Sat. Aug 15th, 2020

From idled car production to iPhone delays, China’s factory closures mean pain for U.S. companies

4 min read
For every additional week Foxconn's production facilities are offline, Apple could lose a million iPhone sales for the quarter, an analyst estimated.
Employees inspect vehicle frames inside the paint shop at the Hyundai Motor manufacturing facility in Montgomery,

To get the fast-spreading coronavirus epidemic under control, Chinese authorities in some parts of the country reportedly have told factories to remain shuttered for as long as three more weeks. The prospect of extended manufacturing gridlock has America’s corporate leaders scrambling to find alternative sources — although that may not be enough to prevent a slowdown in their business.

“Factory shutdowns will cause a sharp slowdown in China’s economy this quarter,” said Mark Williams, chief Asia economist at Capital Economics. “Firms with dispersed supply chains are particularly exposed, since a delay to delivery of individual components may be enough to bring all production to a halt.”

Chinese manufacturers face two deficits: They can’t get the raw materials or components they need to run their production lines, and they face a worker shortage because of the travel bans still in effect in much of the country. Manufacturers of consumer goods, as well as inputs such as steel, remain offline, with facility closures concentrated in and around Wuhan, where the virus originated.

The optimization of just-in-time manufacturing and inventory fulfillment leaves manufacturers acutely exposed in the event of a supply chain breakdown, because they don’t stockpile raw materials or parts.

“Inventories in most manufacturing sectors today are typically quite lean. When the supply chain stops, then you run out,” said Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics.

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Rajiv Biswas, executive director and Asia-Pacific chief economist at IHS Markit, said: “For many global multinationals, the severe disruption of China’s industrial output during February has highlighted the vulnerability of their global supply chains to excessive reliance on China.

“As occurred during the U.S.-China trade war, the protracted shutdown of Chinese factories will also encourage global manufacturers to increase production from their plants in other manufacturing hubs worldwide,” Biswas said.

Commerce Secretary Wilbur Ross was sharply criticized after he said in a Fox Business Network interview two weeks ago that he thought the virus “will help to accelerate the return of jobs to North America.”

Experts dismiss that as unlikely, although other exporters may benefit: Biswas said Asian countries such as Vietnam, Thailand, India and Indonesia could pick up business from displaced supply lines, as could emerging markets in the Western Hemisphere, such as Brazil.

But in many sectors of industrial production, the supply chain has become so highly refined and specialized that there are no ready alternatives to China. In particular, that could cause the production of consumer goods like cars and iPhones to be delayed, analysts said.

“It seems like most of the supply chains that will be impacted would be in manufacturing, and more specifically, a lot of technology components, like semiconductors and autos,” said Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute. Hyundai Motor Co. shut down facilities in South Korea last week when its supply of Chinese parts dried up, and Fiat Chrysler has also warned that it could be forced to idle plants.

“When you see auto companies move to shut down production, as opposed to trying to find other components, that highlights that this is not easy. It’s close to impossible in the short run,” Kirkegaard said.

Wedbush Securities analyst Daniel Ives wrote in a client note about reports that the shutdown at key Apple manufacturer Foxconn might be longer than anticipated.

“Once production and the supply chain starts back up, we estimate it will take roughly one to two weeks to get to full production, which may not happen now till the end of February/early March with the current trajectory,” Ives said.

Ives estimated that for every additional week Foxconn’s production facilities are offline, Apple could lose a million iPhone sales for the quarter.

That could have a material effect on Chinese economic growth, although most analysts say the impact on U.S. economic activity should be minimal — provided China contains the crisis. “It is very likely that output in China will contract this quarter, for the first time since the global financial crisis,” Williams said.

Goldman Sachs economists lowered their estimate of China’s first-quarter growth in gross domestic product to 4 percent, year over year. “The prolonged shutdown will lower industrial activity not only in China but also abroad through lower goods exports to China,” they said.

David Dollar, a senior fellow at the Brookings Institution, said: “If they get the virus under control, then the economy can bounce back quickly, but at the moment, when that will happen is not clear. It will take a couple more weeks to really assess what the impact will be.”

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