As the potential for the coronavirus to become a pandemic looms, the outbreak is starting to affect the supply chains of critical industries across the globe.
About 30% of all imported manufacturing inputs in the U.S. came from China in 2015.
Since the first confirmed case in Wuhan, the virus has spread to manufacturing hubs including Shanghai, Zhejiang, Jiangsu, Guangdong and Chongqing, according to data released by Chinese officials.
These centers are the heart of an increasingly interdependent, global manufacturing network. Now, almost all companies in these districts are closed until February 9 as Chinese authorities try to limit the spread of the virus.
The potential for a ripple effect across the world and to the middle market is enormous.
According to Bloomberg and OECD trade data, the exposure to global imports of intermediate manufactured goods coming from Chinese factories is about 20%. American factories are also at risk, with approximately 30% of all imported manufacturing inputs coming from China in 2015. Those figures have only increased since then.
Consider the health care sector in the United States. As RSM’s Matt Wolf wrote, the sector is seeing risk on two fronts: Health care providers not only need to plan on how they will treat patients, but hospitals also need to consider the effects on their supply chain if the outbreak worsens.
Antibiotics at risk
Hospitals in the United States are particularly vulnerable. According to the Department of Commerce, 97% of all antibiotics in the United States come from China. This is in addition to the many Chinese-made products that fill American hospitals like syringes, surgical gloves and equipment.
The effect of a limit on these supplies could be all the more crippling because ramping up production of antibiotics outside of China could take significant time.
From a medical device perspective, though, the effects of a potential pandemic could be less pronounced. According to the trade association AdvaMed, medical device and diagnostic products imported from China make up just under 3% of the $170 billion medical technology market.
Beyond health care
Outside of health care, middle market businesses in the United States and the rest of the world have come to rely heavily on goods from China, which exports the most intermediate manufactured goods throughout the world. The risk of disruption increases the longer the coronavirus outbreak persists.
Any industry where Chinese suppliers are the leading provider will make it hard for manufacturers to find an alternative source, especially in the short term. These industries include textiles, computer equipment, electronics and non-metallic mineral products, all of which relied on China for at least a third of their imports in 2015.
The center of the outbreak, Wuhan and the Hubei province, are home to many major car manufacturers. In 2018, 1.7 million cars were produced in Wuhan and the Hubei province, accounting for almost 9% of China’s automobile output, according to Bloomberg Intelligence.
Factory closures reducing output will affect the first-quarter results and could extend into the second quarter unless production can be caught up. Tesla reported delays in deliveries of its Model 3 scheduled for early February because of the outbreak, which will affect its first-quarter profitability. The company also reported that its Shanghai factory closure would extend another week and a half.
General Motors, which counts China as its biggest market, is also feeling the effects. At its recent Capital Markets Day, GM reported that the virus would lead to “meaningfully lower equity income in China for the first quarter of 2020.” And the impact for automakers is extending beyond China. The first factory closures outside of China occurred this week with Hyundai in South Korea.
Oil markets are being hurt by the virus outbreak, with decreased travel and commercial operations. The price of the benchmark Brent crude has dropped nearly $15 a barrel since early January, to about $55 on Thursday, in part because of the weakened demand from China, one of the world’s largest importers of commodities.
Western consumers will see a reduction in price, but the economies of exporter countries will suffer the most from reduced revenues. Excess supply in China may be sent to nearby markets, putting pressure on margins. In an effort to stabilize the oil market, it is possible that representatives from OPEC and their allies will decide to reduce output or cut deliveries from Saudi Arabia.
The interconnected supply chain
But the interdependence extends beyond the automakers and oil producers. Take the modern manufacturing ecosystem. Evolutions in the way goods are made inherently increase the risk of disruption from events like the coronavirus outbreak.
- Just-in-time manufacturing: Businesses engaged in these processes could face challenges in operations from sourcing through delivery.
- Concentrated partnerships: Often used for specialized and proprietary manufacturing, these require major upfront investment and coordination and are vulnerable to interruption.
- Contracted sourcing: Manufacturing limitations or service-level agreements often come with penalties for temporary service disruptions
No matter what they produce, it is important for manufacturers to assess their supply chain and business exposure to the coronavirus outbreak.
As Troy Harris, senior director of RSM’s Business Continuity Planning Practice, put it: “While organizations typically prepare business continuity plans focused on isolated disruptions, pandemics and emerging diseases require consideration of broader situations that could have impacts on a regional or even global scale.”
What’s a manufacturer to do?
There are effective measures a company can take, not only for the current outbreak but also for the future:
- Effective preventative and containment strategies for internal and third-party sites.
- Continuous monitoring of health and environmental conditions
- Broad supplier diversification.
- Comprehensive incident and crisis management plans.
- A plan to substitute suppliers and manufacturing processes.