How the outbreak of coronavirus will hit the global business hard
Given China’s massive global economic footprint, the impact of the epidemic is beginning to be felt, without a crisis point being reached as yet.
The outbreak of the novel coronavirus in China is causing a global alarm. So far, the death toll in China has risen to 909 and almost 40,185 people have been declared affected (which may not be the true number). Coronavirus cases have been detected in other countries, including in India.
The consequences of the outbreak for China’s economy, its authoritarian leadership, the global economy and for India deserve examination. Given China’s massive global economic footprint, the millions of Chinese that travel abroad for business or as tourists and its reverse, the numerous Chinese students in the West, the thousands of foreign companies operating in China, and the sizeable expatriate population in the country, the impact of the epidemic is beginning to be felt, without a crisis point being reached as yet.
Domino effect
The Chinese economy has been hit, with reports about massive closure of outlets of Starbucks, McDonald’s, KFC, Pizza Hut, Ikea stores, Uniqlo shops, Disneyland parks and cinemas affecting consumption.
With several countries suspending flights to China (including Air India) and from China, cancelling e-visas for the Chinese by India, six of eight airlines in Africa stopping flights, Russia closing its border in the east and only Aeroflot allowed to fly to China, with domestic travel groups in China prohibited, the travel industry has taken a blow.
When the SARS epidemic erupted 17 years ago, China’s share of the global economy was 5 per cent, whereas now it is 16 per cent. The SARS virus cost the global economy $50 billion; the coronavirus could cost it $360 billion, given China’s current share of global GDP. As the manufacturing hub of the world, China is a critical part of global supply chains. It’s the largest oil importer and its travellers are the top spenders in international tourism, spending $277 billion abroad in 2018. It is the largest market for several categories of consumer goods — automobiles, spirits, luxury items. The car industry has been hit in particular. Hyundai has closed all its factories in South Korea because component supply from China has been disrupted. VW and BMW have announced a temporary closure of their Chinese plants. Toyota, General Motors, Renault and Honda operations have been affected.
Qualcomm has warned about the impact on the smartphone sector. Luxury good makers have been hit. Fuel demand within China has dropped, causing China’s largest refinery to cut production by around 600,000 barrels a day. China’s stock market has plummeted. China has injected $171 billion to ease the pressure on the domestic money market and the banking system.
Global risk
The current level of disruption is considered manageable by some economists, but if the epidemic is not controlled soon, the economic damage worldwide will escalate. According to a study, the countries most at risk from a coronavirus epidemic and a dampening of Chinese and global demand, are Sri Lanka, Vietnam, Philippine and Sub-Saharan Africa. Countries with links to China through trade, investment and movement of people such as Mongolia, Cambodia, Laos, Thailand and Myanmar could be economically impacted more than others. The most exposed African countries include Angola (which exports 60 per cent of its goods to China), Congo, Sierra Leone, Lesotho and Zambia.
How much of an impact the lockdown in China will have on India’s exports and imports in areas such as pharmaceuticals, electronics, mobiles, and auto parts needs analysis. Telecom instruments, electronics components, computer hardware and peripherals, industrial machinery for dairy, and organic chemicals are the top five items accounting for 46 per cent of our imports from China. Approximately 85 per cent of active pharmaceutical ingredients (APIs) imported by Indian companies are from China and this dependence exposes India to raw material supply disruption and price volatility. Indian pharmaceutical companies have two months’ stock of APIs and intermediates, which along with higher capacity utilisation of existing manufacturing plants may address the issue of shortage now.
Trial for China
Chinese travellers accounted for 3.12 per cent of tourists in India in 2019. Around 50-60 per cent of India’s demand for electronics is met by China, but in 2019, the share of imports from China declined to about 37 per cent from 57 per cent, limiting the impact in this sector. Vehicle makers, including Maruti Suzuki, import Chinese components and raw materials, but Maruti’s chairman thinks this will not impact the sector.
At this stage, the relatively negligible economic impact is anticipated but India isn’t immune. The outbreak may test President Xi’s authority, as with the unprecedented lockdown in Wuhan, confining millions to their homes, along with Dr Li Wenliang’s death, the doctor who sounded an early warning about the virus outbreak but was silenced, anger has grown on Chinese social media.
China’s belief in the superiority of its political and economic system will come under questioning. President Xi has not taken a visible leadership position in the handling the emergency, leaving it to Premier Le Keqiang, which has invited caustic comments on the social media. Sensing potential political damage, the state media is trying to shield Xi from criticism. How a prolonged outbreak will affect China’s BRI ambitions remains to be seen.
(Courtesy of Mail Today)