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CCC: COVID19 – what it might mean for our industry

As of late February 2020, there have been over 82,000 known cases of the coronavirus, or COVID-19. Tragically, over 2,800 individuals, the majority in China, have lost their lives to the virus

As of late February 2020, there have been over 82,000 known cases of the coronavirus, or COVID-19. Tragically, over 2,800 individuals, the majority in China, have lost their lives to the virus. As new cases are diagnosed across multiple continents, fears of a global pandemic are very real. As fears mount, the stock market has taken a significant hit – February 27th the U.S. financial markets experienced their biggest drop since August 2011. And brent crude, the global benchmark for oil, has dropped nearly 3 percent to $50.26 per barrel, its lowest point since December 2018. S&P Global is forecasting the U.S. economy will slow to a 1 percent annual growth rate in the first quarter versus growth of 2.1 percent in fourth quarter 2019. One-half percent of the anticipated decline they attribute to the coronavirus. However, if the virus were to badly hit the U.S., the Congressional Budget Office estimates economic output could decline by over 4 percent.

Beyond the loss in human life, there have been innumerable studies and articles projecting the potential impact to the overall global economy. Because the virus originated in China, COVID-19 is “… both a demand and a supply shock to the global economy.” If the production stoppages worsen or continue into the second quarter, analysts project a global supply crunch could have severe repercussions for an already weakening manufacturing sector, potentially impacting jobs and overall economic growth. Economists, analysts, reporters and others have drawn parallels to several major historical events in order to better understand the potential wide-sweeping impact COVID-19 may have on the global economy. Among these are the following events, and information why each does not help provide a clear formula for what we can expect with the outbreak of the COVID-19 virus.

a) The 1918-1919 influenza pandemic, or Spanish flu, that killed at least 50M individuals worldwide. Nearly 1 in 3 people in the U.S. alone were infected, and 500,000 people died. While the impact was global, it was relatively short-lived, and occurred before people could travel globally via jet travel, or before the establishment of complex supply chains.
b) The SARS epidemic in 2003. While this virus has proven to be deadlier than COVID-19 so far, the virus was contained fairly quickly. China’s weight in global exports is also twice what it was then.
c) The 9.0 magnitude earthquake that devastated the eastern coast of Japan on March 11, 2011 and the tsunami that followed destroyed huge swathes of land in northern Japan. Among the industries significantly impacted was the automotive industry. Many automakers experienced significant damage to their own research and manufacturing facilities and saw their new vehicle production slowed or even halted as numerous suppliers also saw extensive damage. Within a month of the earthquake, the Original Equipment Suppliers Association conducted a survey and found that 78 percent of respondents sourced some portion of their product from Japan. Over two-thirds had not seen production schedules impacted to date but anticipated some output reduction over the next several months. At that time, Japanese suppliers were key producers of electronic components such as integrated circuits, sensors, and semiconductors; as well as powertrain components including gears, clutch packs, solenoids, and specialty materials. Many of these parts were among the most difficult to quickly swap out with another supplier. High-tech electronic circuits and components used in engine control units, antilock brakes, airbags, and other systems remain particularly difficult to resource as they are vehicle-specific, and require significant redesign, retesting, and recalibration if they have to be resourced elsewhere. Many suppliers experienced significant damage to their facilities in Japan, delaying return to production for many months. Many suppliers like Renesas Electronics Corp, one of the most impacted by the 3/11/2011 earthquake rebuilt in Japan, but also opened new plants in China, which were also recently closed due to COVID-19. The good news is that the ramp-up and return to full production should be significantly faster in China where plants have been closed to prevent spread of the COVID-19 virus but are otherwise still fully operational. Additionally, according to the Center for Automotive Research “…[t]he North American impact of the supply chain disruption may still be a few weeks out as it can take 30-60 days for parts sourced from Asian factories to reach the point of production here. Additionally, the disruption may impact parts and components sourced from other countries, and each level of the supply chain has an inventory that may serve to buffer and further delay production interruptions in North America.”

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