Governance, Risk & Compliance: GRC
Coronavirus Crisis Set to Cripple Global Supply Chains
An interconnected global economy is feeling the strain of China’s latest viral outbreak.
It has been 12 days since Chinese authorities placed the coronavirus-hit city of Wuhan under lockdown, on Jan. 23. China’s attempts to halt the spread of the coronavirus have resulted in isolation for the vital economic center, and the effects are rippling across the world; testing the entire global economic system and fuelling fears that efforts to contain the outbreak will have grave economic consequences.
Rarely has such an essential part of global industry and trade faced such an abrupt and open-ended freeze out. As China’s economy grinds to a halt, the uncertainty over the health crisis has significantly disrupted global trade and supply chains, asset prices have depressed, and multinational businesses are being forced to make hard decisions about their Chinese operations.
The growing disruption to China comes as figures released on Feb. 4 show that the number of infections from the 2019-nCoV coronavirus, now known as COVID-19, continues to climb, suggesting that it could take a while before the outbreak ends. The World Health Organization (WHO) declared the outbreak a “public health emergency of international concern” on Jan. 30. As of Tuesday, Feb. 4, there were 20,500 confirmed cases in 27 countries, the majority of them in China, according to the WHO. As of Feb. 18, the novel coronavirus has infected more than 73,000 people around the world, still mostly in mainland China, with the death toll nearing 1,900.
The last time we had something like this – severe acute respiratory syndrome (SARS), a strain of coronavirus – the business reaction wasn’t as extreme.
SARS, which first emerged in China during November 2002, killed almost 800 people and resulted in more than 8,000 cases during the eight-month outbreak. The economic impact of the virus was felt mostly in China. One study estimates that the SARS crisis cut the gross domestic product (GDP) of mainland China by 1.1 percent.
Speaking with TIME Magazine Eswar Prasad, an economics professor at Cornell University, sounded out a stark warning, “China’s economy is now a global behemoth compared to its more modest size at the time of the SARS epidemic,” he says, “so a shock to China’s growth will have major reverberations across the world.”
China’s sheer size of manufacturing dominance means the coronavirus health emergency has far greater potential to gouge global growth.
Seventeen years ago, China’s GDP was 4 percent of the global total – it’s now 17 percent. Since then China has climbed from the world’s sixth-largest economy to the second largest, worth nearly US$14.55 trillion in 2019, almost as large as the entire European Union.
Today, China is the world’s largest manufacturer and has become an essential part of the modern global industrial machine; integral to nearly every sector of the world’s economy. China alone accounts for roughly one-sixth of the global economic output. Its sheer size of manufacturing dominance means the coronavirus health emergency has far greater potential to gouge global growth. And while it’s difficult to pinpoint an exact cost as the crisis is still unfolding, the global hit from this new outbreak has some experts predicting the potential to be three to four times larger than the US$40 billion blow from SARS.
All the while, the COVID-19 virus’ toll continues to rise, the fallout from the lockdown of China’s booming manufacturing powerhouse, Wuhan, is set to reverberate across the globe with supply chains of some pretty large and lucrative industries stymied. The virus-hit city, which has an output of US$213 billion, is a hub for producing automobiles, electronics, optics and fiberoptics and has 230 of the Fortune 500 companies invested in the area. It is also the home to more than one-third of all French investment in China.
All the while, the virus’ toll continues to rise, the fallout from the lockdown of China’s booming manufacturing powerhouse, Wuhan, is set to reverberate across the globe.
The first wave of economic impact on supply chains from the virus is already being felt by those companies with big exposure to China.
- Tesla has been forced to close its new Shanghai-built factory temporarily and is evaluating whether the supply chain for cars built in its California plant will be affected.
- General Motors, which last year sold more cars in China than in the U.S., has said its Chinese factories will be closed for at least another week at the request of the government.
- Ford and Toyota have also idled some of their assembly plants and that looks set to continue into mid-February.
China’s formidable stature in the global technology supply chain has many large multinational giants bracing for disruption. There’s perhaps no better example than Apple:
- Some 290 of about 800 plants named in Apple’s global supplier list are located in regions that have delayed returning to work.
- Taiwan’s Hon Hai Precision Industry, which makes the majority of the world’s iPhones, has suffered its biggest share price fall in almost 20 years.
- Despite not having to close any of its factories in China, Apple supplier LG Display has warned the outbreak has increased uncertainty for suppliers.
- And on Feb. 18, Apple joined a growing number of public companies to warn about the impact on revenue due to production delays following global supply constraints plus weakened demand in China.
China’s formidable stature in the global technology supply chain has many large multinational giants bracing for disruption.
Although Silicon Valley’s giants, like Apple, do prepare for extreme scenarios like the coronavirus by mandating that major components be dual-sourced – both in terms of vendors and geography – any major immediate impact to production plans are unlikely for now.
The coronavirus has certainly created a more uncertain environment and the scale of the short-term impact is big but the longer-term impact on companies reliant on China is much less clear. The effects of the virus on supply chains, which have grown notoriously complex, are difficult to anticipate. Companies themselves often do not know the suppliers that are three and four rungs down the chain. This means stronger and more robust methods of mitigating disruption in supply chain need to be developed.
China’s essential role in the global supply chain means business owners and executives around the world are being forced to contemplate what will happen in a prolonged crisis. This could cause a sea change in how business is conducted between China and the rest of the world. We’re already seeing multinational companies reassessing their supply chains, due to rising wages in China and trade war tensions, to reduce their production footprints in the country. Could the coronavirus be the tipping point for China’s dominance to slide?
One thing that we do know, is that this outbreak is a stark reminder that the world isn’t ready for a pandemic.
No one knows how long the coronavirus outbreak will last, how far it will spread, or how many lives it will claim. It is impossible to calculate the extent to which it will disrupt China’s and the global economy. But one thing that we do know, is that this outbreak is a stark reminder that the world isn’t ready for a pandemic.
Businesses should therefore be vigilant, detailed and accurate in recording how they manage the crisis. This will be invaluable as their reaction will be a blueprint to managing the next outbreak – which is expected to be far more lethal.
Updated to follow the spread and business impact of COVID-19.
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