When China Sneezes, the Global Economy Catches Cold
Global corporations are struggling to contain the economic damage caused by coronavirus. Singapore's Prime Minister Lee Hsien Loon commented, “the impact (from coronavirus) will be significant in the next couple of quarters. I can't say whether we will have a recession or not. It's possible, but definitely our economy will take a hit”. According to The International Energy Agency, “global oil demand has been hit hard by coronavirus and the widespread shutdown of China's economy. Demand is now expected to fall in the first quarter of 2020.” This is the first ever decline in a decade.
Global automakers like Volkswagen, Toyota, Daimler, General Motors, Renault, Honda and Hyundai may have to slash their production by 15% in the first quarter of 2020, as their China plants have been closed since the Lunar New Year holiday. Production sites of businesses are running low on parts for products assembled in China. Apple Inc. works with suppliers in 43 countries, all of whom get components from Apple’s contract manufacturers in China. There have been auto parts shortages as well causing Hyundai and Nissan to close plants outside China.
There could be some surprises in the waiting as the impact on primary suppliers will be huge as well. Yossi Sheffi from Massachusetts Institute of Technology said, “The most vulnerable companies are small and leveraged suppliers upstream in the supply chain that are in danger of going under.”
Since a year there have been moves to diversify supply chains out of China. But that is a long path to cover. China is still a dominant manufacturer of flat panels used for notebooks computers, TVs, etc. After entering the WTO two decades ago, China has become an indispensable part of global business.