An interconnected global economy is feeling the strain of China’s 2019 novel coronavirus outbreak — and the potential US$160 billion hit in lost growth that could be on the way.
In New Zealand, a bath furnishings seller told a customer that the German-designed shower head he ordered is unavailable — because the factory in Shanghai is closed.
In California, executives of REC Group organized a supply-chain war room to plan around an anticipated trucking shortage and port logjam in China.
Illustration: Mountain People
In the Middle East, Saudi Arabia is rallying support for an emergency OPEC meeting on concern demand for oil would falter.
Since China’s last global health crisis, the SARS outbreak of 2002 and 2003, its share of global economic output has quadrupled to about 17 percent.
It is now the biggest market for new vehicles and semiconductors, the largest spender on international tourism, the leading exporter of clothing and textiles, and the nation where many PCs and virtually all iPhones are made.
The global hit from this new outbreak could be three to four times larger than the US$40 billion blow from SARS, Australian National University professor of economics Warwick McKibbin says.
China so far has absorbed most of the economic shock from the coronavirus outbreak. Wuhan, the city with 11 million residents where the virus came to light, remains closed off from the world.
Under a government-mandated extension of the Lunar New Year holiday, provinces generating at least two-thirds of economic output are to be shuttered through next week, including Shanghai and key eastern manufacturing hubs.
All the while, the virus’ toll continues to rise — and with it the worry. China’s essential role in the global supply chain means business owners and executives around the world are being forced to contemplate what would happen in a prolonged crisis.
“Everyone is waiting to see how this evolves,” Kraft Heinz Co chief executive officer Miguel Patricio said.
The food giant has a couple of thousand employees in China, including a small sales team in Wuhan.
“The danger, of course, is that if this continues and people have to stay home, you start having problems in terms of distribution, production,” Patricio said.
Four months ago, Levi Strauss & Co opened the doors on a new flagship store in Wuhan, a booming manufacturing powerhouse that alternately gets called the Chicago or Detroit of China.
It features three levels of premium collections and a massive tailor shop. At a little more than 697m2, it is twice as big as any other Levi franchise in China. The store was heralded by top executives as a symbol of a new era of growth for the brand in the nation.
Today, like almost everything else in town, the store is shut. A major component of Levi’s growth strategy in the region is temporarily stalled, joining thousands of international corporations, Chinese conglomerates and small businesses in the first wave of economic impact from the coronavirus.
“Our priority is employees, and if the situation doesn’t correct itself quickly, we will probably remain closed for a while,” Levi chief financial officer Harmit Singh said in a telephone interview.
International firms have poured into China, opening up Estee Lauder counters, Canada Goose stores and Rolls-Royce showrooms in Beijing and Shanghai.
More recently, they moved into second and third-tier cities whose populations have ballooned during the nation’s mass urbanization.
Companies with big exposure to China, from Starbucks Corp to Tesla, refrained from predicting this week how the virus would affect demand, saying simply that they would update their forecasts when they know more.
Apple and Microsoft Corp gave wider-than-usual forecast ranges for the quarter amid uncertainty about the impact.
The hope, of course, is that health officials are able to contain the spread of the coronavirus enough to let people get back to the normal rhythms of life in a matter of weeks.
A vaccine could be months or even years away, but some viruses can burn themselves out within the season. Others take longer. SARS was declared a global health emergency in March 2003 and was considered contained by July.
The fear is that because 2019 novel coronavirus has a stealthy quality — symptoms can appear as late as two weeks after infection — it will have staying power. Worst case, it could frustrate the best efforts of the world’s health authorities, and wreak havoc along trade routes and in boardrooms for months to come.
The first wave of economic impact from the coronavirus comes at a delicate moment.
Western companies have helped convert last month’s Lunar New Year holiday into a shopping bonanza, to the point where it has become a key period for economic growth in China. This year, it has been so subdued that consumption growth in the first quarter is to slow by more than half in China from the 5.5 percent growth rate recorded in the final months of last year, Bloomberg Economics data showed.
It is easy to see how.
Starbucks has closed more than 2,000 outlets across China — half of its total — and it cannot get some menu items for those that remain open. McDonald’s Corp has shut hundreds of restaurants. Some Walmart Inc stores are running out of products. Walt Disney Co’s theme parks in Shanghai and Hong Kong have gone dark.
Even before the US and Japan advised their citizens to avoid traveling to China, airlines had curtailed flights to the nation — not because of fear of contagion, but due to lack of passengers.
Many of those coffee purchases, vacation getaways and impulse buys are lost forever, in terms of GDP — it is not as if consumers will buy two lattes next month to make up for the one they meant to purchase last month.
Manufacturing is different.
Although factories that were supposed to be reopening remain closed, many have some wiggle room to make up for lost time, pay employees some overtime and finish off their orders, but with every passing day, there is less room to maneuver.
Construction activity that was paused over the winter, especially in the colder northern parts of China, should be starting up by now. Capital spending is likely to be reined in as companies delay decisions until they know more about the impact of the outbreak.
The many companies that rely on Chinese manufacturing need to place orders soon to have products ready for peak shopping times.
Take Anne Harper, founder of OMG Accessories, a New York-based company that sells bags and backpacks to Macy’s, Nordstrom, Dillard’s, TJ Maxx and Burlington Stores.
Even before the Lunar New Year, she works to lock in orders with her supplier near Guangzhou to ensure she gets priority after the holiday.
Customers want the product by May or June for the back-to-school season, when some customers will sell 80,000 backpacks in a single week. That means OMG tries to fill its warehouse by April.
“Making those deliveries is just so important for the life cycle of our product,” Harper said. “If you miss delivery, everyone has already bought their school bags.”
The outbreak will also have a wide-ranging impact on the technology industry, with China accounting for about 21 percent of global IT hardware spending, Bloomberg Intelligence analysts wrote on Wednesday last week.
Some of the biggest PC makers and parts suppliers are based in China, and if there is a slowdown in sales, that would constrain demand for Microsoft’s Windows operating system software.
More than 50 percent of the more than US$470 billion of chips that are sold each year are either used in devices sold in China or go there to be put into electronics sold around the world.
Apple has roughly 10,000 direct employees in China and its supply chain has a few million workers manufacturing products such as the iPad, iPhone and Apple Watch.
The Cupertino, California-based company prepares for extreme scenarios such as the coronavirus by mandating that major components be dual-sourced — both in terms of vendors and geography — and a major immediate impact to its production plans is unlikely for now, a person familiar with its operations said.
Even so, most of its assembly work is done in China and so a shortage of workers for assembly lines would have a direct impact on shipment numbers.
On the other side of the equation are small manufacturers in China whose livelihood depends on the confidence of their customers.
Any hesitance from clients can cause disarray for people such as Cash Liu, a sales director at hot-tub maker Shenzhen Kingston Sanitary Ware.
“Some of our clients choose to wait and see, and hold off from placing orders, due to concerns over the coronavirus,” Liu said via a messaging app. “Thus we are likely to miss the peak season of sales to Europe in March.”
Add up the effects of lower consumption, investment and a pause in manufacturing, and the impact from the coronavirus could knock China’s first-quarter GDP growth down to 4.5 percent — the lowest since the quarterly data began in 1992 — from 6 percent in the final quarter of last year, Bloomberg Economics chief Asia economist Chang Shu (舒暢) said.
The biggest knock-on effects would be felt by Hong Kong, followed by South Korea and Japan, she said.
Germany and Japan might take a 0.2 percent hit to GDP, while the US and UK would absorb a 0.1 percent blow, she added.
It is survivable, and fiscal stimulus from Beijing could even lessen the blow. On the other hand, the estimate assumes the outbreak is contained to China and “the longer factory output is affected, the bigger the risk China’s dominant position in global supply chains disrupts activity elsewhere,” Chang said.
Within and outside China’s borders, the coronavirus is bringing up flashbacks to the height of last year’s trade dispute with the US, when global companies raced to find alternatives to their Chinese suppliers to avoid tariffs.
The outbreak could spur more businesses to move manufacturing to the US and Mexico, US Secretary of Commerce Wilbur Ross told Fox Business last week.
What is clear is that the virus is adding another layer of complexity for businesses that were just beginning to breathe a sigh of relief over trade tensions.
“This virus outbreak may be even a bigger hit to us than the US-China trade war,” said Melissa Su, export manager at E.D. Opto Electrical Lighting Co’s auto-parts factory in Zhenjiang.
Decades of globalization have made leaders at large corporations comfortable with the logistical challenge of moving resources from place to place and responding nimbly to geopolitical shifts, but last year was a lot for anyone to handle and the thought of contending with a potentially lethal coronavirus this year is giving even the most hardened executives pause.
“Between the virus and the tariffs and the protests in Hong Kong — I’m waiting for the locusts,” said Emanuel Chirico, chief executive of PVH Corp, which owns Calvin Klein and Tommy Hilfiger.
He said it is too early to determine the impact the coronavirus would have on the apparel industry.
“The honest answer is nobody really knows yet,” he said.
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