How will the coronavirus outbreak affect manufacturing?

News about the Australian bushfire catastrophe has recently been superseded by a new crisis: the coronavirus outbreak. With over 170 deaths in China, cases being discovered in other countries including Australia and the Chinese government locking down entire cities in a short timeframe, the full economic impact of the outbreak is yet to be seen.

So the question is, with the large role that China plays in the global manufacturing industry, how will the lockdowns and travel restrictions affect an industry already impacted by the US–China trade war?

According to CNBC, some in the banking industry are predicting major disruptions, quoting REYL Singapore as saying that supply disruptions should be expected.

“The sharp action taken by the Chinese government to basically delay workers going back to work is definitely going to cause some supply disruptions,” said Daryl Liew, Chief Investment Officer at REYL Singapore.

In Hubei province, where the majority of cases have been found, resumption of local business has been delayed till at least 14 February.

The outbreak has sent tremors across markets in Asia and beyond in recent days, as investor concerns about the potential economic impact grow. There are concerns that the overall impact on the Chinese economy could lead to greater concerns for the global economy.

Wuhan, where the outbreak started, and the surrounding region of Hefei and Jiangsu are major manufacturing hubs that work with many international firms, and many cities in this region have been shut down due to the virus outbreak, and transport links stopped.

Companies that outsource some or all of their manufacturing to China, or that depend on parts and materials supply from affected regions, will no doubt be impacted.

One obvious and well-known example is Apple. Virtually all of the world’s iPhones are made in China: Foxconn’s so-called iPhone City in Zhengzhou and another assembly site near Shanghai. Each of those locations is more than 500 km away from Wuhan but that distance doesn’t immunise them from its effects. Any element of a company’s supply chain can be impacted, if not from the infected areas, then by travel and work restrictions imposed by the Chinese government in its efforts to contain the spread of the virus — and now that cases of coronavirus are rising in Henan province, there is no guarantee that large plants like those in Zhengzhou will not be forced to close temporarily.

Apple, for example, has roughly 10,000 direct employees in China, and its supply chain also has a few million workers manufacturing products like the iPad, iPhone and Apple Watch. Many of those employees have been home the past few days for the Lunar New Year holiday, but this year Chinese authorities have imposed severe travel restrictions and taken the drastic step of quarantining the entire city of Wuhan, a population of more than 11 million.

If employees across Foxconn and other component manufacturing hubs in China are restricted, or working days are limited, this may have a severe impact on production for many companies that are dependent on Chinese workers.

Image: ©stock.adobe.com./au/Kateryna_Kon