Via Naked Capitalism

Even though we are not that far into the progress of the novel coronavirus, experts are still trying to assess its impact and spread.

On the one hand, Goldman Sachs forecasts that the novel cornoavirus won’t dent global growth, based on the assumption that the infection peaks in China at the end of the first quarter, which is in line with WHO projections.

And the Wall Street Journal reports that China is deploying its surveillance technology to follow where people who’ve contracted the disease have been, even though some experts pooh-poohed its utility:

Ms. [Susan] Erikson [professor of health sciences at Simon Fraser University in Vancouver], who spent time in Sierra Leone during the Ebola crisis, said the idea of using big data often sounds more impressive than it is.

“In reality, there is too little return on the massive investment required to translate telecom info into public-health action,” she added. “The opportunity costs in an emergency are huge. Paying attention to low-return activity during a crisis means not paying attention to other more urgent public-health needs.”

But there is one area where there’s somewhat less uncertainty: auto industry supply chains, where for quite a few players, shortages are already hurting production. This should come as no surprise; the big car manufacturers long ago adopted “just in time” manufacturing, with protective inventories a no-no. But optimizing for efficiency creates vulnerability to shock, and coronavirus is proving to be a big one.

The Financial Times has a good recap, with several automakers hitting the red alert that they were mere weeks away from having to shutter some operations due to coronavirus hitting deliveries of key parts from China. Hyundai said yesterday it had halted production in all of its South Korea car plants, with a frantic search on to find new sources for ” engine wire-harness”.

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And as we indicated at the top of this post, infections in China are currently expected to grow until late March/early April, meaning these car manufacturers aren’t very likely to get a break.

Mind you, some of the apparent freakout may be due to an abundance of caution. China extended its Lunar New Year holiday to try to stem the spread of coronavirus in Wuhan and other parts of the country deemed at high risk. That in turn kept some manufacturers from restarting production. A key section from the article:

Many vehicle manufacturers are still scrambling to assess how they will be affected by a Chinese shutdown, several executives told the Financial Times.

“It’s almost impossible to know where the pinch points will be,” said Justin Cox, head of global production at LMC Automotive. “We just don’t know right now how big the problem is or how long this will go on for.”

He added: “A lot of carmakers will have back-up supply options, so they can switch suppliers. But if there is such a loss of output globally, there might not be enough to go around. If it does run out, they have to stop.”

Carmakers in Germany, which make the bulk of their profits in China, have announced the temporary closures of their production plants in the country, as have large car-parts suppliers.

Meanwhile, Japanese carmaker Nissan on Tuesday said it was considering extending a shutdown of its joint-venture operations in China, in line with other carmakers including Toyota, Honda and Ford. For its two plants in Hubei province, which is at the heart of the outbreak, Nissan said production was expected to restart some time after February 14.

Earnings at Volkswagen and BMW operations in China are expected to fall by at least 5 per cent in the first half of 2020, after the companies suspended production in the country, according to analysts at research firm Bernstein.

The article does cheerily point out that Hyuandai expects to reopen its South Korea factories next week but also points out that automakers moving production around to keep operations humming, even if they did succeed in keeping output on a par, would still dent profits.

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The South China Morning Post warned that if the coronavirus isn’t under control by April, smaller manufacturers will start failing:

Concerns among small and medium-sized manufacturers in China over the impact of the coronavirus outbreak have risen sharply, with many worrying about going bust if the situation is not brought under control soon.

Anxiety is most acute among labour-intensive manufacturing firms, as local governments have restricted business where numerous people congregate in an effort to contain the deadly virus…

If the outbreak is not brought under control by March or April, when many foreign customers place orders for the rest of the year, some Chinese companies fret business will shift to suppliers outside China, accelerating a move to alternative manufacturing bases, especially in Southeast Asia.

“The number of workers resuming work [at factories] in Dongguan will definitely be affected in the coming couple of months, as well as at logistics operations and supply chain firms,” [Tom] Wang [operator of a footwear factory] said.

There have yet to be any reports of shortages of pharmaceuticals, an area where the West is even more dependent on China than for auto parts. Admittedly, there is almost certainly more inventory slack, between retailer and drug distributors. But all it takes is for a critical drug or two to become scarce to create serious consequences.

And it is far too early to tell if multinationals will start to question the wisdom of extended supply chains. Coronavirus can be excused as a black swan, but now all these big ticket execs have been put on notice. Look at how hurricanes in Puerto Rico led to shortages of IV fluids and bags because three Baxter factories were knocked out. Fires, storms, electrical outages…all are more likely than in the past and big companies need to take a hard look at their exposures.

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For the want of a nail, a shoe was lost….

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