PGI INSIGHT: China – February 2020
Coronavirus to cause prolonged supply chain disruption
- An outbreak of new coronavirus that causes a respiratory illness was first detected in the Chinese city of Wuhan, Hubei province, in December 2019. The virus has killed more than 600 people and prompted Chinese authorities to quarantine several major cities.
- Authorities have ordered businesses in over 20 provinces across the country to remain closed until at least 10 February, while businesses in Hubei province will remain closed until at least 14 February.
- The manufacturing sector is at a high risk of prolonged disruption. Supply chains may provide a vector for the spread of the disease, and as such authorities are likely to maintain restrictions on travel for a long period.
- Foreign businesses reliant on China’s manufacturing sector will come under pressure to endure the disruption associated with the outbreak or move their supply chains to less risky markets.
Factories across China have been closed for an extended period in an effort to contain the spread of a new coronavirus outbreak. More than 20 provinces throughout the country have instructed businesses not to resume work until 10 February at the earliest to minimise risks of human-to-human transmission. Businesses in Hubei province, the epicentre of the outbreak, will remain closed until at least 14 February. Even if factories reopen on 10 February, it will be difficult to restart production. Many workers had travelled across China for Chinese New Year celebrations before travel bans went into effect, meaning that it will be difficult for employees to return to work.
There is a high likelihood that the Chinese authorities will extend factory closures to limit the spread of the virus. In manufacturing, industries with a high demand for human labour, such as electronics and garments, are at higher risk of becoming contagion hubs due to the large number of workers, often in poor sanitary conditions. Authorities will likely crack down on anyone violating the closures. Companies may be reluctant to risk opening too soon to avoid repeat outbreaks and recurring business disruption.
The logistics chain presents a significant risk of virus transmission. If the coronavirus spreads to industries such as those mentioned above in other countries in the region, the virus will become increasingly difficult to contain and outbreak recurrences are likely. Within China, authorities are likely to focus on transport suspensions to limit outbreak expansion. Thi s may mean that suspensions on logistics and travel will last for significantly longer than business closures.
Sectors reliant on production in China are likely to be severely impacted by the continued supply chain disruption. This applies particularly to those dependent on commercial aviation, shipping and overland transport. In addition, as more countries close their borders to mainland China, this is expected to cut off the supply of some goods into the country. As more sectors of the Chinese economy are impacted and the regional mobility of supply chains becomes more restricted, the adverse economic impacts are likely to be severe.
Impact to foreign companies manufacturing products in China
Foreign businesses that depend on China’s manufacturing sector will become pressured to either endure the disruption associated with the coronavirus outbreak or move their supply chains to less risky markets. In addition, failing companies in China that want to reduce their liabilities may try to use the coronavirus as a pretext to terminate contracts with foreign companies.
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