Coronavirus Disease 2019 (COVID-19) and How it Affects Global Supply Chains
Patrick O'Loughlin Mar 4
The Coronavirus, otherwise known as COVID-19, has begun to infiltrate different parts of the world far from the origin in Wuhan, Hubei Province, China. Instead of trying to explain its chemical composition and other scientific aspects, here I will explain some of its impact on the world of global shipping and supply chains. I will do this by discussing the interruption of manufacturing, the effect on shipping operators, and a potential inventory crisis.
Coronavirus has Affected Manufacturing in China and Other Countries
Without question, China is the world’s premiere manufacturer of goods. According to Macrotrands.net, in 2017, China’s annual industrial output was about $3.5 trillion. This number is staggering when you consider that the United States’ industrial output for the same year was about $2.1 trillion. Because China is the manufacturing leader of the world, many nations rely on the manufacturing of goods there to import into their own markets.
Since many workers in China have been quarantined and many workplaces are not safe to resume operations yet, manufacturing has slowed considerably compared to normal times. The closing of factories in China has also affected manufacturing in other countries. For example, Wall Street Journal reported that earlier this month Hyundai Motor Co had suspended production in its plants in South Korea as those plants relied heavily on parts from suppliers in China.
Luckily, it seems more and more factories are once again becoming operational. Bloomberg Economics estimates that Chinese factories were operating at 60-70% capacity this week. As more and more factories become operational again, manufacturing should continue to rebound.
Effect on Shipping In and Out of China
The effect of the Coronavirus has impacted the shipping of goods from China to other parts of the world. Dozens of Ocean Sailings leaving China have been cancelled. These sailings connect Europe and North America to the world’s largest exporter of manufactured goods. These sailings also connect some of the supplies needed for manufacturing in other countries, such as South Korea who have also been hit hard by the Coronavirus outbreak.
According to the Wall Street Journal, the cancellation of sailings has lead to a record number of containers and ships made idle this quarter. The larger shipping operators are better equipped to absorb the cost of idling their ships without too much trouble but smaller shipping operators who service important regional routes around the main routes will definitely be affected more than most. For those smaller operators, many costs continue to accumulate while ships are idled and most, if not all, revenue streams coming from a ship are halted while it is idled. This is noteworthy because the smaller shipping operators play a vital role of connecting some of the world’s smaller markets to global trade. Without some sort of stimulus for those companies, smaller markets might be playing at a disadvantage in the aftermath of the Coronavirus if smaller operators go out of business.
Air Cargo & Passenger Flights Have Been Grounded
Just like the ocean sailings have been cancelled, many flights in and out of China have been grounded. This has caused a bit of a panic as many jobs rely on those flights to be operational. Many airlines including Lufthansa, Singapore Airlines, Delta Air Lines, American Airlines, etc have taken measures to either cut expenses in the region in some way or have made exceptions to allow for booking changes on flights around the affected regions.
According to an article written by Alistair MacDonald and William Boston of the Wall Street Journal, more than 200,000 flights to, from and within China have been cancelled. This is expected to have a severe impact on the revenues of airlines worldwide. Furthermore, it has prompted many airlines to be forced to offer unpaid leave to their employees during this time.
Experts agree that the repercussions of the Coronavirus on the global economy will be significant. We will have a better idea of the real effect on supply chains starting in the next days and weeks of March. It is generally thought that a company will try to maintain 15-30 days of inventory on hand at any given time. It is routine for companies to carry more inventory going into Chinese Lunar New Year which is why the month of March will be important to follow as inventory may be dwindling for many companies that rely on China in their Supply Chain.
Companies who had prepared for an interruption of their supply chain and have found an alternative source for a substitute product outside of China can breath a little easier as their supply chain should be back to normal soon! But for those companies who completely rely their supply chain on China and whose inventory is depleted or low, March will be a crucial month to survive until this blows over. Look for many companies to expedite products over from China once available to save their supply chain…at a relatively large cost.