"Made in China" Economic Hit Coming Right Up

Mish

Economic contagion due to the coronavirus is underway. Hyundai halted production. Sony, Apple, and Ford issued warnings.

If you can't get parts, you can't build cars.

And due to a coronavirus-related manufacturing halt in China, Hyundai to Shut Down Some Production.

Hyundai, the world’s fifth-largest carmaker, announced Tuesday that it was suspending production lines at its car factories in South Korea, one of the first major manufacturers to face severe supply-chain issues because of the coronavirus.

Many auto plants in China have already shut down because of the virus, including factories run by Hyundai, Tesla, Ford and Nissan. Hyundai plants in South Korea would be the first to shut down lines outside of China, and comes as Hyundai has ramped up production in China over the past two decades.

Economic Contagion

The Wall Street Journal comments on China’s Economic Contagion

More than 20,000 coronavirus cases have been confirmed worldwide—an eight-fold increase over the last week—and experts say hundreds of thousands may not yet have been diagnosed. Two dozen or so countries have reported cases, and many have restricted travel from China to limit the contagion. Companies are evacuating employees from China.

U.S. manufacturers such as Ford, Apple and Tesla have temporarily halted production. One-sixth of Apple sales and nearly half of chip-maker Qualcomm’s revenues come from China. So do 80% of active ingredients used by drug-makers to produce finished medicines. Because China is the world’s largest manufacturer and an enormous consumer market, the economic freeze will disrupt supply chains and reduce corporate earnings.

China’s GDP growth was already almost certainly lower than the official figure of 6%, and it is likely to fall by a third or more.

It’s probably too much to ask Mr. Trump to lift his tariffs on Chinese exports, though it would help. At the very least he could give Beijing more latitude to meet its promise to buy $200 billion more in U.S. products over the next two years. The last thing the President should want when campaigning for re-election is an economic pandemic.

Coronavirus Menace

The New York Times reports SARS Stung the Global Economy. The Coronavirus Is a Greater Menace.

Apple, Starbucks and Ikea have temporarily closed stores in China. Shopping malls are deserted, threatening sales of Nike sneakers, Under Armour clothing and McDonald’s hamburgers. Factories making cars for General Motors and Toyota are delaying production as they wait for workers to return from the Lunar New Year holiday, which has been extended by the government to halt the spread of the virus. International airlines, including American, Delta, United, Lufthansa and British Airways, have canceled flights to China.

Companies Warn On Impact

MarketWatch discusses the Earnings Impact.

  • Wynn Resorts Ltd. has among the highest China exposure, as the company derived about 75% of total revenue from Macau over the last 12 months, according to estimates based on FactSet’s proprietary algorithm.
  • Sony Corp. CFO Hiroki Totoki, said the fallout from the coronavirus slowdown on the company’s manufacturing, sales and supply chain operations could wipe out its revised guidance for 2019.
  • BP said current demand for the year is between 300,000 and 500,000 barrels a day, not the 1.2 million it had anticipated for the year. “There is no question coronavirus, I suspect, will impact demand this year,” a BP executive told investors.
  • Jewelry retailer Pandora said it’s already struggling in China in 2020 but the virus is presenting other threats. “China is currently also challenged by the coronavirus that have left streets empty and forced store closures,” Pandora CEO Alexander Laxik said. “China is the biggest jewelry market in the world and we’re not going to walk away from this.”
  • Royal Caribbean Cruises Ltd. estimated that cruise cancellations and itinerary modifications as a result of the coronavirus will have a 25-cents-per-share impact on earnings. The company has already canceled eight cruises out of China.

Known Disruptions

Major disruptions include Ford, Apple, Tesla, Qualcomm, Hyundai, Wynn resorts, Sony, BP, Pandora, Royal Caribbean, GM, Toyota, Nike, all the airlines, and many drug makers.

If it's "Made in China" there will be an economic hit.

This is on top of the Trump-sponsored manufacturing slowdown. Trump's steel tariffs have started a Rolling Cascade of Downstream Pain

Freight shipments have collapsed: Cass Year-Over-Year Freight Index Sinks to a 12-Year Low

And GDP Internals show business investment contraction: Ignore the Headline, Real GDP is Much Worse Than It Looks

So forget about Trump's Trade War Ceasefire with China. All that did was halt escalations.

Due to the coronavirus China cannot possibly honor commitments. And it's highly doubtful they could have or would have anyway.

Mike "Mish" Shedlock

Comments (32)
No. 1-7
shamrock
shamrock

Speaking of Tesla, this guy Chanos was WAAAAY off. Not sure what kind of crack he is smoking.

  1. Tesla remains one of Chanos' biggest short positions
  2. Run the numbers on Tesla you get a stock market value of zero.

Was $350, now $920.

Latkes
Latkes

The effects will be in many ways very different from a regular recession, where a collapse in demand and large inventories of stuff usually trickles down to everything else. This time, lots of the issues will be due to the lack of supplies, like during a war.

Realist
Realist

Global supply chains are highly efficient and effective. However, no system is perfect, and occasional interruptions, like this virus, or Trump's tariff wars, can throw sand in the gears.

The free market approach to operating a global supply chain, allows it to adapt to these occasional disruptions. Production will shift to the appropriate areas, based on free market principals. Production was already beginning to shift out of China to other areas of southeast Asia. Continued problems with China will naturally lead to more production elsewhere.

The temporary effect will be slower global growth. However, longer term, much of this growth will be recovered. Expect 1% growth throughout most of this decade for the US. Expect 2% global growth over the same time period.

KidHorn
KidHorn

And the stock market is booming. No products to sell and customers who won't buy anything. Great for fundamentals.

Tony Bennett
Tony Bennett

"Made in China"

...

Heh. China has been one of my top candidates for pin-to-the-bubble. Fitting.

abend237-04
abend237-04

Historically, normal business cycle recessions provided the CEO/CFO with "kitchen sink quarters," or windows of opportunity within which they could jettison failed business units and generally clean up balance sheets, all under the cover of external events ostensibly beyond their control, typically rising interest rates.
Central bank repeal of the business cycle for more than a decade now has grown a fine crop of zombie corporations, worldwide.

I haven't had as many thirty somethings telling me I don't understand since Enron.

It'd be the height of irony if pandemics restored the business cycle by killing as many zombies as people.

ReadyKilowatt
ReadyKilowatt

Well, it automatically gives everyone who misses their quarterly number a get out of jail free card for the next earrings call. I was passing through Las Vegas Sunday night, and thought I'd hit one of the strip buffets. Granted, it was Super Bowl Sunday, but I've never seen a buffet so empty. Seriously, the staff was just standing around talking to each other. The walkways and casino floor looked like it was 8:00 in the morning, but with lots of open tables and dealers standing around looking bored. I could clearly hear the background music. As I was heading back to the parking lot, I saw a few bright red banners with Chinese script. At the bottom they had the English translation: "Happy New Year!" Whoops!


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