COVID-19, the novel coronavirus making its way around the globe and threatening to unleash a worldwide pandemic is not only causing a public health crisis, but disrupting production supply chains as well. China, where the contagion originated, is slowly coming back online after shuttering for weeks in the hope of containing the outbreak. Workers were told to stay home, production came to a virtual halt and the latest manufacturing data released by the government shows that the February PMI (Purchasing Managers Index) has cratered to a record low.
As "the world’s factory" responsible for a quarter of global manufacturing, the fact that pretty much nothing was produced for an entire month in China is going to have a far-reaching and outsized impact. The only question is – how big will that impact be?
Like countless other companies, Apple relies heavily on Chinese manufacturing to assemble its products, specifically the iPhone, and produce component parts. The quarantines and work stoppages forced the tech giant to announce that it would not meets its March quarter sales forecast, sending its sky-high stock dipping into bear territory.
Although China is now slowly ramping back up, Apple is still not out of the woods yet. CEO Tim Cook recently stated that the company also has suppliers in South Korea and Italy, two nations contending with massive COVID-19 outbreaks of their own which will likely spell further production disruptions.
Apple is far from the only company dealing with supply challenges as a result of the outbreak. In South Korea, Samsung, the world’s top producer of smartphones and computer chips, had to halt production at a smartphone factory over the weekend after an employee tested positive for the virus. Two additional cases have also been confirmed at other Samsung facilities, but have not yet, as of this writing, caused production stoppages.
Electronics screen maker LG Display and South Korea’s second-biggest company Hyundai also had to suspend operations after workers tested positive for the virus. The series of stoppages is forecasted to cause negative disruptions across the global technology supply chain.
Outside of tech companies, apparel makers, automakers, and industrial-equipment manufacturers are also particularly vulnerable to COVID-19 supply shocks as they have become highly dependent on inputs from China and Southeast Asia over the last two decades. In fact, a quarter of U.S. imports and half of imported computer/electronics products come from just China, South Korea, and Japan.
Last Thursday, Goldman Sachs revised earnings growth for U.S. companies down to zero, forecasting stagnation as a result of supply-chain challenges. “Our reduced profit forecasts reflect the severe decline in Chinese economic activity in 1Q, lower end-demand for US exporters, disruption to the supply chain for many US firms, a slowdown in US economic activity, and elevated business uncertainty,” Goldman’s U.S. equity strategist, David Kostin, said in a note to clients.
At this point, it’s anyone’s guess as to just how profound the impact of the virus will be on corporate earnings and the global economy. Countries outside of China had a few weeks to get a jump on preventing and containing the outbreak. Unfortunately, the latest reports point to viral proliferation picking up speed on multiple continents.
Further disruptions are likely in the offing, and the longer the crisis continues, the greater the possibility of an actual economic recession. Yet and still, many businesses may be reluctant to radically alter their supply chains as a result of the current or even future viral epidemics. Tim Cook called the immediate crisis a “temporary condition,” noting that Apple “worked through earthquakes, tornadoes, fires, floods, tsunamis, SARS,” and has been resilient. So while the company may make a few alterations, it doesn’t expect to make fundamental changes to how its sources and produces its products.
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