By Ben Foley
Since its identification in December over 63,000 confirmed cases of COVID-19 (commonly referred to as “coronavirus”) have been discovered. The World Health Organization has recorded 1,383 deaths. Approximately 80% of confirmed global cases and 95% of all deaths caused by the disease have occurred in the Chinese province of Hubei. Wuhan, the capital of Hubei and the city where COVID-19 is believed to have originated, has effectively been closed off to the outside world by a central government-enforced quarantine.
Although this policy may have helped slow the spread of the deadly virus, it has proved catastrophic for industries that rely on Wuhan. Commonly described as the “Motor City of China”, Wuhan is a pivotal cog in the global automotive industry. IHS Markit forecasts that coronavirus could cost China the production of 1.7 million cars, roughly a third of its total production. But it is not just domestic manufacturers that have been impacted. The South Korean auto industry imports 29% of its intermediate parts from China and shortages of have already caused Hyundai and Honda to shut down their entire Chinese supply chain and begin to look elsewhere for critical components.
Going Past Wuhan
There are economic implications that extend past the industries with facilities in Wuhan. The city is also viewed as being a pivotal hub for the logistics chain that links central China to its seaports and the global economy at large. While it is not known how far-reaching the effects of coronavirus will be, it has been estimated that China’s economic growth will slip below 6% for the first time since the 1980s because of the epidemic. This number likely will only increase if the virus is not contained by April and there are many worrying signs that it will not be.,
As coronavirus spreads there are concerns it will be as disruptive in other Chinese provinces that play a central role in the global value chains. Guangdong province, home to industrial centers like Shenzhen and Guangzhou, is host to almost 30% of China’s entire semiconductor industry. The province is also the largest importer and exporter in China. Guangdong has yet to implement any travel restrictions in its cities, but the municipal governments of Shenzhen and Guangzhou have enacted emergency powers allowing property seizure to prevent the spread of cases.
Risk spreads outside of China
In addition to the tremendous impact on the health and wellbeing of individuals, the impact of the coronavirus has been amplified by economic conditions that are are not exclusive to China. Other countries in East Asia, such as Malaysia, have also wed foreign investment with state-centered development policy creating geographic centers focused entirely on several or even one specific industry. While this surely has been beneficial at helping the rise of developing economies, it creates highly concentrated sub-tier ecosystems that at prone to single points of failure. This is called geographic concentration risk, which occurs when a large number of suppliers within a given supply chain are located in a single geographic region, making the businesses that depend on them unusually vulnerable to disruption within that region. Geographic concentration risk is largely born out of convenience and cost reduction, it’s easier and cheaper for industries to operate in areas that have already built the necessary infrastructure and attracted the talent required to do business. But this convenience clearly has its costs.
Being aware of such risks may not prevent organizations from being impacted, but it will help them ride the waves of disruption with more agility than their competitors.