ONE ‘FLU OVER THE CUCKOO’S NEST

By: Stuart White 21-02-2020

Categories:HRMC Articles written by Managing Director, Stuart White,

On the news this week was a report that sales of Jaguar cars in the UK had been halted due to a shortage of key fobs.  Yes, you did read that right!  To alleviate the problem, the report went on, senior staff from the company were flying to China and bringing back stocks of the items in their suitcases.  The company is also expected to run out of other essential parts (I had to resist the urge to write ‘key components’!) in its UK factories within two weeks.

In addition  JCB has cut working hours and suspended overtime for its  4,000 UK employees after the corona virus outbreak prompted a shortage in parts coming from China.  Factory workers will work a 34-hour week until the disruption ends, although they will still be paid for a 39-hour week and will work them back later in the year.  Explaining the move, JCB’s chief operating officer, Mark Turner, said: “More than 25% of JCB’s suppliers in China remain closed and those that have reopened are working at reduced capacity and are struggling to make shipments.  It is therefore clear that the inbound supply of certain components from Chinese partners will be disrupted in the coming weeks as they seek to replenish their stocks.”

The World Economic Forum issued these statistics on the current and potential knock-on effects of the virus, now renamed Cobid 19

‘Apple’s manufacturing partner in China, Foxconn, is facing a production delay. Some carmakers including Nissan and Hyundai temporarily closed factories outside China because they couldn’t get parts.

The pharmaceutical industry is also bracing for disruption to global production.

Many trade shows and sporting events in China and across Asia have been cancelled or postponed.

The travel and tourism industries were hit early on by economic disruption from the outbreak as well as global airline revenues.

A total of 24 airlines have so far cancelled flights in and out of China, including  British Airways, Air France, and Dutch airline KLM, which axed flights through much of March. In the US, American Airlines and Delta halted flights until the end of April, as did the Spanish carrier Iberia.  Asian and Middle Eastern airlines were also heavily affected. Emirates and Etihad are among at least 16 to scrap some routes to China.

The worst effects are, of course, being felt in China itself with thousands of businesses - shops, offices and factories- closed or on short time. The boss of China’s biggest listed company, the online sales platform - Alibaba, described the corona virus outbreak as a “black swan” event that could have a significant economic impact.  CEO Daniel Zhang said the outbreak would present significant near-term challenges for Alibaba, with many of the merchants who use its facility unable to return to work.

French spirits maker Pernod Ricard said profit growth would be slower than previously expected for the year to 30 June. “Nightclubs and bars are all closed in China, those bars and restaurants that are not closed are empty,” said Alexandre Ricard, the founding family scion who serves as chief executive, according to Reuters.

Ralph Lauren, the US fashion brand, said the outbreak would cost it between $55m and $70m in lost sales. Two-thirds of its stores on the Chinese mainland had been closed for the past week.  Disruption to the company’s supply chain could have a knock-on impact on orders around the world in the first three months of the year, it said.

The EU said the virus was “a source of mounting concern” and a key downside risk to global growth.  The downgraded expectations, particularly for the fast-growing Chinese economy, have dented oil prices.  And according to the IEA (International Energy Association) “There is already a major slowdown in oil consumption and the wider economy in China.,”

Clearly what began as outbreak of a new ‘flu virus has catapulted itself into a major global problem in just a few short weeks.    Much of this slowdown can be attributed to a combination of 2 factors – the fear  felt by the Chinese population  itself of catching the virus and their efforts to self-isolate and the measures taken by the government to contain it, issuing directives concerning workplace initiatives to stem the disease spread.  However, all of that comes down to a single factor – the global reliance on Chinese goods, whether it be cheap clothing and electronic goods – consumer end use – or manufacture and export of components – start-up and assembly producer consumption in almost every industry worldwide.  Wherever you live, it is fair to assume that if you had not already been affected by the virus, you very soon will be, even though you of course stand only an infinitesimally tiny chance of actually catching the ‘flu strain.

For years it has been clear that if China figuratively caught a cold, the whole world would sneeze, and that has now almost literally come to fruition.   Reliance on parts and products from that country is absolute and everywhere.  Accordingly, global manufacturing has been slowed down, international travel severely disrupted, the entertainment and leisure industry is feeling the pinch, consumers are faced with shortages and all of this has come about through panic and preventative measures.  We’re not just running out of cheap Chinese watches; we’re running out of time!

I would like to say that one upside might be in the production of face masks since shops all over Asia have run out of stocks trying to meet the huge demand but alas, I fear those factories are also on a slowdown, as are the distribution firms carrying  the goods to retail outlets.  Masking the extent of the problem, perhaps?