It all started from the ‘Wet Market‘ in Wuhan, which sold both alive and dead animals to the public. This market is assumed to be the epicentre of the disaster. The epidemic in question, which emerged from China and shook the world, causing an undisclosed number of deaths, is known by the name Coronavirus or COVID-19.
In this article, instead of focusing on the causes of COVID-19 or how it spread to different countries across the globe, the focus is on the impact of the virus on the business world.
Temporary Shut Down Of Manufacturing Units In China
China is the centre for mass production for the majority of the companies which look to achieve economies of scale. Since the spread of Coronvirus has caused the population of China to restrict their outdoor activities, basically trapping them inside their own homes, it has led to a sudden and steep decline in their production capacity. As a result of this, a lot of companies are facing problems to fulfil the demand of the consumers. Coronavirus has disrupted the supply chains throughout the global economy, causing unrest among the various MNCs.
Microsoft has announced that it has cut their sales projections for Laptops and Tablets since their production has been severely hampered.
Apple’s manufacturing partner in China, Foxconn, is facing delays in meeting their production targets due to lack of labour turnover and high absenteeism.
Apart from these companies, others, including Nissan and Hyundai, have temporarily closed their assembling plants as factories in China are facing difficulties in supplying them with parts required to make their products.
The Tourism Industry
The spread of the virus has caused not only a change in the behaviour of the customers but also that of different companies as attempts are being made by them to avoid the infection as much as possible.
Consumers and producers are avoiding international trips. This has resulted in a cut in the growth forecast by MasterCard. Amazon and Nestle are some of the companies that have suspended their employee travels. Due to a drop in demand for flights to Europe and Asia, several American flights to these continents have been cancelled. The travel restrictions, along with the safety concerns, have drastically affected the overall tourism industry. According to travel analytics company Forward Keys, outbound travel from China to Europe fell by 41.7% in the three weeks following travel restrictions.
With India temporarily suspending visas to people from China and foreigners who had visited China, restrictions on travellers from several other affected countries, and new cases emerging in Europe and the U.S., leisure and business travel, both incoming and outgoing, has taken a hit.
The Global Economy
The Chinese economy has been drastically affected by the COVID-19, but it is not the only country facing this difficulty. Europe is experiencing an increasing number of identified Coronavirus cases, which has the members of the European Union on high alert, and the same holds for the United States of America. The spread of Coronavirus has affected the global economy, and it is going to get worse unless the virus is controlled.
According to data collected by the Chinese statistics agency and an industry group, the Monthly Purchasing Managers’ Index fell to 35.7 from January’s 50 on a 100-point scale on which numbers below 50 indicate activity contracting.
In Cambodia, textile factories rely on China for well over half their raw materials, and some could be forced to close. In Australia, a significant chunk of exports—from iron ore and liquefied natural gas to meat and seafood—go to China. With the Chinese economy slowed down by COVID-19, orders are taking a significant hit.
Stock markets around the world plunged again on 28th February. On Wall Street, the Dow Jones index had taken yet another hit and closed down nearly 360 points. The index dropped more than 14% from a recent high, making this the market’s worst week since 2008, during the global financial crisis.
In Europe, economists had forecasted that global growth would slip to 2.4% this year, the slowest since the Great Recession in 2009, and down from earlier expectations closer to 3%. For the United States, estimates are falling to as low as 1.7% growth this year, down from 2.3% in 2019.
But if COVID-19 becomes a pandemic, economists expect the impact could be much worse, with the U.S. and other global economies falling into recession.
The Chinese Economy
The Chinese economy has already started to show the effect of the virus outbreak on the annual GDP. According to several forecasts, China will continue to bear the losses of up to 2-4 percentage points per quarter. The consumption and output have already been hit, which is evident by the statements of companies like Adidas and Nike, whose significant revenue-generating market China has been tumbled roughly by 85%.
A survey of 1,000 SMEs conducted by two Chinese universities found that unless conditions improved, one-third of the firms would run out of cash within a month. Another study of 700 companies found that 40% of private firms would run out of money within three months.
The economy is practically on a halt with the metro traffic as low as 90% when compared to the last year; coal-fired power plants are not firing on all four cylinders, let alone on all eight. Now it all depends on how quickly the measures are taken to control the virus. Oxford Economics said it still expected the impact of the illness to be limited to China and have a significant, but the short-term impact, bringing world GDP growth just 0.2% lower than January at 2.3%.
This is not the first time that China has faced this kind of trouble. In 2003, another corona-virus, Severe Acute Respiratory Syndrome (SARS), which lasted for eight months, disturbed the Chinese market for the short term. Optimists believe that the behaviour of the market is thus temporary, and it will be restored by the second quarter.
Another reason why it is unfavourable for the Chinese economy to incur losses, in the long run, is the rapid expansion of their digital economy. Of the total retail sales, 35.3% amounts to online purchases. Mobile internet penetration is very high and rising, and China is currently the leader in possessing the most advanced mobile payment systems.
All of this points to a massive potential for the Chinese economy to tap into the digital market, especially into existing scenarios where major cities are in lockdown, and the movement of the citizens is restricted. With the rise in digital opportunities, employees will be able to continue performing their jobs via work from home with the help of various online platforms.
The Indian Economy
The Indian economy was already trying to recover from the slowdown, and now the Coronavirus outbreak has reduced the chances even more. The supply chains and import-export between countries across the world have been drastically affected. Unfortunately, India is amongst those countries. Despite China being India’s competitor, the economic slowdown in China has turned out to be unfavourable for India.
This is because China alone accounts for 18% of the total imports by India. India imports electrical components, pharmaceuticals, automobile components, plastic goods, etc. from China.
Since China is not able to meet these demands, India is forced to find alternative countries for these imports like Japan, South Korea, Germany, but these countries, too, are not perfect substitutes for all the imports. The electrical industry has taken a hit as individual parts cannot be imported from China, and it is not possible for India to manufacture these parts themselves in such a short period.
Indian exports are also being affected by the spread of Coronavirus as imports from China are temporarily on a halt, procurement of certain parts which are required for the shipping of finished goods has become an obstacle. Other than that, China accounts for 9% of the total export, and out of the total petrochemicals produced in India, 34% of it is exported to China. With a sudden drop in the demand for consumer goods, this export market has fallen.
Apart from import-export, the tourism industry has slowed down as people are refraining themselves from going to international trips, especially to Asian countries.
Stock markets across the world have remained highly volatile in the last many days. In India, the 30-share BSE barometer on 2nd March closed 153.27 points or 0.40% lower at 38,144.02, and the broader Nifty closed lower by 69 points or 0.62% at 11,132.75. The Sensex has fallen nearly 1300 points from highs.
On the other hand, if the Coronavirus outbreak affects the Chinese economy in the long term, possibilities are that the MNCs will start looking for alternative countries for their supply chains, and this opportunity could be grabbed by the Indian manufacturers to reduce unemployment and foster industrial growth.
Irrespective of the pros and cons, Coronavirus outbreak should be controlled as soon as possible or else the situation will get a lot worse and could possibly lead to a global recession.