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  • Vinay Nair

Coronavirus sends Supply Shockwave around the Financial World

Updated: Mar 9, 2020

As stock markets crash around the world, and global giants like Microsoft see billions of dollars wiped off from their market values, investors are having painful flashbacks to the fateful days of 2008. The global financial crisis of 2007 and '08 have gone down in history as one of the most disastrous financial slumps since 1929. But this time around, we seem to have fewer answers to the frenzied questions of investors, as rising panic takes hold around the rapidly spreading risk of Coronavirus.

The Chinese manufacturing and service sectors are two of the chief ramparts of our global economy. They are instrumental to pumping lifeblood into the hearts of industrial operations worldwide: be it supplying parts and raw materials to producers in Europe and America, or sending finished goods to emerging economies around the world. Now, with the entire country in a disarray over the insidious threat of a brand new virus, the global supply chain is dismantling faster than ever, sending shockwaves across all sectors of economic activity. The emergency mode has been activated, but there seems to be little cure for the escalation of coronavirus at the moment, or for the extremely low consumer confidence and willingness to spend, both of which have been in free fall since disaster struck.

How Did it all Begin?

The Chinese government has long been notorious for suppressing information outflow from the country, lest the world should find out about everything that goes wrong within. It took a similar approach with the coronavirus, a devastating viral outbreak, to keep the world's financial community from finding out how a disease had crept into China and that it could potentially spread through the numerous supply chains the country has access to. The coronavirus is essentially viral illness similar to pneumonia, or the flu, just deadlier and easier to spread. The incidence of this disease was officially reported by China on 30th December, long after rumours had started circulating about the threat of this illness in the Wuhan seafood market. By then, the virus had sneaked into the supply chain, and human bodies, as people traveled from China to other parts of the world.

As it stands now, coronavirus is en route to turning into a full blown pandemic, having already affected people across four continents and killed a substantial number. Recently, the first coronavirus related death was reported in the US, the largest and arguably most powerful economy of the world. The mortality rate from this viral outbreak is about 2%, considerably higher than the 1% mortality rate that seasonal flus tend to have. This rate would have been much more containable if we had a clear medical solution, but when it comes to the "Covid-19" virus, the world's health community is yet to find a vaccine that could potentially work.

The odds are worsened by the fact that some carriers of this dangerous virus have either mild or no symptoms at all, which makes it particularly hard to discover it before the disease is transmitted to other people. This means that before the disease was officially identified and announced, viral strains can easily have entered into the global supply chains via unaffected or mildly affected carriers. Considering how most of our smartphones and gadgets, or at least some of their parts, are made in China, this raises huge questions about the product safety standards maintained before the official identification of the disease. To prevent this now, many countries have banned travellers coming in from affected regions, even if they are not ostensibly suffering from the disease. Tedros Adhanom, the Director General of the World Health Organisation (WHO) put it rightly. when he said that this viral outbreak was far more challenging to contain than terrorism and insurgency. He added that governments would have to be far more proactive in tackling it than they usually are with counter terrorism measures. And he's right, the governments around the world, especially in countries that have already been affected, have their work cut out for them in preventing further spread of this disease.

Speaking of governments and policymakers, what is the role that the authorities can play in quelling this disaster?

Governmental Measures to Contain Coronavirus

Governments around the world are undertaking a slew of measures to restrict the spread of this virus. From disinfecting public spaces, especially those susceptible to inflow of the viral strain, to banning travellers coming in from regions such as China, Hong Kong and Macau, the authorities have clamped down on the viral outbreak. In France, the authorities have banned public gatherings in confined spaces with more than 5000 people and Japan has introduced quarantines in cruise ships. But, as WHO noted recently, each affected person can infect 1.4 to 2.5 people on average, which means that the most stringent measures may not be enough.

As for the impact the virus has had on the financial markets, there is little that the government can do. No fiscal stimuli or financial packages will allay the fears of a slowdown now, no demand side policies will restore confidence. This is exactly where this financial crisis differs from the one in 2008. Back then, the central banks and finance ministries had at least some tricks up their sleeves: be it tax cuts, or relief packages. Now, however, nothing seems to be quieting the fears of consumers, as they double down on the purchase of hand sanitisers and refuse to shell out cash for much of anything else.

The Impact on Consumer Confidence

As the headlines grow increasingly upsetting and frightening, consumers around the world have cut back on purchases, and developed a morbid, and perhaps even rational fear of traveling, eating in restaurants, buying a host of products and more. Amazon US has repeatedly been selling out of hand sanitisers, and people are becoming increasingly queasy about buying products that are often associated with Chinese production. If we all take a look around our houses, we will find at least a few things that have been made in China, or have been made with parts in China. Naturally, this has worsened the fears of consumers, as they worry about falling prey to the disease via the things they buy.

However, some aspects of the falling consumer confidence have been woefully irrational. The stock prices fell for the parent company of the Corona Beer, as the people became increasingly squeamish about consuming the product named the same as the deadly virus. Similarly, consumers have shunned many China Town restaurant areas in cities far away from China. While it is true that the outbreak occurred around the time of the Lunar New Year, when many Chinese nationals go home before coming back to their place of work, many Chinese origin restaurateurs who have never even been to China are facing financial woes because of this crisis as well.

Eating Into the Global Supply Chain

China has some of the most important production facilities and warehouses that supply goods to the leading companies of the world. Apple manufactures many of its iconic iPhones in Chinese factories, and Microsoft also makes a lot of its electronics in the country. These are only a couple of examples, but you would only have to read the labels on your smartphone boxes or laptop packaging to know how much of our consumer electronics come from China. Right now, with the city of Wuhan in a lockdown, and many Chinese factories operating at only 25% to 50% of their full capacity, there is a widespread lull in the global supply chain. Even the real estate and construction industry in Europe and America, which source light parts from China, have slowed down significantly in the absence of these supplies. Even the products we don't commonly associate with the Chinese production line have come to a screeching halt because of the outbreak. Coca Cola, for example, has had to reassess its financial projections and outlook as well, because the disease has disrupted the supply chain bringing artificial sweeteners from China to Coca Cola factories around the world. Although the Chinese government is trying hard to resurrect the operability of production facilities and manufacturing plants, especially in the low risk regions, few companies can take the chance of bringing in supplies from China, and sending unanticipated ripple effects further into their value chains.

Why are the Share Prices Falling?

The share prices of many major countries have taken a hit, with Apple losing 26 billion dollars in a single day. Microsoft has been forced to renew its growth projections in the wake of this crisis, as Windows production depends heavily on Chinese parts and supplies. This downward revision of revenue projection has caused the investors in the public market to pull out in panic, resulting in a loss of $62 billion intraday. While technology firms have had to restructure their expectations because of supply chain disruptions, many other companies, especially fintech and travel ones, have had to revise their growth outlook to account for the impact felt across e-commerce, travel and tourism. As people get increasingly wary of shipping in products from elsewhere, and cut down on travel bookings, MasterCard has had to lower its projections as well. Consequently, the fintech giant's market value has taken a nearly $22 billion dollar hit. A similar fate has befallen the likes of United Airlines and Royal Caribbean Cruises in the wake of reduced travel expenses incurred by consumers.

Microsoft, Unity, Sony, Epic and others have also pulled out of the highly anticipated Game Developers Conference as a result of the coronavirus threat. In a similar vein, the Mobile World Congress has been cancelled, as health and safety concerns have kept participants from gathering in these large meets to discuss the future of these burgeoning industries. The smartphone and electronics companies are currently in high alert, pulling out all stops to contain the damage from eroding years of growth. It is only natural perhaps that they would hit pause on attending conferences now, which is only reflective of the growing fear that's gripping companies and people worldwide. As long as the supply chain remains unhinged, and the technology, travel and finance giants don't figure out a clear plan to restrict the threat from irreversibly damaging their growth outlook, the revenue figures will continue to be revised negatively, and so will the share prices.

The viral outbreak has taken a significant toll on the financial market, with little to no remedy in sight. Even after the threat is contained, rebuilding the supply chain will take a fair amount of time, and efforts, and one can only hope that the exhausting impact does not push us towards another recession anytime soon.




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