Nasty Virus Spells Danger to Global Economy

By DirectorCorps

February 18, 2020 Manufacturing Risk

It’s been tough to trade with China lately. Throw in a nasty virus and it gets even worse. Global manufacturing is expected to feel the impact of the spread of the coronavirus — not at the least because China is a far larger exporter than it was during the 2003 SARS virus outbreak, according to The Wall Street Journal.

Global supply chains also are much more complex than they were in 2003. Products are rarely made in just one country; global manufacturers now piece parts together from a worldwide network. Many companies could be harmed by the disease’s spread.

The effect could also be diffuse. Research suggests that natural disasters impact the economies of other countries in unexpected ways. As much as 60% of the economic fallout from the 2011 earthquake and subsequent nuclear meltdown in Japan was borne by other countries, including a quarter of it by the United States, the Journal says.

This time, it’s not only the United States that relies on Chinese manufacturing. Japan gets more than 10 times the amount of automotive parts from China than it did in 2003, for example. China has become a global hotbed of technology and electronics manufacturing, touching everything from mobile phones to computers. FoxConn Technology Group, the world’s largest electronics supplier, has 70% of fixed assets, like manufacturing facilities, in China.

Apple seems particularly vulnerable: The company has looked into expanding its manufacturing outside China, but has so far kept it mostly in China. CEO Tim Cook told investors that the company is working on backup plans to make up for any lost production time. But Apple also depends on sales inside China, as do many other American companies. In a recent survey of members of the American Chamber of Commerce in Shanghai, 87% expect to take a hit to revenues because of the coronavirus. Only 13% considered the revenue consequences limited, as Chinese consumers cut back on shopping and eating out to avoid crowds.

Companies around the world need to take another look at their global supply chains. The U.S.-China trade war already has spurred many of those discussions, according to Stephanie Krishnan, a supply-chain analyst at International Data Corp. “If things escalate in China, some industries will need to build in further contingencies,” she told the Journal.

New trends suggest that the corporate supply chains have already divested away from China before the virus struck. Vietnam has benefited from some of that shift, with a 16.1% compound annual increase in exports in the last 10 years, according to S&P Global Market Intelligence.

“China’s industrial heft leaves global manufacturers in a quandary with no obvious parallel, even with shutdowns only just beginning,” according to The Wall Street Journal. “The impact may be felt for years to come.”