International

China’s Halting Return To Work Signals US Supply Chain Headwinds

Coronavirus Bodes Ill For US Supply Chains

In a way, it’s a strange reminder of the 80/20 rule.

You know the one – it’s the Pareto rule, where 80 percent of effects are made by 20 percent of causes. In sales, the rule of thumb is that 20 percent of sales reps make 80 percent of sales.

So: The New York Times has reported that, per commentary from University of Chicago Economist Chang-Tai Hsieh, Chinese businesses are running at about 20 percent of normal levels – so, we wonder, what happens to the vast majority of the world’s commerce?

Those Chinese businesses are, of course, an integral part of the supply chains that stretch across continents and verticals.

Beyond the speculation of what the Coronavirus might mean for the ongoing presidential election, and for the current occupant of the White House, the hits to marquee names across consumer-facing tech, such as Apple and Microsoft, due to supply chain disruptions, signal trouble for other companies and sectors.

“The economic consequences are, everything is down,” Chang-Tai Hsieh told the Times. “Everything is down tremendously.”

As we’ve previously noted in this space, estimates have pegged the economic impact of SARS at $40 billion; we’re seemingly way past SARS in terms of the reach and severity of this epidemic – and, of course, China is a much bigger part of the global supply chain than it once was.

As The Wall Street Journal noted this week, surveys show that two-thirds of small and medium-sized Chinese businesses had less than three months of cash on hand, and about 40 percent had about one month of cash or less. Even companies that are idle – as in, not making things, selling them and bringing in revenue – must pay fixed costs and salaries. If Chinese suppliers must shut their doors due to cash crunches that not even heightened lending activity might solve, as go the local suppliers so goes the global supply chain.

In research issued during last year’s trade war between the U.S. and China, more than 20 percent of U.S. production in industries such as textiles/shoes, computers and electronic products were produced by Chinese intermediates in the chain.

In an interview with CNBC, National Retail Federation CEO Matthew Shay said the inventory that is needed to satisfy demand has already been “pulled” into the supply chain, and is either in transport or in distribution centers. Indeed, the trade group is projecting retail sales to grow by 3.5 percent to 4.1 percent, if the virus does not become a pandemic stretching across the globe.

We note that a pull-forward of inventory can be helpful to satisfy current demand … but what happens once that inventory makes its way through the last mile – and smaller Chinese suppliers have been decimated to the point where meeting future demand would be, well, more than a challenge?

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