Covid-19 & its Impact

Covid 19 (also known as Corona virus or Wuhan virus) has been making the top headlines specially in south-asian reports. Unless one has been living in a cave, everyone is aware of this situation unfolding in Wuhan, China which has a rippling (also crippling) effect on rest of the world. Since, many already know about the virus, how it spreads, prevention and hand hygiene, we will skip that portion and jump directly to its potential impact on different countries and industrial sectors. These are still early days as virus continues to spread and its full impact will be known after 3-6 months in future. To understand the economic impact, first we understand what was being produced out of Wuhan.

Wuhan’s Shutdown

Source: Bloomberg

Wuhan has been an industrial hub for China, with major industry being automobile, electronics, hardware equipment & chemicals (dye stuff). Major MNCs have their factories in Wuhan and the impact will be felt in their origin countries like Japan, US, Taiwan, Hong Kong, France & Germany in that order.

  • Toyota, Honda & GM motors have to shut their facilities in Wuhan which will impact supply side of the equation. Apart from the major MNC, there are many auto ancillary & industrial equipment manufacturers based in Wuhan. They provide key support to many firms which are not even hosted in Wuhan or China. For example, Hyundai, said that it had to close factories in South Korea because they are running out of supply parts from China. Executives from car companies across US & Europe are warning that they are few weeks away from being forced to temporarily shut factories one by one.
  • Xiomi, Huawei, Lenovo, Apple & Oppo have also raised concerns on this development and re-planning to 5G pipeline & new smartphone lunches.
  • From Chemical sector, China & specially Wuhan has been a major supplier of dye chemicals & other bulk commodity chemicals to rest of the world. This will impact fabric manufactures & all other dependent industries which uses dyes to artificially color their products. There are many companies in India as well who procure bulk chemical from China & turn them into specialty chemicals as per requirements. They will be surely impacted. Only backward integrated companies will be able to survive and possibly gain market share & achieve higher profit levels as price will rise.

Beyond Wuhan: The great Chinese slowdown

Despite best efforts from Chinese authorities, Covid-19 has spread beyond Wuhan or Hubei to other states as well. Predominately towards the eastern- southern port states which are major manufacturing & export hub of China and account for 69% overall Chinese GDP. It will be no surprise that in 2020 China’s GDP will take a deep plunge. There are no confirmed ways to find out the impact at this stage but based on historical data (SARS outbreak in 2003), experts predict China’s GDP to nosedive from 6.1% to 4.5% odd levels. Similar dip was seen during SARS days.

Source: NBS & Bloomberg Report

However, this projection has two fundamental flaws. One: China is no longer the same economy as it was in 2003. Back then it was the sixth largest global economy & by now it is number two contributing 17% of world’s GDP. Two: Covid-19 is far more contagious than SARS. The ramifications will be higher this time in not just China but across the globe. The above graph also provides one more interesting insight, that Covid-19 or SARS pandemic still have milder impact than 2008’s US financial meltdown.

If China slows down, it will impact specific industries for which China is either a major consumer or major supplier across the world.

  • Global Industries:
    • Automobile & Luxury Goods: China is a home to the next leg of growth for luxury cars like Jaguar, BMW, Audi etc. So much is the impact that these car manufactures were forced to make a fast switch to electric vehicle as they started losing market share to manufactures like BYOD. Speaking of Jaguar, we know how much pains Tata Motors took to revamp their production facilities to produce electric cars (completed last year) since Chinese consumers had moved on. Tesla expect delays of few months in ramp up to its newly opened factory in Beijing, German major Bosch has huge presence in Hubei alone. Brigita, one of China’s largest car dealer have to shut down more than 100 outlets across China. Company says it is facing cash crunch as cash reserves are dwindling and banks are not ready to extend credit, soon they have to take a hard decision to ramp down the business. This is significant and more of ground level report, if dealer supply chain is broken , it will takes long time for automobile companies to recover from this situation and re-establish distribution supply chain.
Source: IATA.org
    • Airlines & Tourism: Anyone who has traveled little bit outside India will know how much part Chinese tourists play in global tourism business. As per IATA report, travel ban to China for 2 months alone will knock off 0.3% of global tourism industry growth this year. Of all tourism sub-sectors, airlines industry is the first to take a hit. Corporate travels have been put on hold not just to China but to many south east regions like Japan, South Korea, Taiwan, Singapore etc. This is going to hit all major airlines in this region. IATA expects that it will knock off 13% average revenue per kilometer for airlines on an yearly basis. As of 31 Jan 2020, seat occupancy levels have halved on an average across Asia.
    • Crude Oil: China is the largest importer of crude oil in the world. As her oil consumption slows down, crude oil prices have started to tumble from $70 per barrel to $58 per barrel. With 40% drop in airlines traffic & general slowdown in global economy, suddenly crude oil finds less takers. In coming days it will not be surprising if it cools down to $50 levels.
    • Cosmetics: China along with Japan & South Korea are the major producer & consumer of cosmetics. Flush with more money Chinese consumer have been driving up cosmetic demand in the world. This industry will also take a hit.
    • Consumer Electronics: China has been the global factory for world’s consumer electronics. Be it iPhone or any other smartphone or branded to unbranded laptops, television screens; China was manufacturing them for the world. With temporary pause in this global factory, expect availability of these products to be patchy in next 3-6 months.
    • Metals: China decides world’s iron & other mineral prices by its production outputs. Prices of commodities may get re-shaped as China pauses on them. Australia & Brazil are already facing the heat.
  • Impacted Countries:
    • There are a number of countries which are very dependent on Chinese suppliers and they will face tough time as suppliers will not be able to meet their obligations. These countries include, Taiwan, Vietnam, South Korea, Japan, HongKong, Sub Saharan African Nations & to some extent India.

Impact on India?

Let’s drill down to what impacts us the most. Impact on Indian economy from China.

Source: Government Reports
Source: Government Reports

India and China are in a trade relationship where China predominately sends finished goods & products to India while India sends raw materials to China. In terms of dollar value, Major imports from China is in the field of electronics like smartphones, laptops & communication equipment etc. India exports majorly, cotton, meat products, iron ore & slug , organic chemicals etc. This is very consistent with Beijing’s policy to import raw materials from neighbors while export them finished goods which are higher in value.

There is another way to analyse the impact of covid-19 virus to India. It is to analyse which industry is too much dependent on Chinese import. It turns out pharma industries top the list along with usual suspects which are electronics & communication industries.

Referring to above data points, it looks like consumer white goods, electronics will have some tough time going ahead and companies like Xiomi or Vivo may slow down a bit. The major surprise of this analysis was the over-dependence of pharma companies on Chinese imports. There are many companies which procure APIs in bulk from China and process it to sell generic drugs across the world. Such companies will be at a maximum risk.

On the contrary, chemicals companies which have backward integration and manufacture majority of raw materials themselves, will enjoy this period as they will be able to sell their products at a higher prices.

Summary

Being Asian competitors, any slowdown in China is generally an advantage to Indian companies. However, these are still early days to assess actual impact of Covid-19 virus. World Bank estimates 0.2% contraction in Indian GDP due to ongoing situation in China. Since Chinese slowdown will slow overall world economy some slowness may be expected in global demand of goods & services. For example, if a Toyota or Ford shuts down a plant, it will impact the economic demand of that province or state, thus impacting overall demand across the country. World is to tightly inter-related that impacts will be felt in the interim but in general it will be positive for India because of global companies will look to re-risk their supply chain by looking at alternates to China. This is where countries which are still under-penetrated by China have an unbeatable advantage like India, Malaysia, South Africa, Latin Americas & Indonesia etc. Final picture of impact will emerge few months down the line as it is still evolving. Global recovery seems to be delayed in 2020 as well. It is a very good time for investors who are into investment phase. Remember, the longer is recovery the sharper will be the bounce back.

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