Currently, China is the world’s largest exporter of goods. Official estimates say Chinese exports amount more than $2 trillion, making the country the largest trading nation on Earth.
But with China’s economy running at just 40% capacity amid Coronavirus lockdown, the effects on the global supply chain industry are devastating. Not only for the country’s economy but to everyone else who depends on Chinese goods.
At the moment, 13 Chinese cities are under full or partial lockdown through transport bans. Authorities in these cities have halted all public transportation, suspended flights, and barred all non-emergency vehicles from entering or leaving.
The lockdowns are severely impeding logistics operations that rely on access to highways to carry goods. Severe restrictions have also been imposed on inbound and outbound air cargo shipments, trucking and rail cargo services, and vessels along the Yangtze River. This means that even if production is slowly increasing, goods have no way of leaving the country and reaching their intended destination.
How the Chinese production shutdown is affecting western countries.
Dun & Bradstreet researchers found that at least 51,000 companies worldwide have one or more direct or “tier 1” suppliers in the impacted regions, while at least 5 million have one or more “tier 2” suppliers. Training
The report also identified that the top five major sectors, accounting for more than 80% of businesses within impacted provinces, were services, wholesale trade, manufacturing, retail, and financial services.
Brazil, which relies on the Chinese market as its largest trading partner, will likely see slower growth this year due to the fallout from the outbreak.
A similar situation can be expected in the U.S. as well. Currently, the American consumer is China’s largest customer. The U.S. depends heavily on China for providing low-cost goods. It also depends on it to support its own exports. Next to Mexico and Canada, China is America’s third-largest and by far its most rapidly growing major export market.
General Motors, the American car manufacturer, is forced to slow down production as its factories, located in impacted areas, are only functioning at minimum capacity. Foxconn, the Taiwan company that makes iPhones and other gadgets on behalf of Apple, also denied it will be able to reach 50% production levels by the end of February. Tim Cook, Apple’s chief executive, confirmed that some of its suppliers could be disrupted.
Things don’t look better in Europe either. The gloomy outlook briefly sent the euro to almost three-year lows against the dollar.
Airbus, the French aircraft maker, recently acknowledged that it cannot meet global demand for narrow-body jets with its Tianjin factory not working at full capacity. Volkswagen has announced that they have only partially restarted production after the Lunar Year Holidays, and they’re looking into gradually increasing it “while implementing all required health and safety measures.”
The Chinese economy constitutes around 20% of global GDP (gross domestic product). Analysts estimate that if containment of the outbreak is delayed beyond the summer, the “cascading effect” will cause a drag of around one percentage point on global GDP growth.
The consequences of a low level of production and lockdowns in China and beyond
If lockdowns are not soon suspended, the impact on supply chain operations and industrial production throughout China will be huge. Experts estimate that the effects of this pandemic on the Chinese economy will force the country into its biggest recession yet.
Though it’s very difficult to predict the exact consequences of the Coronavirus impact across global supply chains, experts predict:
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supply shortages of materials or finished goods coming from or routed through logistical hubs in impacted areas;
limited availability of white- and blue-collar labor due to quarantine guidelines or illness;
limited ability to discover, qualify and certify new business or programs and to transact business;
challenges in finding alternative routes and means of transportation – even if materials are available, they won’t be easily transported;
consumers may be more cautious in their purchasing habits.
“Supply chain excellence is mostly a matter of efficiency and predictability. With the outbreak of COVID-19, both of these dimensions are being heavily impacted, with suppliers struggling to meet demand while navigating disruptions in workforce availability, transport plans, and their own supply chains.
In the next few weeks, we expect to see a significant increase in the number of procurement events, like eAuctions, organized via Prokuria, as procurement teams will likely scramble to identify, qualify, and sign new suppliers outside the impacted areas to ensure the needed quantities”, said Alina Naftanaila, Co-Founder Prokuria
The Coronavirus instilling the biggest crisis in Asia in recent years
From a supply chain perspective, the disruptions can be associated with past crises such as the 2003 outbreak of severe acute respiratory syndrome (SARS) that swept across Asia, the 2011 Fukushima nuclear disaster, or the 2011 Thailand floods. However, these events had a short-lived economic impact; the impact of the Coronavirus could be much more sustained.
Moreover, this virus is affecting both supply and demand, so the potential threats are graver than those earlier disruptions. We also have to consider China’s growth since the SARS crisis as a manufacturing powerhouse and as a major consumer market.