Coronavirus to Begin Destroying Global Supply Chains Within Next 3 Weeks

January 31, 2020 Updated: January 31, 2020
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News Analysis

Chinese suppliers in coronavirus zones may declare “force majeure” to legally terminate export supply chain deliveries and cause many global factories to begin running out of parts within three weeks, IHS Markit warned.

With the United Nations World Health Organization (WHO) declaring the potential pandemic spread of the 2019-nCoV form of coronavirus as a Global Health Emergency on Jan. 30, domestic companies can exercise “force majeure” (Act of God) provisions under Chinese law to escape financial liability for failing to deliver customer shipments on time. The WHO designation also eliminates delivery liability since December for failures due to China’s National State Council efforts to extend holidays, implement quarantines, and interrupting transports to slow the virus spread since late December.

Wuhan is often called the “Detroit of China.” The city produces about two million passenger vehicles a year, and its factories export hundreds of millions of parts and sub-assemblies to hundreds of huge original equipment auto and commercial vehicle assembly plants across the globe.

James Pinto, who managed ten large factories across Asia during China’s eight-month outbreak of SARS coronavirus in 2002-2003, told The Epoch Times that modern original equipment manufacturers (OEM) only hold a few days inventory of sub-assemblies and parts. OEM supply chain contracts require their Chinese vendors to hold two months of “safety stock” near foreign assembly lines and another three weeks of back stock at their domestic factory. Despite such preparations, SARS caused an estimated $40 billion of disruption losses.

But Pinto warns this coronavirus outbreak was not recognized as so dangerous until after 400 million Chinese began traveling in early January for Chinese New Year. He suggests that it is common practice at Chinese factories to ship their three-week back stop inventory before plants begin to shut down around January 10. With Chinese factories closed and the three-week backstop inventory already shipped, safety stock is running down at assembly plants all over the world.

Almost all OEM vehicle plants have disaster recovery plans with backup suppliers, but many of those backup plants are in different locations in China. If 2019-nCoV coronavirus is a pandemic, production and transportation will shrivel across the nation.

IHS Markit cautions that China’s National State Council powers in a WHO Global Health Emergency extend to setting the “rules and regulations governing corporate behavior.”

Most Asian countries had already labeled the 2019-nCoV as a “level one” communicable disease, alongside bubonic plague and cholera. Several nations have blocked travel from Chinese cities with high coronavirus reports, such as Wuhan.

IHS Markit expects the WHO Emergency designation will add additional Chinese cities in areas along the Yangtze River, such as Chongqing municipality and neighboring Sichuan Province. China’s direct high-speed railway connections are expected to maximize the pandemic risks along the Beijing-Guangzhou railway, which links Beijing municipality, Guangdong, Henan, Hubei, and Hunan provinces.

The economic impact of SARS was about a 1 percent reduction of China’s 2003 GDP, but that was during a period of double-digit economic growth. IHS Markit pre-coronavirus estimate for 2020 economic growth was only 5.8 percent.

Mainland China’s impact on the world economy is also much larger now than during the SARS outbreak when it was the sixth largest economy in the world, and only accounted for 4.2 percent of world GDP. China’s economy is now the second largest in the world, which accounts for 16.3 percent of world GDP and 10.4 percent of the world’s goods imports versus 4.0 percent in 2002.