomacy response to this crisis. China’s governing system has not adapted well to social media, citizen journalism, and viral videos. In a fragile authoritarian state, public opinion can be harnessed, but it can also be destabilizing. China has traditionally seen public opinion as something to be defended against and has spent enormous resources trying to constrain and shape it.

In an era of global audiences and an information explosion, however, this is proving difficult, to say the least.

Chinese were no doubt taken aback and offended by an apparent unsympathetic reaction abroad to Wuhan’s trials and suffering. Many Chinese who saw it were incensed by The Wall Street Journal’s headline calling China “the Sick Man of Asia,” for example. To do so at a time when people are dying of an untreatable virus is in obvious poor taste. But China’s response, to threaten to exile journalists who had nothing to do with the story in the middle of a crisis, is not appropriate.

That China has a difficult time with such things was reflected in its disproportionate response to a Twitter GIF about Hong Kong posted by an NBA coach last fall, resulting in the cancellation of the entire NBA season in China, even before Covid-19 hit. Can China learn and adapt in this difficult area as it has in others?

Many in the West belittle Chinese soft power and public diplomacy efforts, and it is true that the results have been mixed. But there are hints that some in China see an opportunity from this crisis for changing China’s public diplomacy. Former Vice Foreign Minister Fu Ying wrote recently that “the outside world’s perception and judgement of China will change with changes in China’s own discourse and behavior.” 

She goes on to list the qualities of persuasive discourse, including that “successful efforts should be based on facts and deeds, as vague concepts and pronouncements are not convincing.”

Another former diplomat noted in a report on China’s Covid-19 response that China “showed shortcomings” in its early response, including “formalism and bureaucracy,” but that it takes the problems seriously and is making corrections. We should not dismiss the notion that China will use this crisis to make reforms and improvements. Will we?

Susan Thornton is a retired U.S. diplomat who most recently was former acting assistant secretary of state for East Asia and Pacific affairs until 2018. She is currently a senior fellow at the Paul Tsai China Center at Yale University Law School.

Chinese Growth Becomes a Tougher Sell on Wall Street

By Jacky Wong  

After two accounting scandals in less than a week, the Chinese growth story will likely become a tougher sell on U.S. stock markets.

New York-listed Chinese tutoring company TAL Education said Tuesday that an employee had forged contracts to inflate sales. The news came just five days after Luckin Coffee, listed on Nasdaq, said much of its revenue last year was fabricated by some of its staff, which triggered an 83% collapse in the Chinese coffee chain’s share price.

The scale of the fraud at TAL, which was discovered in a routine internal audit, seems much smaller. Its “Light Class” segment, which provides live-streamed lessons to school kids and where the sales were made up, accounted for just 3% to 4% of its estimated revenue for the fiscal year through February. Its stock dropped 6.7% Wednesday.

The economic emergency stop prompted by the coronavirus pandemic probably has helped bring these incidents to light. The plunge in revenue and difficulties in getting funding may have made covering financial holes harder.

More scandals will likely surface as the downturn drags on, especially as the yearslong bull market made investors complacent about burning money to achieve unprofitable growth.

The scandals will also put the spotlight back on the longstanding corporate-governance problems of U.S.-listed Chinese companies. Their audits aren’t subject to U.S. inspections because China doesn’t allow it, and the legal recourse for investors could be limited.

Given how difficult and costly it is to conduct proper due diligence, investors may choose to keep their distance, especially from the smaller stocks.

Luckin Coffee said much of its revenue last year was fabricated by some of its staff.
Photo: jason lee/Reuters .

There were already calls for tighter scrutiny on U.S.-listed Chinese companies as geopolitical conflicts between the U.S. and China escalated. These latest scandals will only make those calls louder.

Initial public offerings for Chinese companies in the U.S. dwindled after a wave of frauds were exposed in 2011 and 2012, but they picked up again with Alibaba’s $25 billion float in 2014.

As U.S. investors become more skeptical, some bigger, better Chinese companies may seek to list their shares closer to home. Alibaba’s $13 billion listing in Hong Kong has been a great success, and its rival is considering a similar move. More may follow suit.

The fallout from the latest debacle among U.S.-listed Chinese companies could last a long time.

Clashes break out in locked-down Paris suburbs as tensions rise

Strict measures enforced during virus pandemic exacerbate entrenched inequalities, say experts

David Keohane in Paris

A trash bin burns in the street during clashes in Villeneuve-la-Garenne, a northern suburb of Paris, on Tuesday
A trash bin burns in the street during clashes in Villeneuve-la-Garenne, a northern suburb of Paris, on Monday night © Geoffroy Van Der Hasslet/AFP

In the suburbs to the north of Paris earlier this week, helicopters circled as police below were bombarded by fireworks and prepared to charge into an imposing white apartment block, called La Caravelle.

Violence between the police and young people from the “banlieues” erupts with disturbing regularity, but is now taking place during a strict lockdown aimed at slowing the spread of coronavirus. This is inflaming longstanding tensions.

The Paris suburbs, separated from the city proper by the Périphérique ring-road, are among the poorest, most ethnically diverse and densely populated places in France.

“All the existing inequalities, of housing, of health, of jobs have been reinforced and revealed by the lockdown,” said Sylvie Tissot a political scientist at the University of Paris 8 in Saint-Denis. French interior minister Christophe Castaner played down the clashes, but admitted they were in part due to “the difficulties of the lockdown for these young people”.

The violence in Villeneuve-la-Garenne broke out on Saturday evening after a young man riding a motorbike crashed into an unmarked police car. Allegations quickly spread that he had been targeted.

“It’s the lockdown . . . what happened with the motorbike, that just started it,” said Michel, 74, sitting with Yveline, 69, on a sunny bench in front of La Caravelle on Wednesday afternoon, beside the house where they have lived for 25 years.

The suburbs have seen worse scenes before. Violence broke out in Villeneuve-la-Garenne in 2018 after a police officer fired on a car driven by a man from La Caravelle, while in 2005, two weeks of riots began following the accidental death of two teenagers chased by police in Clichy-sous-Bois, to the east of the capital.

The most recent clashes spread during the first half of the week to other Parisian suburbs, while confrontations were also reported in Lyon and Strasbourg.

Order has now begun to be restored — the man injured in the crash appealed for calm from his hospital bed — but the authorities are still on high alert. Since the beginning of the lockdown, everyone who ventures outside in France must carry a form justifying the trip.

Police have carried out 15.5m stops and administered 915,000 fines.Mr Castaner said that 220,000 stops, more than double the national average, had been made in the neighbouring department of Seine-Saint-Denis alone.

“I think that the young people today are persecuted by the police. We are never stopped by the police, but the kids are chased,” said Sandrine, a 46-year-old mother who has lived in Villeneuve-la-Garenne for more than 20 years.

Police officers stand ready during clashes in Villeneuve-la-Garenne
Police officers stand ready during clashes in Villeneuve-la-Garenne © Geoffroy Van Der Hasslet/AFP

The police have been accused of using newly bestowed powers to harass and intimidate.

Videos have spread on social media of beatings that allegedly took place during stops by the police. A coalition of rights groups, including Human Rights Watch, said earlier this month that the methods being used were sometimes “unacceptable and illegal”.

On Twitter, police unions have dismissed such stories as “fables”.

“In a time of high tension, they are sending in police who are not known to the community. I’m not sure that helps people,” said Zakaria Sekkafi who heads APSA, an organisation that provides food to the poor, and who works as a mediator between police and the young people of Villeneuve-la-Garenne.

“People here can find themselves in families of 12 in apartments of three rooms,” said Mr Sekkafi who also warns that people are running short of food.

“I’ve seen tears in people’s eyes after I give them yogurts.

The existing inequalities appear to be reflected in the number of people dying of Covid-19.

Seine-Saint-Denis is one of the areas of the country hit by “an exceptional excess” of coronavirus deaths, according to French health officials. Of the more than 13,500 deaths recorded in French hospitals, 752 have occurred there.

While wealthy Parisians were able to flee to country homes to wait out the lockdown, in the suburbs many people don’t even have the option to work from home.

The result is that large numbers of “essential” but low-paid workers commute into central Paris every day to staff supermarket checkouts, drive buses and clean houses, exposing themselves to infection in the process.

A quarter of Parisian Uber drivers live in Seine-Saint-Denis, according to a 2018 study by research group Kantar, while the Institut Montaigne, a think-tank, said that before the virus, 300,000 people left there every day to work in the capital.

The lives of those who have lost their jobs or have seen their incomes slashed have become increasingly precarious. Some academics who have studied the area also suggest that the disruption of the drug trade is behind some of the recent clashes.

The government is trying to help, with additional payments starting at €150 to families on social welfare from next month, but there are concerns that this will be too little.

“The lockdown increases the risk of violence, it increases the level of poverty, people are working less, they have less income,” said Agnès Audier, who is leading a study into Seine-Saint-Denis at Institut Montaigne.

It “just increases the difficulties which were already immense”.

Fabien Truong, a sociologist at the University of Paris 8 in Saint-Denis, said that the lockdown had shown “that the banlieue aren’t sealed off ghettos, it’s where cashiers, bus drivers, cleaners live and if you take a train in Paris you are taking a train with them. That is going to have to be remembered.”

Zoom Rushes to Improve Privacy for Consumers Flooding Its Service

The features that allowed companies to hop on videoconferences also made it easy for trolls to hijack meetings and harass students.

By Natasha Singer, Nicole Perlroth and Aaron Krolik

Taking classes via the Zoom app. The company is trying to address a number of security and privacy issues.Credit...Albert Gea/Reuters

Over the last month, the Zoom videoconferencing service has emerged as the communication lifeline of the coronavirus pandemic. But the convenience fueling Zoom’s explosive popularity has come at a price.

Originally a service meant for businesses, Zoom was designed to make it easy for company employees, sales representatives and clients to hop on meetings. When consumers flocked to the video platform for school and socializing, however, those conveniences also made it easy to hijack videoconferences and harass participants in online attacks known as Zoombombing.

Now the company is scrambling to deal with privacy and security issues that keep popping up.

On Wednesday morning, Zoom announced that it had formed a council of chief information security officers from other companies to share ideas on best practices. The company also announced that it had hired Alex Stamos, the former chief security officer of Facebook, as an outside adviser.

Eric S. Yuan, the chief executive of Zoom Video Communications, the California company behind the video platform, said in an interview Tuesday evening that his greatest regret was not recognizing the possibility that one day Zoom might be used not just by digitally savvy businesses but also by tech neophytes.

“We were focusing on business enterprise customers,” Mr. Yuan said. “However, we should have thought about ‘What if some end user started using Zoom’” for nonbusiness events, “maybe for family gatherings, for online weddings.” He added: “The risks, the misuse, we never thought about that.”

Mr. Yuan said Zoom never felt the need until now to rigorously examine the platform’s privacy and security implications for consumers. “If not for this crisis,” he said, “I think we would have never thought about this.”

In addition to the Zoombombing episodes, Zoom has reacted with surprise to press reports that the company’s iPhone app leaked user data to Facebook as well as to criticism that the platform had allowed certain users to covertly access the LinkedIn profile data of other participants.

Zoom’s trajectory from mass media darling to privacy pariah may seem like a familiar narrative in a tech industry with a build-it-first, beg-forgiveness-later culture. But the coronavirus has accelerated the Silicon Valley story arc at an incredible pace.

The coronavirus-fed boom has essentially forced Zoom to publicly acknowledge and address problems on a vastly shorter timetable than older companies like Facebook. Now attorneys general in several states are scrutinizing Zoom’s privacy and security practices even as the company has publicly committed to improving them.

Mr. Yuan said the company had not anticipated the exponential growth in new users during the coronavirus pandemic or the unrelenting public scrutiny that would come with it.

Four months ago, Zoom was a niche business tool with 10 million daily users, many of them people working in offices or at home. Today, it has emerged as a fundamental online utility, with 200 million daily users — including family members gathering to celebrate holidays, teachers leading online classes for students and members of Alcoholics Anonymous holding meetings.

Last week, Zoom said it was suspending work on features for the next 90 days to devote all of its engineering resources to shoring up its security and privacy practices.

Security researchers also discovered that, despite its marketing promises, Zoom encrypted users’ communications but not with end-to-end encryption — a system that prevents third parties from accessing private communications. Mr. Yuan noted that end-to-end encryption was significantly more difficult with many users communicating simultaneously instead of something like Apple’s FaceTime, which is typically used by a handful of people at the same time.

Last week, the office of New York’s attorney general sent a letter to Mr. Yuan, questioning whether Zoom’s current security practices were capable of handling “the surge in both volume and sensitivity of data being passed” through its network.

Several days later, the Federal Bureau of Investigation issued a warning saying that it had received multiple reports of Zoombombing, including incidents where school meetings were hijacked by strangers posting pornography and using threatening language.
Zoom quickly announced that it was removing the Facebook software from its iPhone app and eliminating the LinkedIn data-mining feature on its platform. To hinder Zoombombing, the company just introduced default settings that will require K to 12 schools to individually admit participants to videoconferences from virtual waiting rooms.

Mr. Yuan said Zoom was now making user privacy and security its top priority and was shutting down enterprise features that could present risks to consumers. “This is a turning point. We have to raise the bar,” he said. “Whenever there’s a conflict, privacy first.”

Mr. Yuan, a former executive at Cisco Systems, founded Zoom in 2011. He has often described the company’s mission as “making video communications frictionless.”

Before the pandemic, Mr. Yuan said, Zoom used a number of security measures to identify vulnerabilities, and invited hackers to probe its service for payment awards, through a bug bounty.

It also developed security and privacy features that could have prevented Zoombombing. But Zoom left it to business customers, which included some of the biggest names in the cybersecurity industry, to decide how they wanted to configure privacy and security settings.

Technologists at those companies vetted Zoom’s code for security vulnerabilities, decided whether their own employees should be required to use passwords to join meetings, and how much of their data should be exposed to colleagues and managers.

Mr. Yuan also said the company created certain services, like the features enabling Zoom users to log in from Facebook or access the LinkedIn profiles of other participants, to accommodate requests from enterprise customers. But outsourcing such decisions to business customers created blind spots for Zoom.

Some cybersecurity and privacy experts said the time for Zoom to reassess its privacy and security was last year, after Jonathan Leitschuh, a cybersecurity researcher, discovered a flaw that attackers could use to activate a Zoom user’s webcam without their permission. Even when users tried to remove the app from their computers, researchers discovered Zoom would secretly reinstall itself.

In its letter last week to Mr. Yuan, the New York attorney general’s office noted that Zoom did not address the problem until after the Electronic Privacy Information Center, a public interest research center, filed a complaint about the company with the Federal Trade Commission last year.

Mr. Yuan admitted that his drive to open access to Zoom during the pandemic sometimes moved faster than the platform’s privacy protections.

Early in the crisis, for instance, a few U.S. schools that foresaw they would need to quickly move classes online contacted him for help, he said, and he personally set up free accounts for them. Soon after, Mr. Yuan made basic Zoom accounts free for schools.

But the company did not have experience working with K-12 school districts, he said, and was not set up for federal privacy laws requiring special protections for students’ and children’s information, noting that the company has had to update its privacy policy for schools several times.

Now, however, Zoom has gone even further and signed an extensive privacy compliance agreement with the Board of Cooperative Educational Services for school districts in Chautauqua County, southern Erie County, and part of Cattaraugus County, in New York.

The landmark agreement, which Zoom signed on March 31, meets stringent new state privacy rules for schools and could serve as a model for other school districts. Among other things, Zoom agreed to delete any data it had collected or stored about the districts’ students, teachers or principals when the contract expires later this year.

Mr. Yuan said his three children were now home doing distance learning over Zoom and he recently asked his daughter, an eighth-grader, if her teacher used certain security features meant to keep out troublemakers. He was relieved when she said “yes.”