* Updated 5th February, 2020
It’s official: the World Health Organisation has announced coronavirus as a public-health emergency of international concern.
Infections have spread from China to more than 21,000 people around the world – which is more than the number of people infected by SARS in 2002 and 2003. There are confirmed cases in 24 countries and regions outside mainland China, and this number is quickly growing, with 13 confirmed cases in Australia as of early February.
At the epicentre of the outbreak is the city of Wuhan, in China’s Hubei province. Its population of 11 million is now in lock down. All public gathering places and factories are closed. Major public Chinese New Year celebrations have been cancelled. There is no transportation into or out of the province. Many countries – including Australia and the UK – are evacuating their citizens from Wuhan and other cities, while the United States has taken its travel warning to the highest level, warning citizens not to travel to China.
This begs the question….
How will the Australian supply chain be disrupted by China’s spreading coronavirus outbreak?
Let’s start by looking at what China means to Australia.
The Chinese economy is now worth $14 trillion (compared with $1.3 trillion during the SARS epidemic in 2003). It is the second-largest economy in the world.
More significantly, it is now much more embedded in the world economy and global supply chains. The world, including Australia, relies on China for education, tourism, minerals exports, manufacturing and more.
China is Australia’s biggest export market and trade partner. Tourism brings 1.5 million Chinese to Australia every year, and the Chinese-student market alone is worth $15 billion.
Economist and former Reserve Bank board member Warwick McKibbin told The Guardian that the damage would initially be felt in China-dependent industries, especially tourism and mining: “You turn off the flow of Chinese tourists for six months and that’s a big economic shock.”
Impact on manufacturing in China
Virtually all of the world’s iPhones are made in China. And even though they are made in locations more than 500 kilometres from Wuhan, Apple will be bracing for disruption. It has already shut 42 China retail stores, mainland corporate offices and contact centres.
A major factor impacting manufacturing is how Chinese authorities are taking steps to reduce the mass migration of workers back to factories after the Chinese lunar New Year holiday to lower the risk of infection. For example, Suzhou, a tech hub north-west of Shanghai, has prohibited businesses from resuming operations before February 8.
Wuhan itself is home to China’s steel industry and a manufacturing hub for automotive companies such as Honda, Nissan and GM. With a lower cost of living and operational costs than China’s eastern seaboard, it’s also attracted corporate giants including IBM, Siemens and Walmart.
What does this mean for Australian businesses?
The reality is, parts of your supply chain may take place in, or pass through, Wuhan for manufacturing, assembly or finishing. That means major disruptions for an unknown length of time.
Ratings agency Moody’s reported: “Complicated supply chains and just-in-time production could mean that production outages in Wuhan factories have broader spill-over effects.”
Even if you source parts and materials from elsewhere in China, expect your business to be impacted by delays and shortages.
What about Australian exports to China?
Red meat and live cattle exporters are bracing for a drop in demand for Australian beef in China. China recently become Australia’s largest export market, accounting for 24.4% of all Australian beef exports last year, and Australia’s third-largest market for live cattle exports.
According to Beef Central, the transport restrictions between Chinese provinces and labour disruptions will limit the ability to distribute beef across the country.
But the main cause of disruption is that fears of contracting the virus are keeping Chinese people at home, which means they are avoiding dining out and non-essential travel.
This is history repeated.
The SARS outbreak in 2002 infected less than 10,000 people, but tens of millions changed their behaviour out of fear of catching the virus. The most-affected businesses were leisure venues (restaurants, bars, hotels and cinemas) and those associated with domestic and international tourism.
It’s no surprise, then, that the Australian wine industry is starting to sweat over the coronavirus. Shares in Treasury Wine Estates, which sells premium wines – including Penfolds Grange into the Chinese market – slumped 30+% last week as investors showed concerns about a hit to top-end wine sales.
Then there’s the lobster market, which has seen a massive hit. The world’s largest rock lobster exporter, Geraldton Fishermen’s Co-operative in WA, has put all deliveries on hold for the first time. Chinese New Year is normally their busiest trading month.
The problem with logistics
When it comes to transporting goods, Australian manufacturers and suppliers should plan for major disruptions globally.
The coronavirus is already having a major impact on air freight demand and capacity. Airlines are cancelling flights and shippers are reluctant to fly goods to China. The air-cargo handling division of British Airways and Iberia, IAG Cargo, announced that it will suspend all air-cargo services to and from China. Lufthansa quickly followed. United Airlines, Cathay Pacific and Air Canada have announced plans to reduce flight numbers, which reduces belly-hold freight.
As at Friday, Qantas had not suspended flights between Australia and China.
If flights weren’t enough of a challenge, customers don’t want to pay for storage in China and transportation cannot be offered on the receiving side. That’s if you can find any staff to pick up the shipments when they arrive in China – truckers, warehouse staff, cargo handlers and manufacturing staff are not able to return to work for the foreseeable future.
Extending the Chinese New Year holiday has already had a big impact on freight businesses, with enormous backlogs reported which will push up demand and rates.
The main economic impact of these events is how people change their behaviour. Trade, tourism and education – the most social activities – are the most severely disrupted as a result.
So what can we do?
For those organisations that are indirectly exposed to the Chinese market, now is the time to think about your supply chains and take necessarily steps.
But ultimately, the coronavirus outbreak underlines the need for Australia to diversify its sources of imports and its markets for exports. Is it time to stop putting all our eggs in one basket? Now could be the ideal opportunity to increase exports of certain products to other countries, especially those that can no longer buy from China.
Need to talk to experts about your supply chain? Matthews can help.
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Image credits: iStock/ Naeblys (main); iStock/ Fokusiert (bottom)