Economics of coronavirus

In the world of business, managers take pride in claiming that they are prepared for all types of scenarios. Anticipating disruptions is a key part of strategic planning. But the world was not ready for the “coronavirus” and how fast it spread. There is no doubt multinational firms were surprised. The slow reaction was amplified by lack of information. Many observers believe that China failed to inform the rest of the world early enough; and, even tried to suppress the news. 

Most global companies are heavily dependent on China as part of their supply chain process. For example, China now accounts for 16 percent of global GDP. It accounts for 40 percent of all exports in textiles and apparel; and, 26 percent of the world’s furniture exports.

According to the Economist magazine, there are three reasons that business will continue to have difficulties in the coming months. First, most global companies practice what is called “just in time” inventory levels. This means keeping just enough inventory to last a few weeks because of their confidence that they can always replenish their inventories “just in time” for production. The closure or slowdown of many factories in China has made this strategy a big problem for these firms. 

In spite of the US-China trade war, giant firms continue to be dependent on China for their supply chain requirements. The closure of China-based suppliers initially caused Hyundai to shut down all its car plants in South Korea. According to the Economist these plants have partially reopened. Nissan also temporarily closed a plant in Japan. Even Fiat-Chrysler warned that it might have to close a factory in Europe if the crisis is not resolved soon.  

The  third reason is that the regions most affected by the coronavirus which have been locked down by the government are major industrial centers  According to the Economist, “...Hubei province where Wuhan is located is the heart of China’s optics valley, home to many firms making components essential for telecoms networks. Perhaps a quarter of the world’s optical fibre cables and devices are made there.” According to LLamasoft, a supply chain analytics firm, the electronics industry is most at risk because of its relatively thin inventories and its lack of alternative sources for parts.

Other economies, especially in neighboring countries of China are preparing for an economic fallout . Park Chong-hoon, head of research at Standard Chartered in Seoul said the latest developments would ensure GDP growth was below last year’s two percent. He said: “ The Korean economy is losing momentum again just when it was about to slowly recover. Sentiment is deteriorating as China’s economic slowdown is negatively affecting exports and tourism revenues.”

According to the Financial Times: “Japan’s economy shrank at an annualised rate of more than 6 percent in the final three months of 2019 following a rise in consumption tax. This worse than expected performance was before the virus outbreak shut down tourism from China and disrupted supply chains from China and disrupted supply chains for Japanese companies. A second consecutive  quarter of falling output, which many analysts believe  is likely, would plunge Japan’s economy into recession.” The immediate fear of Japan is that the coronavirus will wreck the 2020 Olympic Games scheduled in Japan . 

Right after analysts said Japan was facing a recession because of the effects of the coronavirus, Korean President Moon Jae-in told a cabinet meeting: “We should take all possible measures we can think of to support the economy. The current situation is more serious than we thought...we need to take emergency steps in this time of emergency.” South Korea has announced a $356 million emergency plan to offer loans to struggling airlines, shipping companies, travel agencies and retailers facing a virus-related liquidity crunch.

Singapore seems to be the best prepared ASEAN nation for this type of outbreak since SARS caught Asia unprepared in 2003. It has barred those who have been to China in the past 14 days from entering the country. Quarantine awaits those who have been in close contact with an infected individual. Any person entering hospitals and offices must have their temperatures taken first. 

Singapore is particularly vulnerable to the virus because it is a small, open  economy heavily reliant on Chinese visitors. It expects visitor arrivals to be down by up to 30 percent this year. The country slashed its GDP growth forecast and will unveil a fiscal stimulus to offset economic fallout from the virus.

It is not clear what will happen next. There are serious doubts about whether China is telling the full story of the extent of the spread of the coronavirus. The mayor of Wuhan admitted that five million Wuhan residents were able to leave the city before the lockdown could be implemented. 

Multinational firms want to return to normal production as quickly as possible. However, the Economist said: “But it is unclear how soon workers will be allowed to return to factories. However, factory dormitories are crowded. Foxconn’s workers are packed eight to a room at its Shenzhen plant. If that leads to renewed infections, plants may be forced to shut down again. “

As I said in my last column, SARS, MERS and now coronavirus. This may be the latest; but, it doesn’t look like it will be the last.       

Creative writing classes for kids and teens

Young Writers’ Hangout on Feb. 22 on the Hero’s Journey with Neni Sta. Romana Cruz  (1:30 pm-3pm; stand-alone sessions) at Fully Booked BGC. For details and registration,  email [email protected].

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