China Factories’ Closure Could Hurt Big US Companies

Danica Bachman | FEB 11, 2020

The negative effects of the novel coronavirus outbreak that started in China transcend to other sectors across the globe. Right now, China is keen to contain and resolve the virus, which has already taken a lot of lives since its discovery. The Asian country recently asked companies to temporarily shut down operations to further strengthen its control and prevention of the virus.

Pedestrians wearing facial masks look at an electric board showing stock averages of Japan's Nikkei and the U.S. Nasdaq outside a brokerage at a business district in Tokyo, Japan January 30, 2020. (Photo: REUTERS/Kim Kyung-Hoon)

This kind of measure, while for the greater good, has big companies scrambling for alternative solutions. Chief Asia Economist Mark Williams of Capital Economics noted that the factory shutdowns in China could cause a sharp slowdown in its economy, particularly in this quarter. This move exposes firms with dispersed supply chains since a delay in a single component is sufficient to bring the entire production to a stop, the economist added.

The recent coronavirus outbreak puts China in a very tight situation. Production plants could not get the right materials needed for their production lines. The other issue is that there is a worker shortage since the country imposed travel bans to prevent the spread of the infection. Consumer goods manufacturers along remain offline, and most facilities, particularly in, and proximate Wuhan, are still closed.

Daniel Ives of Wedbush Securities said in a client note that for each week that Foxconn's production facilities are offline, Apple could potentially lose a million iPhone sales for the first quarter of 2020. Economists at Goldman Sachs estimate that the first-quarter GDP growth of China could be at 4 percent year over year. The industrial activity of the country could get affected by the prolonged shutdown of businesses and facilities as well as lower the export of goods.

IHS Markit's Executive Director and Asia Pacific Chief Economist Rajiv Biswas said that for a lot of global multinational companies, the disruption in the industrial output of China this February underlined the companies' vulnerability in terms of global supply chains and excessive dependence on China. The shutdown of Chinese factories, according to the executive director, would encourage manufacturers to raise production from plants in other parts of the world.

Brookings Institution Senior Fellow David Dollar said that if China could get the coronavirus under control, the country's economy could bounce back rapidly. However, at present, it is not clear when exactly this would happen, Dollar said. He added that it would take two more weeks to evaluate the impact of the current scenario.

The current shut down of factories in China could benefit other Asian countries like Vietnam, Indonesia, Malaysia, and Thailand. These countries could pick up displaced supply lines. It could also benefit other emerging markets like Brazil.

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