How the coronavirus in the “factory of the world” struck down the global business – part 2


In the first part of the article we examined the effect of the coronavirus COVID-19 in China has on some of the neighbouring countries. In this we will turn our attention to the industries reaching far beyond China.

Since China produces all kinds of goods and components for other goods, the quarantine in Wuhan, which is a significant industrial and transportation hub, as well as the overall transport limitations, inevitably affect the production of almost everything – from smartphones, through automobiles, to medications.



Last week the giant Apple that closed its stores in China at the start of the epidemic, said it is expecting significant disruptions in the deliveries of the iPhone which is made in China. In a statement to the investors, the company said it does not expect to meet its own revenue guidance for the second quarter due to the impact of the virus, and warns that “worldwide iPhone supply will be temporarily constrained.” Even though the Apple partners opened their production facilities, the production is slower and “these iPhone supply shortages will temporarily affect revenues worldwide”. Meanwhile, Foxconn, one of the iPhone producers, said it will expand its production facilities and will start producing surgical masks, along with the smartphones.


Medications and medical supplies

And while the temporary problems with iPhone supplies would hardly kill anyone, the situation is far more different when we talk about medications and medical supplies. China, it turns out, is one of the major suppliers of active ingredients of different types of medications.

A recent article in the US publication Pharmacy Times claims that 40% of the medications in the USA are produced in China and India (India mostly receives the ingredients from China) and 13% of the active ingredients for US-made medicines come from China. The reduction of the production capacity and the delayed deliveries due to the coronavirus could cause significant problems with the supplies of medications. At the same time, there may appear quality problems.

There are similar concerns in the EU. A publication of EU Observer reports that several member-states have urged the European Commission to take measures to avoid the possible shortage of medicines and medical supplies in the Union. In response, the commissioner for health Stella Kyriakides told the health ministers that the Commission is following the situation and for now there is no reason for concern. “We will remain vigilant and if the situation changes, we will step up our work,” she said.

A Reuters publication from last week, however, quotes Joerg Wuttke, EU Chamber of Commerce president, who commented at a roundtable in Beijing, that difficulties in production and supply of medicines, packaging and active ingredients in China may cause a worldwide shortage of antibiotics and other medicines.

Meanwhile, a number of media across the world report of a global shortage of medical masks and protective clothing. This is due to the fact that the large part of the production of these goods is in China and exports have been halted. At the same time, the other producers across the world simply do not have the capacity to meet the global demand, which has grown exponentially. The World Health Organisation (WHO) reports that demand for masks has increased 100-fold, and prices – 20 times.


Luxury Goods

Against the background of the reasonable concerns about global deliveries of medications and medical supplies, the misfortune of the luxury goods companies would hardly affect the lives of ordinary people, but in reality the industry is facing massive losses.

According to the latest data of the consultants Bain & Company, the Chinese customers generate around 1/3 of the revenue of the luxury goods industry, both at home and abroad, and spend the staggering $100 bln annually. Because of the coronavirus, however, many companies temporarily shuttered their stores in China, while others work with reduced hours, as there are almost no customers.

This is what the British fashion brand Burberry did – closed 24 of its 64 stores in China and reduced the opening hours of the rest. The company also noted that the sales in China dropped significantly.

The situation with Capri Holdings, the parent company of Michael Kors, Versace, Jimmy Choo, is similar. Earlier this month it announced that it downgrades its expectations for Q1 revenue by $100 mln, while more than half of its stores in China remain closed.

Kering Group, which holds the brands Balenciaga, Gucci, Alexander McQueen, Yves Saint Laurent, Brioni, Ulysse Nardin, etc., also said it closes its Chinese stores for the time being.


Automotive Industry

 Besides luxury goods, China is also the largest automobile market and one of the largest producers of cars and car parts. The coronavirus has affected this industry as well.

Recent data shows that the January sales of new cars in China have been a little below 2 mln and fell 18%. The expectations are for the drop to continue. But this is the smaller problem of the automotive industry.

In addition to the Chinese factories of global brands like Toyota and Honda who temporarily closed their factories due to the quarantine, the same thing happened with the car parts factories. And the effect of this is global. Car factories across the world – Fiat Chrysler in Serbia, Nissan in Japan, Hyundai and Renault in South Korea, General Motors in the US – decrease their production output or outright halt it, because they lack parts produced in China, while Jaguar Land Rover had to “ship parts in suitcases” for its UK factory. Even though most Chinese factories said they would reopen last week, it is still not clear how many of them actually did. Data from the week before last shows that of 183 car parts factories in China, only 59 have reopened.

Meanwhile, analysts avoid making forecasts about when the supply lines will be restored or when production will go back to normal. And in the meantime, some car and car parts producers like BYD Co. and Guangzhou Automobile Group Co., similarly to Foxconn, started to make surgical masks.

Another big loser from the crisis in China is the airlines. When the epidemic started, many airlines reduced the number of flights to and from China, while others outright cancelled them until further notice. Last Friday the International Air Transport Association (IATA) warned that the annual losses of airlines from the coronavirus outbreak could amount to $30 bln in revenue, where the worst affected would be the airlines in the Asia Pacific region. IATA also predicts that, for the first time in a decade, the global demand for air travel would fall.

Obviously, unlike previous recent epidemics, COVID-19 would have a more serious impact on the global economy and these are only some examples of its effects. Even though for now the reactions of the markets are mixed, it is certain that investors and analysts would keep a close eye on the coronavirus spread and the related events and are trying to figure out how they will affect the global business.


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