When leading economists start talking about a drop in manufacturing comparable to the start of the 2007-2008 global financial crisis, you can be sure that the world’s leading industries are in for a torrid few months.
The trigger for this alarming state of affairs was the December outbreak of the COVID-19 Coronavirus epidemic in the Chinese city of Wuhan, which prompted authorities to lock down major cities, close factories, and severely limit the movement of individuals.
Since then, the impact on manufacturing and global supply chains, across multiple industry sectors, has been significant.
Pinpointing the Industries Hit the Hardest
In an opinion piece, International Monetary Fund chief economist Gita Gopinath says the drop in manufacturing is “comparable to the start of the global financial crisis”.
Gopinath adds, however, that this time around the decline in services “appears larger”.
The IMF’s Gopinath joins other economists and analysts in identifying a number of industries they believe will bear the brunt of supply chain upheavals caused by the epidemic, which has now spread to 115 countries and killed more than 4,000 people.
And with an estimated five million companies around the world having Chinese suppliers, the fallout has the potential to create an immeasurable degree of havoc.
The Auto Industry
Wuhan is a major centre of automotive manufacturing and accounts for a significant portion of the manufactured vehicle parts, worth around $35 billion, that China exports annually.
With the city in lockdown, the supply has dried up and automakers in Europe and the United States have had to pillage their stockpiles.
A shortage of parts and accessories has already caused the closure of Hyundai, Nissan, Jaguar Land Rover, and Fiat Chrysler factories outside of China. European automakers have also been impacted by the closure of an electronics factory in northern Italy, another hotbed of COVID-19 activity.
With components taking six to eight weeks to reach Europe from China, the crisis still has some way to run.
In the United States, automotive stocks have fallen due to a shortage of parts affecting production at the plants of General Motors, Ford, Toyota, and Fiat Chrysler. Moody’s Investor Service forecasts a drop of 2.5% in vehicle sales worldwide in 2020 due to Coronavirus.
Drewry Shipping Consultants predicts that in the short term, global container volumes and carrier earnings will take a sharp hit, but expects that the medium-term impact will be manageable provided the virus is contained.
It adds that, so far, the impact of the epidemic on container shipping has just about been bearable, but warns that the longer the outbreak goes on, and the more widespread it becomes, the more damage it will cause.
Here are some other ways that shipping has been impacted:
- Around 200 sailings from and to China were cancelled in the period January-February, resulting in a revenue shortfall of at least $1 billion.
- Cargo volumes have dropped by between 5 and 25 percent in the same period at ports in Europe and the United States.
- With China buying less iron ore, oil and coal, charter rates for bulk freighters and tankers have dipped by more than 70 percent since early January.
This is another sector especially exposed to the disruptions in China, with most electronic manufacturers finding themselves short of critical parts and products.
US-based technology giant Apple, in its latest quarterly guidance, warned of a shortage of its iPhone due to production problems in China. Samsung has shut production in several factories while HP and Lenovo have also warned of a possible shortage of product.
A February survey found that most electronics manufacturers were running short of product and were expecting delays of four to five weeks.
China is the world’s largest producer of chemicals called active pharmaceutical ingredients (APIs), a core component of most drugs. The US and many Western producers source most of their APIs from China. Any stutter in the supply chain, therefore, has a potentially harmful effect on public health.
Most antibiotics used in the US also come from China, which also controls worldwide penicillin production, according to a senior US drugs expert. India, meanwhile, produces the bulk much of the world’s generic drugs but derives most of its APIs from China.
Although not directly caused by the hiccups in the supply chain, the global technology industry, too, is being mangled by the Coronavirus epidemic. Most of the disruption has been caused by fears that the virus could be spread through contact with infected colleagues in the office, at seminars, and at special events.
How US Techno Giants Have Responded to COVID-19
Facebook: Cancelled its F8 Developer Conference, asked staff to work from home, restricted employee travel to China, cancelled a marketing summit, and is giving the World Health Organisation free ads to provide health information.
Google: Told staff to work remotely whenever possible, curtailed business travel to China, temporarily closed its offices in China, Hong Kong, and Taiwan, cancelled a developer conference, and changed its annual cloud conference.
Twitter: Told all employees to start working from home, suspended all non-critical business travel and events for employees, and closed its office for deep cleaning after an employee was suspected of carrying the virus.
Amazon: Told employees to work from home, and removed thousands of merchants’ items as a consequence of price gouging.
Where to From Here?
Most industries affected by supply chain shortages are scrambling to find alternative suppliers, while some are airlifting supplies from China—or paying a premium for expedited shipping to avoid disruptions.
The IMF’s Gopinath, in announcing rapid-disbursing funding amounting to $50 billion, called for a coordinated international response to the epidemic, which she said has a broad reach across many countries and involves extensive cross-border economic linkages.
It’s likely that such a cash injection could go a long way towards helping repair the world’s tattered supply chains and get industry up and running again.
That said, who knows what further dramas might beset the commercial world—and in which industrial sectors—before any sense of normality begins to return.
Thanks for the informative blog
Covid-19 global situation has caused, to say the least, certain catastrophic impact to purchasing practices and norms. To the extent of failure to meet the stock level requirement for industries and services to effectively operate. For certain service industries even compromising service quality so that the basic service can still carry on.
However, there was a “double barrel” blow effect as when it started with the Chinese govt locked down the whole country in an effort to contain and control the virus. We see the shortage of raw materials/parts of sorts were not available then as the virus spread to other countries and they in turn implement respective lock down again services and industries were affected if not no production and disrupted services as they could not operate fully if at all as availability of supplies quickly diminishes.
This only emphasize the need to re-look at theories and practices for new approach to purchasing practice that can address this unusual situation that is beyond any present assumptions. As a fore thought maybe something like in the line of “intuitive purchasing” whereby action is taken “in the event/likelihood” certain catastrophe is predicted to happen.
This situation should open our eyes to look for different ways and means of forcasting economic disaster due to non-economic reason in this case a virus. The whole world communities must somehow must must look into a paradigm shift theories and thinking.
I am not one of those “prime movers”of ideas and philosopher but the whole world should “wake-up” having gone through/am still going through this difficult patch myself. The frustration of not able to effectively carry out my work is most worrying. I am sure there are many out there going through the same thing as well.
Thanks for your comments.
Thanks for the informative blog