Companies around the world are increasingly concerned about how the coronavirus outbreak is affecting their supply chains.
Security guards check the temperature of visitors at a seafood market in Guangzhou, Guangdong Province, China.
With a mounting death toll from the coronavirus in China and severe restrictions on travel, companies around the world are increasingly concerned about how the illness is affecting their crucial supply chains.
By February 5, the death toll in China stood at 490, with a total of 24,324 confirmed cases of the virus. The U.S. led a number of countries, as well as Hong Kong, in imposing two-week quarantines on travelers arriving from China, in an effort to contain the spread of the disease.
But China’s key role in the global supply chain can’t be shut off so easily. The lack of parts caused by closure of Chinese factories led South Korean and Chinese carmakers to announce they were shutting down production. European airplane maker Airbus also announced the closure of a factory in China.
“You cannot make a car with just 98% of the parts,” says Kristin Dziczek, vice president for research at the Center for Automotive Research in Ann Arbor, Michigan, noting that car-part makers in China had delayed re-opening factories by another week. “If it delays much further than we will start to see a crunch.”
Another industry reeling from the coronavirus outbreak is electronics. Nintendo announced that the virus would delay its new consoles. Foxconn, which assembles products for Apple, Sony and HP, among others, had expected to get back to work February 10, a week later than originally planned because of the holiday.
But the company said Wednesday that it would quarantine workers coming back to its giant factory complex in Zhengzhou from outside the province for at least two more weeks, meaning production is unlikely to resume in February.
The virus prompted Apple CEO Tim Cook to give unusually wide revenue guidance of between $63 billion and $67 billion for the second quarter. The $4 billion possible variation is due to uncertainty related to the virus’ impact on production, Cook said.
Wuhan, the center of the virus, was completely cut off from the rest of China after the beginning of the Lunar holiday, when the government imposed severe transit restrictions on all of Hubei province after millions had already left to return to their home villages in other provinces. China has more than 100 million migrant factory workers who are marooned in their home villages because of the transportation stoppage.
And it’s not just Chinese factories that are affected, either. Chinese components are used in supply chains throughout Southeast Asia and Mexico, where such things as Chinese fasteners and circuit boards are added to locally sourced materials before being shipped to factories in the US, Europe, Japan and Korea.
Nathan Resnick, CEO of Sourcify, a platform company that helps other firms source parts overseas, told business channel CNBC that he believed that there will be “trickle down effects on everyone’s supply chains for at least six months.”
On the other hand, Scott Kennedy, a senior adviser on Chinese business and economics at the Center for Strategic and International Studies in Washington, D.C., said he believed that the virus is likely to be a short-term problem for most companies.
“Although there is some uncertainty, most still see this as a problem that will have a defined time to it,” Kennedy said. “Unless the restrictions on returning to work are extended far beyond the middle of February, my expectation is that for most companies this will not be something that on its own leads to a significant adjustment of supply chains.”
Kennedy noted that Chinese supply chains have already been reduced because of increasing labor costs in China and the arrival of automation in other areas, such as Eastern Europe, which offer more economical alternatives. The trade war with the U.S. also accelerated movement out of China to factories in other countries such as Vietnam.
According to the Center for Automotive Research’s Dziczek, this shift also has even affected the car parts industry, where China was long the number two supplier to U.S. firms after Mexico. For example, Mexico supplied $53.9 billion in parts to the U.S. industry in 2018, followed by China with $20.1 billion and Canada with $17.5 billion. But she said in 2019 Canada had overtaken China as the number two suppler as companies struggled with import tariffs on Chinese goods.