The coronavirus outbreak in China is bringing significant disruption to the supply chains of major multi-national companies, especially in the consumer electronics and automotive industries, despite the gradual resumption of manufacturing activity in the country.
The death toll from the disease has now surpassed 2,000, with more than 75,000 people infected and over 1,000 confirmed cases outside mainland China.
Earlier this week, Apple became one of the first major global manufacturers to warn of supply chain shortages resulting from the Covid-19 coronavirus which could shave billions of dollars off its worldwide sales.
In an investor update, the US electronics giant – which makes most of its iPhones and other products in China – said that manufacturing production “is starting to resume around the country, but we are experiencing a slower return to normal conditions than we had anticipated”. As a result, it said “worldwide iPhone supply will be temporarily constrained”.
“While our iPhone manufacturing partner sites are located outside the Hubei province – and while all of these facilities have reopened – they are ramping up more slowly than we had anticipated,” Apple said. The company stressed that “the health and well-being of every person who helps make these products possible is our paramount priority, and we are working in close consultation with our suppliers and public health experts as this ramp continues”.
A second factor that would “temporarily affect revenues worldwide” was that demand for its products within China had been affected, because all of its stores in China and many of its partner stores had been closed, and “stores that are open have been operating at reduced hours and with very low customer traffic”.
It added: “The situation is evolving, and we will provide more information during our next earnings call in April. Apple is fundamentally strong, and this disruption to our business is only temporary”, expressing gratitude to “those on the front lines of confronting this public health emergency”.
Taiwanese electronics manufacturer Foxconn, Apple's key iPhone supplier, has switched some of its production to making surgical masks instead of smartphones, but is reportedly struggling to get its production lines back up to speed. It usually fits eight workers into each dormitory at its factory in Zhengzhou but quarantine measures mean each person now has to have their own room, the Financial Times (FT) reported.
In contrast, Korean consumer electronics giant Samsung stands to be a major beneficiary of the China production difficulties announced by rival Apple earlier this week as a result of its decision taken a decade ago to relocate low-cost smartphone manufacturing in Vietnam. Half of Samsung’s smartphones are now made in Vietnam, where the coronavirus has so far had only a limited impact on its production.
Car giants face supply chain shortages
Meanwhile, supply chains in the automotive industry appear to be among the hardest-hit by the coronavirus.
The UK’s biggest carmaker, Jaguar Land Rover (JLR), is flying components out of China in suitcases as it races to prevent its UK plants from closing by the end of this month, according to a Financial Times report.
At an event to unveil the company’s autonomous electric car, Project Vector, chief executive Sir Ralf Speth said that the company’s British plants were “safe for this week” and the week after, but faced difficulties sourcing parts from China in the following weeks, which represented “a risk for overall production”.
He continued: “We have flown parts in suitcases from China to the UK just to make sure that we have got the right parts,” he said, adding that last week the company was missing 38 key components.
Speth said the “very first critical part” for which JLR was facing a shortage was the key fob. “We have to take all the key systems apart and every car only gets, at the moment, one key fob – just to make sure we can produce.”
JLR has three plants in the UK plants but Speth did not say if they might have to close or reduce production.
Prof. David Bailey, of Birmingham Business School, told The Guardian newspaper: “If you think back to the Japanese earthquake and tsunami, there were critical parts coming from Japan, so Japanese producers shut down in the UK. It depends whether they have second sourcing agreements to get parts elsewhere and whether they can flex those.”
Speaking at the Project Vector event, Guenter Butschek, chief executive of JLR’s parent company Tata Motors, said the company would be able to operate in February and early March but was not covered for the whole of March. He added that the “biggest problem is logistics” and the difficulty of getting components out of China.
In early February, Fiat Chrysler said that one of its European plants would be forced to halt production in a matter of weeks as it struggles to source key parts from Chinese suppliers. Toyota, Hyundai, Volvo and PSA, the owner of Peugeot, are among the carmakers to have disclosed that coronavirus is disrupting their supply chains or risks doing so. Hyundai and Nissan have closed their sites in South Korea.
Freight capacity shortages could push up rates
With export freight volumes gaining momentum again as China's manufacturing output picks up, albeit slowly, shippers are likely to face an increasing squeeze in air and ocean outbound capacity – accompanied by higher rates – in the weeks to come, according to a coronavirus operational update released by global freight forwarding and logistics group Agility.
It noted that pressure on capacity was currently affecting inbound air freight and China domestic trucking in particular. And on the production side, it highlighted that “many large exporters, including original equipment manufacturers (OEMs), are not immediately resuming full production either due to manpower shortage, in response to or as a precaution to ensure quarantine measures for returning workers”.
Based on preliminary assessments, it said an estimated 30% of major suppliers remain closed, with major OEMs indicating “the delay to reach full production could last well into March”.
The update underlined that today, both international air and ocean capacity are available, reflecting the slowdown in production over the last few weeks. However, moving forward, pressure on outbound capacity will likely increase and drive market rates up.
Agility is encouraging customers to communicate demand forecasts “so that we can better support them through this period of volatility”.
WTO warns about potential global impact
Meanwhile, the latest WTO Goods Trade Barometer, released earlier this week, concluded that world merchandise trade growth is likely to remain weak in early 2020. The real-time measure of trade trends now reads 95.5 – less than the 96.6 recorded last November and well below the index’s baseline value of 100.
The WTO said the drop in the barometer since November has been driven by additional declines in indices for container shipping (94.8) and agricultural raw materials (90.9), as well as the plateauing of the automotive products index (100.0).
Although indices for export orders (98.5), air freight (94.6) and electronic components (92.8) are all below baseline, they appear to have stabilized and would normally be expected to rise in the coming months.
However, every component of the Goods Trade Barometer will be influenced by the economic impact of COVID-19 and the effectiveness of efforts to treat and contain the disease, the WTO warned.
