Just as the U.S.-China trade war was starting to fade, the coronavirus crisis is exposing how heavily dependent foreign companies are on China for their production and business.
As the new virus continues to spread in China, killing more than 1,800, cities have been locked down, logistics and the movement of people hampered, and consumer demand dented, leaving companies—both Chinese and foreign—grappling to resume business operations.
In a sign of how devastating the economic impact could be, China’s State Council on Tuesday called on regions with lower risk from the virus to resume full production. The regions deemed to be higher risk were instructed to monitor the health conditions on the ground, with a priority placed on controlling the disease. It didn’t specify which regions were deemed high-, medium- or low-risk.
Companies also are offering bonuses to workers and helping organize group trips for employees to return to work as they seek to combat the worker shortage.
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Meanwhile in the U.S., Apple Inc. became the first major American company to say it won’t meet its revenue projections for the current quarter because of the coronavirus outbreak. It said the epidemic had both limited iPhone production for world-wide sales and curtailed demand for its products in China. Apple assembles most of its products, including the iPhone, in China through contract manufacturers such as Foxconn Technology Group. Apple shares were down 2% in Tuesday trading.
“I think many companies have realized their complete dependence on China. If the country goes down like this, it is going to really hamper” their business, said Jörg Wuttke, president of the European Chamber of Commerce in China. Many companies will now look to diversify, he said in a briefing on Tuesday, “seeing that not all eggs are in one basket.”
Apple withdrawing its prior guidance wasn’t surprising because roughly 70% of the company’s revenue is generated from products manufactured in China, according to Bernstein analyst Toni Sacconaghi. He said HP Inc., Dell Technologies Inc.and Hewlett Packard Enterprise Co. are among tech hardware companies to watch considering their exposure to China based on their supply chain and how much business they do in the country.
The range of challenges that foreign companies face now in China is broad, Mr. Wuttke said. Many truck drivers who carry components and goods have had to face quarantine of up to two weeks as they go from one city to another, slowing down logistics. Sourcing materials and components have been difficult. Many employees who left town have been unable to come back to work at factories or offices, as they follow quarantine rules; and those rules as well as other government orders have varied city by city, region by region, causing confusion.
Workers at a Galanz factory in Foshan, China, wearing protective gear amid the coronavirus outbreak.And even if companies are able to produce goods, there are hurdles in shipping those goods to consumers. Companies are running short of packing materials, while many shopping centers are closed. With fewer flights and ships coming to and from China, less room is available to ship goods overseas, Mr. Wuttke said.
Apple suppliers including Foxconn have restarted some plants, but more time is needed to get production levels back to normal, people familiar with the matter have said.
A major reason continues to be worker shortage. The quarantine of nearly 60 million people in Hubei province and its capital Wuhan, the center of the epidemic, means that workers who visited family in the region over the Lunar New Year holiday can’t get back to their jobs.
On top of that, many Chinese cities, including Beijing and Shanghai, are asking most people entering from elsewhere to quarantine themselves at home for 14 days before going to work.
In a sign of Foxconn’s eagerness to secure more workers, the Zhengzhou plant in central China—Foxconn’s biggest iPhone assembly factory—is offering some new and returning workers a bonus of up to 3,000 yuan ($430), according to the plant’s WeChat account.
Foxconn didn’t immediately respond to a request for comment.
Analysts, however, are split on how long the difficulties from the spread of coronavirus will have on business in China and abroad. Research firm International Data Corp. expects the virus’ impact on the Chinese economy to be limited to the first quarter of 2020 and gradually fade in subsequent quarters, though the effects will be more pronounced in the country’s information technology and communications sector. Cowen analysts described Apple’s change in guidance as a transitory issue and that unfulfilled demand for products including the iPhone could largely be made up later in the year.
Meanwhile, Raymond James analysts see more troubling signs based on the potential for the virus to continue spreading rapidly in China and other countries, including the U.S. “It seems as though the market is underappreciating the potential dangers and what the key government leaders on the virus are saying,” according to a Monday research note.
The worker shortage is a shared concern among many factory operators in China. To bring back workers, some local governments have been organizing group trips to get them back to their destinations.
Sichuan province in southwestern China, home to many migrant workers, is one example. The government there has been coordinating with provinces of Zhejiang, in the east, and Guangdong, in the south, which are major labor destinations, on how to organize trips and send them back amid a nationwide transportation disruption.
In one such effort, 154 migrant workers boarded a plane at an airport in Sichuan to go back to their workplace at Jiashan county, Zhejiang province, this week. Upon arrival, they were picked up by buses dispatched by Jiashan authorities. The fees were covered by their employers and the local government, Jiashan government said in a post on WeChat.
Another challenge for companies, Mr. Wuttke said, is the weak consumer demand. Most people are focused on buying daily necessities, but beyond that, people aren’t shopping much, he said.
Many stores and shopping centers in China remain closed or are operating shorter hours. Apple, which had closed all of its 42 retail stores in China earlier this month as the virus outbreak worsened, now has seven stores back open, with shorter hours of operation, including all five stores in Beijing and two in Shanghai, an Apple spokeswoman said. The remaining 35 stores in mainland China are still closed.
(Wall Street Journal)
