What is the impact of COVID-19?

Coronavirus Disease 2019 or COVID-19 is a viral respiratory disease that was first identified in the city of Wuhan in the Chinese province of Hubei. It is a SARS like disease and as at the time of writing it had claimed almost 1,400 lives in the last 8 weeks. Approximately 65,000 people have tested positive in eighteen different countries. The World Health Organization has declared a Global Health Emergency as approximately 450 people in 24 different countries are believed to have contracted the disease. Nobody yet knows exactly how devastating this emergency will be when compared with previous pandemics. What we do know is that it will have a severe effect on the supply chains of many global industries. Wuhan is a key industrial centre for China’s export industry. There are some 500 industrial manufacturers in Wuhan who make parts that are critical to the assembly processes of many different industries in many different countries.

It is this key role in the “just in time” inventory processing systems that major industries have embraced that makes this event different from others on record. Shortages are bound to affect the manufacturing lines of many industries, particularly the technology and auto-manufacturing industries. Others are iron & steel, hardware, electrical equipment, renewable energy, pharmaceuticals and transport.

For example, Foxconn, Apple’s most important contract manufacturer, was originally supposed to resume production on February 12th but the factories will remain closed for some time to come. If Foxconn is unable to ramp up production soon, Apple will have to delay the launch of its next iPhone, which would impact its financial results.

Razat Gaurav, the CEO at LLamasoft, points out that the ability to activate contingency plans is affected by the industry. LLamasoft is a leading supplier of Artificial Intelligence-powered supply chain analytics software. “If companies are making sneakers in China, they can get an alternative plant up and running in Bangladesh or southeast Asia relatively quickly.” The production facilities already exist and the cost of adding capacity is relatively low. But, a typical semiconductor factory costs $1 billion to open, so short term optionality is greatly reduced.

A survey this week by the Shanghai Japanese Commerce & Industry Club found that the outbreak had affected the supply chains of 54% of companies. But only 23% said they had alternative production or procurement plans in case of a prolonged Chinese shutdown.

• 48% of companies report their global operations are already impacted by the shutdown
• 78% of companies do not have sufficient staff to run a full production line
• 41% of companies say a lack of staff is their biggest challenge in the next 2-4 weeks; 30% of companies say logistics issues will be their biggest concern
• Over the next few months, 58% of companies expect demand for their output to be lower than normal
• 38% of companies do not have sufficient masks/other supplies to protect their staff from coronavirus infection
• 35% of companies ranked a clearer explanation of requirements as the most important thing government officials could do to speed up factory opening approvals

Clearly this event will adversely affect the global economy in Q1 of this year but will be far more serious if it continues into Q2 and Q3 as manufacturers run out of parts inventories and have to close their assembly plants.

In such a scenario, we would expect the global economy to slow by approximately 1% which might drive the Global GDP growth rate below 3% which is considered to be a global recession. U.S. GDP growth could also be hit by between 1% and 3% for the year, depending on the length of the shutdowns.

Canada’s economy is less dependent on China’s supply chains than is the U.S. and may escape with less direct impact but will still be hurt if there is a notable slowdown in the global economy.

Charts Data from Bloomberg; Source LWM