Wuhan virus: Financial hit looms as businesses globally feel their dependence on China

HONG KONG (NYTIMES) – The world is quickly learning how much it depends on China.

Apple is rerouting supply chains. Ikea is closing stores and paying staff to stay home. Starbucks is warning of a financial blow. Ford and Toyota will idle some of their vast Chinese assembly plants for an extra week.

Japan’s leaders are bracing for a possible hit and the US Federal Reserve is “very carefully monitoring” the situation. Hotels and tour operators across Asia are watching fearfully as the world’s largest source of tourism dollars tightens its borders.

The mysterious coronavirus that has killed 170 people and sickened thousands has virtually shut down one of the world’s most important growth engines. Desperate to slow the fast-moving virus, Chinese authorities have extended the country’s national holiday to Feb 3, and crippled land, rail and air transport. Entire cities have shut down.

An impoverished nation just four decades ago, China has become an essential part of the modern global industrial machine. It alone accounts for roughly one-sixth of global economic output and is the world’s largest manufacturer and trader.

China’s importance goes beyond what it makes. Its consumers buy more cars and smartphones than anybody else. When they go abroad, Chinese tourists spend US$258 billion (S$351 billion) a year, according to the World Tourism Organisation, nearly twice what Americans spend.

But it has become so crucial to the operations of US companies that some members of the Trump Administration cite that dependence as a justification for the trade war that began two years ago, an economic conflict that is forcing businesses to consider shifting their factories in China to countries with better relations with Washington.

Global companies were reconsidering their China strategies even before the trade war began. Its growth is slowing, its labour costs are rising, local companies are increasingly competitive and the government has become less accommodating. Still, its skilled worker base, extensive highway and rail systems and vast consumer market make China tough to quit.

“What is clear is that businesses were already reeling from multiple sources of uncertainty,” said Mr Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. “It’s one more thing,” he added.

The full extent of the hit to the broader business world is not yet clear. The obvious comparison is to the deadly Sars outbreak 17 years ago, which began in China and killed hundreds globally. In early 2003, Sars slowed China’s growth substantially.

“There will clearly be implications, at least in the near term, for Chinese output,” Federal Reserve chairman Jerome Powell said during a news conference on Wednesday. “We just have to see what the effect is globally.”

Most of China had already been shut down since at least Friday for the annual Chinese New Year holiday, a week-long nationwide hiatus. But with the outbreak showing no signs of slowing, many companies are already preparing for a longer slowdown.

“Our members are dealing with varying degrees of disruption in their businesses, including supply chain issues, temporary closings of some retail outlets and factories, and other challenges,” said Mr Jake Parker, the senior vice-president of the US-China Business Council, which represents major companies. If travel restrictions and quarantines are expanded or the holiday extended further, he said, “that will amplify these problems”.

Many companies are now looking for temporary stopgaps.

Carmakers like General Motors and Nissan plan to close their factories until the week of Feb 3 to comply with the longer mandated holiday, while Toyota and Ford said this week that they would close some of their factories a week longer than that because of virus-related disruptions. Companies like GM, Honeywell, Facebook and Bloomberg restricted travel for employees in China and established their own self-quarantine measures.

On Tuesday, coffee company Starbucks said it had closed more than half of its 4,292 stores in China, its second-biggest market after the US, and said it would take a quarterly and full-year financial hit. On Thursday, Ikea, which employs 14,000 people in China, said it will close all 30 of its stores there.

Mr Tim Cook, the chief executive of Apple, said on Tuesday that the iPhone maker was looking for alternative suppliers to “make up for any expected production loss”. Foxconn, a Taiwanese company with an extensive network of factories in China that make gadgets on behalf of Apple and others, said its factories would continue to follow the new holiday schedule.

Apple is not the only company that has had to pivot quickly. Just last week, executives of Honeywell, the US engineering company, travelled to Wuhan for a ceremony related to its plans to open an innovation headquarters. Two days later, Wuhan was put under lockdown by the authorities. Honeywell has since restricted travel to certain parts of China.

Wuhan in particular appeals to major companies because it is a major national transport hub. The auto industry, including General Motors, Honda, Nissan and many others have set up shop there, and many of their suppliers have followed. It is the home to more than one-third of all French investment in China.

On Monday, PSA Group, the French carmaker, said it had set up crisis communications between Wuhan and its Paris headquarters to determine the potential impact on production. The company employs about 2,000 people in Wuhan through its joint venture and was evacuating 38 expatriates.

It is not clear how quickly businesses will bounce back. During the Sars outbreak 17 years ago, some factories paid higher wages to bring workers back and get factories humming again.

Businesses in other countries are also trying to determine the impact.

“If the situation takes longer to subside, we’re concerned it could hurt Japanese exports, output and corporate profits,” Mr Yasutoshi Nishimura, Japan’s minister of state for economic and fiscal policy, told a group of reporters this week. Chinese visitors account for about 30 per cent of all foreign tourists, and Chinese companies are major buyers of Japanese-made components, like semiconductors and lenses.

In Thailand, Chinese sightseers spend nearly US$18 billion annually, totalling about a quarter of tourist spending.

“Chinese tourists are the No. 1 tourists to Thailand,” said Mr Yuthasak Supasorn, the governor of the Tourism Authority of Thailand. He added that the government was exploring ways to compensate business owners who had lost money from the drop in tourists over the past few weeks. The government was even considering reducing parking fees for airlines and excise tax on jet fuel to lure more tourists, he said.

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