Via Financial Times

The emergence of the coronavirus — a deadly respiratory disease that originated in the central Chinese city of Wuhan — has had far-reaching ramifications on the corporate world. Here is a look at how sectors from luxury goods to automobiles are grappling with the fallout.

Luxury

Shoes are displayed at a Dolce & Gabbana shop in Beijing on November 22, 2018. - Dolce & Gabbana cancelled a long-planned fashion show in Shanghai on November 21 after an outcry over racially offensive posts on its social media accounts, a setback for the company in the world's most important luxury market. (Photo by Nicolas ASFOURI / AFP)NICOLAS ASFOURI/AFP/Getty Images
Chinese customers shopping at home and abroad account for 90 per cent of the growth in the luxury market © Nicolas Asfouri/AFP/Getty

A queue of roughly 30 people, many of whom were speaking Chinese, queued at the Louis Vuitton, Chanel and Gucci stands in the Galeries Lafayette department store in Paris on Monday, writes Leila Abboud. Across the street at Galeries Lafayette’s centre for Asian tourist groups, crowds of people were waiting to get tax refunds on their purchases.

The scenes in the French capital reflect how critical Chinese buyers have become to the global luxury goods sector. The luxury market grew 5 per cent in 2018 to reach €1.3tn, according to Bain & Co consultants, with Chinese customers shopping at home and abroad accounting for 90 per cent of the growth. Chinese customers now account for more than a third of the value of luxury goods purchases.

This means that the industry’s conglomerates such as LVMH, Kering and Richemont, as well as brands like Hermès and Burberry, are particularly exposed to a drop-off in Chinese demand.

Luxury brands have so far weathered a drop in sales since the political protests in Hong Kong because many of the purchases were repatriated to mainland China, or elsewhere in Asia. The coronavirus could change all that.

Bar chart of % of sales from Chinese consumers showing Luxury groups are heavily exposed to China

Joëlle de Montgolfier, director of Bain’s luxury practice, said the coronavirus could have a “double whammy effect” on the sector. “Not only will Chinese people buy less domestically during the key New Year shopping season, they will also have to cancel trips abroad, during which they often buy luxury goods,” she said.

China’s Ministry of Culture and Tourism on Monday told travel agencies to temporarily suspend the sale of group tours abroad.

It is too early for the effects to be seen in Paris shops, but investors in the sector — which before the outbreak had been trading at valuations not seen in a decade — are spooked. Shares in LVMH are down 4 per cent this year so far, while Kering is down 8 per cent and Burberry dropped 9 per cent.

RBC analysts estimated that a 10 per cent drop in Chinese consumption in the first half of the year would translate into a 2 per cent reduction in luxury companies’ revenues, and a hit to annual profits of up to 4 per cent.

Leisure

Attendees play electronic slot machines during the Global Gaming Expo Asia (G2E Asia) in Macau, China, on Tuesday, May 21, 2019. The expo runs through May 23. Photographer: Paul Yeung/Bloomberg via Getty Images
Macau, which has felt an immediate impact from the coronavirus, relies predominantly on Chinese visitors for its tourism revenue © Paul Yeung/Bloomberg

No official fireworks will mark the Chinese new year in Macau on Monday as the world’s largest gambling hub cancelled all its celebrations in the wake of the coronavirus outbreak, writes Alice Hancock in London. Dealers in its casinos wore masks, casino visitors were temperature checked, and parts of the gaming floors were closed off.

Macau is a popular destination for travellers from China where gambling is officially illegal, and it relies predominantly on Chinese visitors for its tourism revenue.

“Macau makes money off China. It’s not foreign tourists that drive business there,” said Charles Gillespie, chief executive of Gambling.com. He added that the lack of Chinese visitors would “really take the legs out” of Macau’s casinos, many of which are owned by international entertainment companies including MGM and Wynn Resorts.

The impact of the coronavirus on Macau has been immediate.

Figures from Macau’s tourist office show the number of tourists from mainland China fell 80 per cent on Sunday, the third day of the Chinese new year holiday, compared to the same day last year. Overall inbound tourist numbers were down 60 per cent over the three days of the holiday so far.

READ ALSO  TransDigm: Great Execution But High Price (NYSE:TDG)

Shares in the major casino companies with resorts in the territory fell, with Las Vegas Sands down about 6 per cent and Wynn Resorts nearly 7 per cent.

There were some unexpected beneficiaries of the Macau shutdown, however: gambling companies licensed in the Philippines. The Philippines is Asia’s online gambling hub, offering betting to the Chinese market.

“When people in China are forced to stay at home they go online. We have seen a massive surge in online gaming as a result of the virus,” said Jason Ader, chief executive of SpringOwl Asset Management, an investment manager.

Many other Chinese leisure destinations have shut as a result of the virus outbreak.

A graphic with no description
Chart showing that most of visitors to Macau come from the mainland. 12-month sum in millions

Disneyland closed its theme parks in Shanghai and Hong Kong “as a precautionary measure,” and said it would aim to refund guests that had booked park tickets or hotel rooms.

The National Museum of China, Forbidden City, Beijing’s Olympic Stadium and parts of the Great Wall of China were also closed.

Major hotel groups including Hilton, Marriott, Accor and InterContinental waived cancellation fees until February 8. Airbnb said it will allow hosts and guests living in or travelling to the Hubei province — the epicentre of the coronavirus — to cancel their reservations up to February 8 with no charge.

Cruise companies such as Royal Caribbean and Carnival banned passengers that had recently come from Wuhan from coming on board and cancelled sailings. Starbucks closed stores in Wuhan and McDonald’s has suspended its business in Wuhan and surrounding cities where public transport has been closed.

Seven blockbuster films due to be released at the weekend, including Jackie Chan’s Vanguard, were cancelled as thousands of cinemas closed their doors, according to a report in Variety magazine.

Additional reporting by Tim Bradshaw in London and Alistair Gray in New York

Airlines

A Boeing 747 of Lufthansa lands on the international airport in Frankfurt, Germany, Saturday, Jan. 25, 2020. (AP Photo/Michael Probst)
Fears that the rapid spread of the coronavirus could have far-reaching effects on travel in China hit shares in several airlines, though analysts said it was too early to quantify the extent of the impact on passenger numbers © Michael Probst/AP

Global airline stocks were battered on Monday as fears grew that the rapid spread of the coronavirus could have far-reaching effects on people’s willingness and ability to travel in China and beyond, writes Myles McCormick in London.

Analysts drew comparisons to the Sars outbreak almost two decades ago — described by Lufthansa’s then-chief executive as the airline industry’s “worst-ever crisis”.

“If people take a view they shouldn’t be travelling or shouldn’t go to a place or be on planes with people who might have been to certain places, they’re less likely to travel,” said Andrew Charlton, a Geneva-based aviation analyst. “It’s going to have an impact on passenger numbers.”

Airline stocks were among the biggest fallers in European equities, with Air France-KLM leading the pack downwards to shed almost 6 per cent. Other major European carriers with exposure to China also took a hit — BA-owner IAG fell 5.5 per cent, while Germany’s Lufthansa dropped more than 4 per cent.

Even airlines with no direct exposure to China came under pressure on fears that a drop-off in passengers flying out of the country could reverberate globally. EasyJet slipped 5 per cent, while Ryanair was down 3 per cent. Many stock markets across Asia and Australia were closed for public holidays on Monday, meaning shares of carriers likely to be directly affected, including Hong Kong’s Cathay Pacific, Australia’s Qantas, Singapore Airlines and others in mainland China have not traded on the weekend’s developments.

Line chart of Share prices in euro terms, rebased showing Global airlines under pressure

Analysts said it remained too early to quantify the extent of the impact on passenger numbers. As a benchmark, many pointed to the Sars virus, which reduced airline revenues by billions and caused passenger volumes on the key Hong Kong to Europe route to fall by about a third from November 2002 to July 2003.

READ ALSO  "We Feel Like We Are Drowning" - Rural Hospitals Overwhelmed By Shortages Of Bed, Staff

“It’s not clear how to market-size this yet,” said Mark Manduca, an analyst at Citigroup. “Does one compare it with Zika? Does one compare it with Sars?”

Banks

In this picture taken on October 24 shows a general view of the HSBC headquarters building (C) in Hong Kong. - HSBC pre-tax profits slip 18 percent to 4.8 billion USD in third quarter, the company announced on October 28, 2019. (Photo by Philip FONG / AFP) (Photo by PHILIP FONG/AFP via Getty Images)
HSBC’s headquarters in Hong Kong: Many international banks with significant operations in China have baned travel to the country, asked staff to work from home, and disinfected their Asia offices © Philip Fong/AFP/Getty

International banks and wealth managers, which have expanded aggressively into China in recent years, have been ringfencing potentially exposed staff, putting in place travel bans, and disinfecting their Asia offices, write Stephen Morris and Owen Walker in London.

Credit Suisse told staff in Hong Kong to work from home and not come into its headquarters in the International Commerce Center tower if they have visited the mainland in the last 14 days.

Affected employees will be required to remain at home for at least a fortnight and get a doctor’s certificate before they return if they have fever or flu-like symptoms. The bank is also offering temperature checks in its main office, which remains open.

Credit Suisse has also told staff that business travel should be limited to “essential travel only”.

Fellow Swiss bank UBS has also told its 2,500 workforce in Hong Kong to stay at home if they have travelled to China recently. Its main offices in China remain open, but staff are banned from travelling to China unless it is deemed “critical”, a spokesman said.

A graphic with no description

HSBC has instigated “more restrictive travel policies”, but travel to the mainland from Hong Kong is not banned. Staff have been told not to come into the office until February 3, the date when the Chinese lunar new year has been extended to by the government.

Meanwhile, Standard Chartered has also restricted all non-essential staff travel to its China and Hong Kong offices, banned trips to the Wuhan and Hubei provinces, and asking those returning from affected areas to work from home for 14 days.

Fidelity International, a $584bn investment manager, said it was encouraging China-based staff to work from home. And Allianz Global Investors, the €557bn investment arm of the German insurer, advised staff to refrain from travelling to affected areas before the Chinese new year holidays.

Automobiles

This photo taken on November 27, 2019 shows employees working on an assembly line at the third auto plant of Dongfeng Honda in Wuhan in China's central Hubei province. (Photo by STR / AFP) / China OUT (Photo by STR/AFP via Getty Images)
A Dongfeng Honda plant in Wuhan, China, which is a is a major automotive hub. Nissan, PSA and Honda are likely to be the most affected by supplier shutdowns, as they have significant operations in the region © AFP/Getty

International carmakers including Nissan, PSA and Renault have begun pulling foreign staff from plants across parts of China that have been hit by the coronavirus, amid warnings the outbreak could further hamper the country’s struggling auto market, writes Peter Campbell in London.

The industry faces a “traumatic next few months” with consumers likely to delay car purchases, said Robin Zhu, an analyst at Bernstein. The 40 Chinese cities that have reported double-digit confirmed cases of coronavirus account for 40 per cent of China’s car market, he added.

Meanwhile, several auto executives said a reliance on parts suppliers from the Hubei region may prevent some plants reopening following the Chinese new year holiday.

Wuhan is a major automotive hub, with plants from Nissan, PSA, Honda, General Motors, Geely and Renault, as well as a large range of car parts suppliers, which serve a wider network of assembly plants.

Carmakers hold very little stock at their assembly operations, instead relying on just-in-time supply chains that see parts delivered to the assembly plant hours or even minutes before required in the factory.

A graphic with no description

Michael Dunne, a former GM executive who runs the China-focused ZoZo Go auto consultancy, said Nissan, PSA and Honda are likely to be the most affected by supplier shutdowns, as they have significant operations in the region.

READ ALSO  Joe Biden reveals top picks for national security team

Companies with staff on the ground are also working with their home governments to help expatriate employees leave the country.

Nissan is preparing to fly its Japanese staff in Wuhan home on a government-chartered flight, a spokesperson said. French carmaker PSA has also begun evacuating 38 people, including expatriates and their families, from its three production sites in the region, the company said on Monday, while Renault is offering its staff the chance to leave.

Bernstein’s Mr Zhu said: “Realistically, we fear investors will need to brace for a slowdown in broader activity levels in China.”

Technology

A Meituan food delivery worker rides her scooter on a street in Beijing on October 21, 2019. (Photo by WANG Zhao / AFP) (Photo by WANG ZHAO/AFP via Getty Images)
Meituan food delivery workers are dropping meals at a customer’s doorstep or office lobby, instead of handing it to them directly © Wang Zhao/AFP/Getty

When the Sars outbreak began in China in 2002, the relatively small number of mobile phone owners there were only just discovering text messaging, write Tim Bradshaw in London, Ryan McMorrow and Sun Yu in Beijing, and Tom Hancock in Wuhan.

Today, China is the world’s largest mobile market, with 1.4bn people relying on their smartphones for payments, food ordering and countless other transactions every day.

That dependence on smartphones may become a blessing or a curse as China attempts to contain the coronavirus outbreak.

Online food ordering is helping to sustain residents in the locked-down city of Wuhan, even if the millions of couriers across China who deliver meals and groceries pose a potential risk of carrying the virus too.

Delivery drivers were still operating on the streets of Wuhan on Monday, some of them working longer shifts to meet demand.

To mitigate potential infection, Meituan, the Beijing-based food ordering company, has introduced a new “contactless delivery” system in Wuhan that it expects to roll out across the rest of China by the end of the week. Couriers, who are now required to wear face masks, are dropping meal orders at a customer’s doorstep or office lobby, instead of handing it to them directly.

Meituan is also donating millions of dollars’ worth of food to Wuhan’s hospital workers via large food cupboards — another move to avoid direct contact between medics and couriers.

Other tech companies operating in China, from Baidu to Apple, have also made various pledges of support. Tim Cook, Apple’s chief executive, said in a tweet on Saturday that the company would be “donating to groups on the ground helping support all of those affected”.

Chinese tech groups have also taken steps to protect their workforces, with companies including internet group Tencent extending the Lunar New Year holiday and asking employees to work from home.

Foxconn’s Zhengzhou manufacturing facility, which accounted for 15 per cent of global mobile phone output in 2018, said it would delay resuming production by a few days, to February 1, and put off hiring.

Still, Dan Ives at Wedbush — one of the most bullish Apple analysts on Wall Street — played down the potential impact on iPhone demand as “negligible”.

“We believe with the limited transportation in major cities throughout China and limited foot traffic in Shanghai, Beijing, and other cities that at most [around] 1m iPhones in the region could be at risk of shifting out of the March quarter into the June quarter,” said Mr Ives. This “would be less than 3 per cent of Chinese annual iPhone sales at most and a very containable risk.”