The impact of coronavirus on China-centered supply chains

The impact of coronavirus on China-centered supply chains (Photo: Shutterstock)

As China struggles to contain the Wuhan-centered coronavirus outbreak, the resulting shutdown of factories and logistics hubs in the country is slowly constricting the global supply chain pipeline.

The Wuhan coronavirus belongs to the same family of coronaviruses as SARS and MERS. Though not as deadly as those previous outbreaks, the Wuhan virus is far easier to contract, leading to an exponential rise in cases reported every week. With over 17,000 infections and 360 people dead, the outbreak has paralyzed the Chinese economy, and with no end in sight on its containment, it might be a few stressful weeks for supply chains with connections to China.

A report published by Resilience360 explains that the severe disruptions to air cargo shipments and overland transport, as well as heavy port congestion for vessels along the Yangtze River near Wuhan will lead to major delays in freight movement in the region. Rail connections that move from China to Europe are skipping Wuhan, further reducing capacity.

“We see that Wuhan is completely under lockdown. In there, cargo can’t leave as the transportation routes are being blocked — there’s the quarantine, nothing’s getting in and nothing’s getting out except for medical supplies and essential things,” Shehrina Kamal, product director of risk monitoring at Resilience360, told FreightWaves.

The outbreak also coincided with the Chinese lunar new year — a time when factories close and people travel around the country to meet friends and family. Apart from enabling the virus to spread faster than at any other time of the year, it also led to the shutdown of factories for much longer than previously anticipated.

In the usual scenario, factories witness near-normal operations between Jan. 14-23 and close Jan. 24-30. Normal operations usually resume by mid-February when all workers return to the floor. However, with the virus outbreak, factory operations will be shut till at least Sunday, with no real clarity on when normal operations will resume.

With long periods of economic inactivity, the Chinese economy is bound to suffer. Kamal contended that it is too early to state any figures on the dip in economic performance. However, extrapolating the impact of the SARS outbreak in 2002-03 on the Chinese GDP could be revealing.

“There was a very clear dip in Chinese GDP, with some estimates putting the loss somewhere between $30-100 billion due to that epidemic,” Kamal said. “If you compare the SARS epidemic with the current epidemic, you’ll see that with the coronavirus, it’s expanding exponentially. I think that we can probably expect the global economy, not just the Chinese economy, to see an effect from this outbreak.”

Wuhan, the epicenter of the coronavirus, happens to be the automotive hub of China, dealing a blow to an already fragile auto market. The Resilience360 report reveals that the auto sector has a 48.39% share of manufacturing in Wuhan and its surrounding cities, including companies like Honda, PSA Group and Dongfeng Motors that have a significant presence in the region.

“As resources become scarce and as the lockdown continues, it’s very difficult to say how long this quarantine will continue as more effects will be evident in production schedules. As interconnected as supply chains are, we’ll start to see some of these effects bubbling up across the supply chain,” Kamal said.

Supply chains are complicated to reconfigure within a short span of time, so such an outbreak is bound to create a logistical nightmare. Though supply chains can make do with certain stopgap measures for the time being, they cannot really circumvent the gravity of the problem in the long run. 

“Just like with the trade war, businesses will be a bit cautious about taking any drastic measures for now. But if the virus outbreak is prolonged over several months, companies might start to look at alternative options,” Kamal added.