Will the coronavirus affect your business? | Creditsafe Blog

How has the coronavirus outbreak impacted the global economy...

3 Mins

While authorities have moved swiftly to contain the spread of the deadly coronavirus, the impact of these measures has kept the global economy reeling with uncertainty. Mass factory closures in China, coupled with tens of millions of employees remaining in citywide lockdowns, as well as international travel restrictions have led to significant loss of revenue for businesses, as well as major disruptions to global supply chains, forcing investors to re-evaluate their positions on the Chinese economy.

As panic continues to mount, it is important to understand the real threats your business could be facing as a result of this global epidemic, and to identify a contingency plan, should your operations be at risk of getting affected.

Chapter 1

Disruption to commerce

In China, delayed factory openings have caused a shortage of parts and products, resulting in manufacturing lags for leading tech and consumer companies such as Apple, Alibaba, Nissan, and P&G. In addition to goods, the services industry has similarly been affected by mass employee quarantines and the cutdown on international travel.

The issue has been further compounded by the issuance of force majeure certificates to local Chinese exporters. These certificates, issued by China’s Council for the Promotion of International Trade, release companies from paying the usual penalties for violating contractual obligations (due to circumstances out of the companies’ control). A steadily increasing demand for these certificates indicates the financial strain that can be expected as Chinese suppliers struggle to make payments on outstanding invoices.

As a business owner or a company, this is a prime opportunity to not only review your list of suppliers, but also identify whether any of your contracts contain force majeure clauses that could potentially be invoked.

Chapter 1

Diversifying supply chains

The far-reaching economic impact of the coronavirus has led companies and governments to re-evaluate their dependency on Chinese manufacturing and diversify their supply chains to neighbouring countries in Southeast Asia, such as Taiwan and Vietnam. This has been an increasingly prominent trend, especially given the recent US-China trade wars and tariffs, but the current situation has brought into stark focus the dangers of concentrating production in one geography.

For many companies, moving production is easier said than done, given the significant advantages China holds in terms of pricing, production capacity, infrastructure, and workforce. Shifting one’s supply strategy could take years to implement, even for multinational conglomerates that have the bandwidth to take on the immediate economic disadvantages of such a shift.

Given this complexity, it is perhaps worthwhile to at least think about potential ways of diversifying your supply chain and improving your contingency planning, since it is unwise to have all your eggs in one basket at any point in time.

Chapter 1

Reduced investor confidence

Increasing volatility in global stock markets has been another unfortunate side effect of the ongoing epidemic, with investors struggling to interpret the data emerging from China.

A Reuters poll of economists suggests that China’s economic growth could slow to 4.5% in Q1 2020 – its slowest pace since the financial crisis. The resulting economic fallout could have much more far-reaching consequences, with China’s status as the world’s second-largest economy and leading trading nation.

Economic indicators such as the return rate of workers, traffic flows, and electricity usage, among others, are being closely monitored to evaluate how the Chinese economy is faring during this public health emergency. While certain indicators have improved slightly, the picture remains bleak in the Hubei province, which accounts for around 4% of China’s GDP. In a similar vein, the International Energy Agency has predicted the first drop in global oil demand in a decade, thanks to the virus’ impact on manufacturing and travel.

In case your company is heavily invested in China, it is advisable to monitor the situation closely, and consider tweaking your portfolio, should these economic fundamentals continue to deteriorate.

Further effects of this global pandemic continue to be observed in consumer demand, global travel, and crisis management measures taken by both companies and governments. While it is important to evaluate its potential impact on your business and supply chain, it is even more imperative to remember not to panic, and to consider the longer-term consequences of any major organizational changes that you are considering.

Complete a full review of your international customers and 3rd party suppliers using the Creditsafe platform and implement ongoing monitoring for peace of mind.

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