In 2002, when a lethal virus known as SARS emerged in China, mainland factories mainly produced low-cost products like shirts and sneakers for global customers. Seventeen years later, another deadly virus is spreading rapidly in the world’s most populous country. International companies that rely on Chinese factories for production and Chinese consumers for sales already face severe problems.
Apple, Starbucks, and Ikea have temporarily closed their stores in China. Shopping centers remain deserted. Meanwhile, factories making cars for General Motors and Toyota are delaying production. They must wait for workers to return from the Lunar New Year holidays, which the government extended to halt the virus. International airlines, including American, Delta, United, Lufthansa, and British Airways, have canceled all flights to China.
Oxford Economics conservatively forecasts that China’s economic growth will slide to 5.6% this year, down from 6.1% last year. This decline would reduce global economic growth for the year by 0.2%, leading to an annual rate of 2.3%. This represents the slowest pace since the latest global financial crisis.
Upon returning from the holidays, Chinese investors saw their equity sales drop by around 8% on Monday. Stock markets around the world plummeted in the following days as experts warned that a public health crisis could quickly turn into an economic shock. In response, Chinese leaders outlined plans to inject new credit into the economy. This package includes a net $22 billion to support money markets and looser lending conditions for Chinese companies.
In addition to producing an astonishing range of low-value items like clothing and plastics, Chinese factories long ago gained dominance in advanced, profitable sectors like smartphones, computers, and auto parts. The country has evolved into an essential part of the global supply chain. It supplies critical components to factories worldwide, from Mexico to Malaysia. China has also grown into a massive consumer market of 1.4 billion people with an increasing appetite for electronic gadgets, fashion, and travel.
The trade war waged by the Trump administration previously forced multinational factories to move from China to other countries, particularly Vietnam, to avoid American tariffs. The Coronavirus outbreak could accelerate this trend if global companies find themselves stuck outside of China.
The outbreak in Wuhan, a city of 11 million inhabitants, prompted the Chinese government to quarantine the metropolis and most of the Hubei province. The government extended the Lunar New Year holidays, but intense fear keeps many workers away from industrial cities. Critical manufacturing zones—including Shanghai, Suzhou, and Guangdong province—extended the holiday closure by at least another week, preventing workers from returning.
This frightening epidemic will result in a substantial loss of sales for China’s tourism and hospitality industries. Organizers canceled concerts and sporting events. IMAX, the Toronto-based film company, postponed the release of five films intended for the Chinese holiday market.
In the United States, authorities confirmed nine cases but no deaths. Anxiety remains intense at airports. US officials quarantined 195 Americans evacuated from Wuhan to California. President Trump temporarily suspended entry to the United States for all foreign nationals who recently traveled to China, while Delta, United, and American Airlines suspended their flights.
General Motors routinely sells more cars in China than in the United States. Now, its Chinese factories will remain closed for at least another week at the government’s request. Similarly, Ford Motor advised Chinese executives to work from home while its factories remain dormant.
If customers cannot buy what they need from China, Chinese factories could reduce orders for imported machinery, components, and raw materials. This shift threatens computer chips from Taiwan, copper from Chile, and factory equipment from Germany. Economists from DBRS Morningstar warn that this situation could potentially disrupt the entire global supply chain.
China today accounts for about a third of global economic growth. This represents a larger share than the United States, Europe, and Japan combined. The American semiconductor industry is particularly rooted in China, which serves as both an important production center and a massive market. Intel generates approximately $20 billion in revenue there. Qualcomm depends even more on the region, drawing 47% of its annual revenue—nearly $12 billion—from Chinese sales.
The true duration and spread of the coronavirus epidemic remain unknown, making it impossible to calculate the exact slowdown. However, the impact of the current epidemic will probably exceed that of SARS, given China’s massive stature in the world economy. Experts at the Peterson Institute for International Economics expect much greater chain effects than the market experienced in the past.
The virus’s effects on notoriously complex supply chains remain difficult to predict. A single part of a smart TV can consist of dozens of smaller components. The companies themselves often do not know which suppliers sit three or four steps down the chain. Apple assembles most of its products in China and has significantly reduced employee travel to the country. Apple also closed its 42 stores in China, while Walmart cut operating hours.
In contrast, at the international toy fair in Nuremberg, Germany, many Chinese suppliers expressed confidence regarding quick factory reopenings. After SARS, China suffered a strong economic contraction but rebounded rapidly. It could happen again. The only certainty remains that whatever happens in China will heavily affect other countries. China has become a dominant player in the world economy and an essential source of last resort.
