The Wide-Ranging Ways In Which The Coronavirus Is Hurting Global Business

February 19, 2020 / 7:36 am

More than a month and a half into the outbreak of a new coronavirus in China, the country's economy is still largely in lockdown mode, stalling a global manufacturing powerhouse at the heart of nearly every industrial supply chain. As the crisis continues, businesses big and small are struggling with the disruption the pneumonia-like illness has caused, with effects reaching across the globe.

Restaurants and stores have been forcibly shut, many with paper seals to prevent owners from covertly reopening. Factory production lines are at a standstill. Hubei province, the epicenter of the outbreak, has twice extended its holiday break, keeping tens of millions at home in an effort to contain the virus. The death toll from COVID-19 now exceeds 2,000 people.

"If this [outbreak] drags past March, that really becomes quite bad," says Tom Rafferty, China research head at the Economist Intelligence Unit. "Then you're talking about long-term dislocation in supply chains. You're talking about a negative impact on the consumer sector, which is not temporary. And when you factor all these things and perhaps a cooling housing market, you get some pretty nasty economic data."

The dire labor shortages have been even more worrying. China's factories normally ramp up production right after the Lunar New Year, but this year few workers have returned. Most of China's migrant workers, who number some 300 million, remain cloistered in sealed-off villages and towns. Those who do manage to leave find themselves barred from renting places to stay near their workplaces by landlords fearful of travelers.

In Kunshan, a city that is home to many migrant workers near Shanghai, labor shortages are glaringly evident. The city is home to massive factories operated by Foxconn and Pegatron, the titans of global electronics manufacturing and key suppliers for companies such as Apple.

Foxconn has declined to publicize which plants it is gradually reopening.

In normal circumstances, these two Taiwan-based multinational electronics manufacturers together employ more than 1 million people across China. But nowadays, Kunshan's normally bustling industrial zone is empty and shops are shuttered. Employees tell NPR most workers haven't returned. Apple said Monday it expected its quarterly sales will fall short of its forecasts because of the coronavirus outbreak.

A skeleton team of "winter break" or hanjia workers was hired to work over the Lunar New Year holiday. But the usual influx of migrant workers has not come to relieve them this year, and so the skeleton crews have extended their shifts indefinitely to staff factories that normally account for more than half of the world's electronics manufacturing revenues.

"We have some real conflicts with labor supply right now ... the problem is we don't want to come to work. But our bosses haven't given us a choice," a 34-year-old skeleton crew member at Kunshan's Pegatron plant tells NPR. Like all of the dozen workers NPR spoke with, he declined to give his name for fear of retribution at work.

"One production line used to have 4,000 people. Now there are about a dozen remaining. My own production line usually has 1,000 workers, with about 60 now remaining," says a female hanjia worker at Foxconn.

Even a slight disruption in major supply chains commanded by multinational manufacturers like Foxconn and Pegatron could create secondary delays among their clients and suppliers, lasting for months in global sectors ranging from electronics to cars.

Foreign carmakers have struggled to restart full production. This week, Toyota, GM, Volkswagen and Fiat Chrysler were among those saying they were slowly restarting at least some of their China plants. Hyundai said it had reopened most of its China production after brief closures for lack of parts.

A recent poll of American companies by Shanghai's American Chamber of Commerce found 78% said they didn't have enough staff to resume full production. Nearly half said the resulting shutdowns had impacted their global supply chains.

"The global ramifications are much bigger this time, because China has a much larger share of global GDP and is much more integrated into the global economy," says Rafferty of the EIU.

Unlike after the outbreak of swine flu a decade ago, Rafferty says China today does not have the luxury of double-digit GDP growth to cushion the economic blow. Its economy grew last year at its slowest rate in nearly 30 years: "In 2010, China was able very quickly to recover with the help of exports and strong global demand. It doesn't really have that option these days."

Labor shortages will also likely cascade throughout the electronics manufacturing sector for months to come, with the burden falling on smaller firms rather than giants such as Foxconn.

"Foxconn can basically get all the labor it needs in the next few months, but they might suck away the labor from smaller component makers, such that the Apples of the world may not necessarily have all the components they want for Foxconn to assemble," says Dan Wang, a technology analyst at the research firm Gavekal Dragonomics. "These supply chains are too well choreographed. Shortages are now going to be causing headaches for months."

Foxconn is trying to get workers from uninfected areas back to its factories — but labor shortages will continue as local officials restrict the movement of migrant workers: "Even if you came back to the factory, you have to spend 14 days as quarantine," the female Foxconn employee says. "We have some longtime workers that haven't even returned."

Instead, Pegatron and Foxconn have turned to another source of temporary labor: student workers, drawn from China's thousands of vocational colleges. During holidays, they intern as poorly paid assembly workers.

But starting last week, most student workers have been heading back home. In Kunshan, dozens of them could be seen outside worker dormitories last week, waiting for transportation to the local high-speed train station.

"We have to do two weeks' quarantine at home. If we leave now, the quarantine ends just in time for us to begin the delayed start of the spring semester [in] early March," says a former Pegatron intern who attends a vocational institute in Gansu province.

Foxconn and Pegatron did suspend production briefly in early February, before reopening parts of their Kunshan plants on Feb. 10. The two firms run some of the largest factories in the world and local governments had an interest in getting them running again, at least in stages.

Smaller manufacturers are having a harder time.

A rare earths magnet maker that normally employs about 300 people in the city of Hangzhou, south of Kunshan, received permission to reopen from local authorities last week. The factory was able to begin manufacturing again with a skeleton crew after buying a large disinfectant machine. Rare earth magnets are used in everything from electronics to motors.

For any factory to reopen now, "There's paperwork that has to be submitted to the local government, and that includes guaranteeing masks, some other protective gear that employees can wear, a disinfecting schedule," says manager Jen Ambrose, one of the few Americans who works at the magnet company.

In other cities, some of the Chinese businesses that buy from or supply Ambrose's firm face different sets of hygiene requirements and have not yet gotten approval to begin work.

The costs of labor shortages, broken supply chains and blanket bans on production are falling hardest on privately run small and medium-sized firms that, according to the national statistics bureau, together employ about 150 million people in China. A recent joint survey conducted by Beijing's Tsinghua and Peking universities showed about 85% of these firms can survive just three months with no revenues before going bankrupt.

Particularly hard hit will be consumption-dependent sectors such as dining, tourism and retail, as residents eliminate outside activities in favor of isolation at home.

"All these kinds of activities have been hammered, absolutely hammered," says Louis Kuijs, head of Asia economics at consultancy Oxford Economics.

"Value chain and supply chain disruptions have much larger [impacts] than the China-U.S. trade friction," Huang Qifan, the well-respected former mayor of Chongqing, wrote last week. Huang warned the economic fallout from the state response to the outbreak will outweigh and outlast that of the U.S.-China trade war.