Coronavirus Economic Impact, China, and the Tech Supply Chain

While we are not in a global epidemic panic yet, and hopefully not ever, the reality is the situation in China is volatile. This blurb from a private report, the latest from top global economists:

Negative impact on Q1 growth could be >2ppts Quantifying the economic impact of the outbreak is extremely challenging at this stage. Assuming that the outbreak will be controlled in Q1 with few new cases after that, we estimate that Q1 GDP growth will drop to 3.8% y/y, while subsequent normalization of activities, the release of pent-up demand and policy support should see growth rebounding in Q2-Q4. With this assumption, we downgrade China’s 2020 GDP growth forecast to 5.4%. The risk to our forecast is biased on the downside. In the case, the outbreak lasts well into Q2, GDP growth will likely fall <5% in 2020.

This creates a dynamic of interest to watch as it relates to trade war with China, the business outlook for companies who compete in China, and the overall supply chain related to the tech industry.

What many economic reports I’ve read agree on is the long-term trends in China are intact. This is viewed as a short term issue and one that the Chinese government, local businesses, and those global companies who compete in China, need to navigate in the short-term.

The biggest areas most agree are impacted relate to consumption more than trade. Tourism and travel industries like hotels and local commerce will be hit the hardest, given people’s concerns about going out in public and traveling to China. Spending is likely to be down as well, which will hit many industries, including technology. One thing that will be of interest is to see what happens with e-commerce shopping, already something more than 50% of Chinese in tier-one cities do weekly. We could likely see a spike in e-commerce, assuming those online sellers can field a workforce during certain quarantines.

Interestingly, global GDP is expected to be in the 1% range, also a downgrade due to global fears and impact of Coronavirus. How far outside of China, and the extent this virus hits other countries is a concern since the impact on GDP could become more significant.

For tech, a big issue in the supply chain. This is a key reason Apple, in particular, gave such a wide range of guidance for their March quarter. Apple’s Dec and March quarters are typically their strongest, and a weak Chinese economy coupled with a shortage in the workforce to deliver Apple supply to meet their relatively strong demand for iPhones, is a concern. Another worry is how much the virus could spread to Taiwan, another area where the tech supply chain is centered. We could see an impact, not just on smartphones but PCs, and other consumer electronics if the workforce takes a hit or factories have to be shut-down during specific quarantines.

Whether or not the virus accelerates in certain areas, there is good chance precautions are taken and areas that jobs like those in the supply chain, where highly concentrated numbers of humans interact with each other, get shut down just to play it safe. We hope it does not come to this, but for the sake of the global population, it is better to be safe than sorry.

Another development to watch is how the Chinese economy bounces back once this virus is contained and beaten. Economists are expecting a significant surge to take place once the local economy gets going again. This may not be immediate, but it makes sense logically. As local citizens are not out consuming, they will want to make up for lost time once they can get out again. I’ve seen estimates of a surge of 6-9% of GDP impact that could take place in late 2020 and into 2021.

This could have a range of implications, and the main one being related to the supply chain’s ability to ramp up to meet a surge in demand. The kind of demand for the tech categories hit, iPhones, for example, would be hard to predict due to unknown comparables. You don’t want to overbuild and then risk having too much suppl,y but you don’t want to underbuild either and leave money on the table. If a surge happens, it will have to be carefully navigated as well.

This year was already shaping up to be a slightly lower one economic wise in the US since that is the trend in election years. It will be interesting to see how this plays out between the US election year and coronavirus concerns. The bottom line is this year will be particularly tricky to navigate now for many companies, and excellent management will be necessary.