There’s an old saying among supply chain pros: “When local supply chains sneeze, the global process catches a cold.” It’s a tidy little metaphor that does a pretty good job capturing the supply chain butterfly effect.
These days though, that idea of supply chain virality is less metaphorical. As of 2/18, a novel coronavirus has infected nearly 75k people in China. And while the number of new cases appears to be slowing, there are waves of economic implications yet to hit our shores.
It seems silly to point out why it matters so much that China is the center of the epidemic. Sourcify.com calls China the world’s “most important manufacturer and industrial producer as it sells more manufacturing goods than any other country in the world.”
Part of this is due to product availability. Along with tech products, China is the world’s dominant exporter of electrical machinery; clothing; automobile parts; furniture and lighting; cases, handbags, and wallets; and more.
These categories drive a global economy that ranks number 2 in the world in GDP. The US is number 1.
And so it is easy to see how the spread of a highly contagious, droplet virus through the manufacturing hub of the world might create some issues.
Lora Cocere, Supply Chain Insights founder, calls the potential fallout “a new phenomena with unprecedented uncertainty.”
So far, the issue has been Chinese consumer demand, rather than the country’s industrial role in the global economy. Over 400 companies have warned on the impact of the Coronavirus on Q1 earnings.
The most outspoken of those companies seem to be in apparel (specifically luxury brands), which makes sense there are over 100 thousand garment producing factories distributing branded apparel in China.
In an article from CNN Business from February 7, Canada Goose announced that its 2020 sales and earnings would be hurt by the coronavirus outbreak in China.
The high-end parka brand said that so far its supply chain has not been interrupted (more on that to come), but rather “retail stores and e-commerce across Greater China…continue to experience significant reductions in revenue.”
Iconic British fashion company Burberry expressed similar sentiments. “The outbreak of the coronavirus in mainland China is having a material negative effect on luxury demand,” said Burberry CEO Marco Gobbetti in a statement. Burberry (BURBY) shares in London fell 1% on the report.
24 of Burberry’s 64 stores in mainland China were closed at the time of publication, and while Chinese tourist spending had not yet slowed, widening travel restrictions did not bode well for brick and mortar locations in Europe
Soon though, the ripples of the coronavirus will spread in the form of supplier disruption. And when they do, it won’t just be one niche market like luxury apparel.
Perhaps one of the most vulnerable supply chains is automotive. China houses almost all of the world-leading auto-parts manufacturers, exporting with higher production efficiency than anywhere else in the world.
Cocere reminds us of Ford in 2011 when “Thailand floods idled global production for one of its most profitable production lines…In the coming months, this will happen over and over again to over 70% of manufacturers. This is a time where supply chains will compete against supply chain. For some brands, the impact will be long-lasting…”