Some of the world’s largest corporations shuttered operations in China on Wednesday as the worsening coronavirus outbreak renewed concerns about their reliance on Chinese factories and threatened to take a lasting financial toll.
The enforced inactivity could rattle supply chains for products that are sold in U.S. stores and around the world. Some of Apple’s Chinese suppliers, for example, now are scheduled to remain closed until Feb. 10, chief executive Tim Cook told investors Tuesday, adding that executives are “working on mitigation plans to make up any expected production loss.”
Most analysts remain upbeat, but the economic consequences of the fast-moving virus could snowball if the problem isn’t soon contained, some executives said. China is the world’s second-largest economy and home to factories that produce machinery, computers, furniture and chemicals for customers on every continent. In one sign of mounting worry, a growing number of major airlines have halted or reduced flights to and from China.
The health crisis comes just two weeks after the signing of a U.S.-China trade deal eased the uncertainty that had shrouded Chinese export factories for nearly two years. Across the globe, health officials, corporate executives and central bankers on Wednesday struggled to determine the bottom-line impact of the outbreak.
“The situation is really in its early stages. It’s very uncertain about how far it will spread and what the macroeconomic effects will be,” Federal Reserve Board Chair Jerome H. Powell told reporters. “I’m not going to speculate about it at this point. We are very carefully monitoring the situation.”
Financial markets in the United States and Europe, however, shrugged off virus fears. The Dow Jones industrial average ended the day relatively flat, closing at 28,734, up just 11 points or 0.04 percent. Chinese markets are closed for the holiday.
But in the absence of concrete information from China, many investors appeared to be gambling that the outbreak would prove no more damaging than earlier scares, including the severe acute respiratory syndrome (SARS) episode of 2003.
“We simply don’t know how far, or fast, the novel coronavirus outbreak will ultimately spread,” John Higgins, chief markets economist for Capital Economics in London, wrote in a research note. “So for the time being, we are assuming that the response … will follow the same pattern observed during and after previous epidemics — that the initial panic will be unwound after a few weeks or months.”
China’s economy has roughly quadrupled since 2003, measured in yuan, and now accounts for close to one-third of annual global growth, according to the International Monetary Fund. Beijing’s debt also has swelled, perhaps limiting the government’s ability to spend its way out of any downturn as it did after SARS. And the global economy is less robust than it was during the earlier epidemic.
“It’s hard to see what the generator of a significant rebound would be,” said one executive, who spoke on the condition of anonymity to preserve relationships with Chinese officials.
The number of confirmed coronavirus cases in China already has surpassed the 2003 SARS count. With Chinese officials anticipating thousands more patients in the coming days, businesses are confronting difficult decisions.
Starbucks temporarily closed more than half of its stores — or more than 2,000 locations — in China, its largest market outside the United States. Google said it closed its five offices in mainland China, Hong Kong and self-governing Taiwan.
The airline industry has been a particular focus. White House officials have been meeting with airline executives about the virus, according to one person briefed on the talks. The White House has told airline executives that it is considering suspending all flights between the United States and China.
On Wednesday, American Airlines and British Airways reduced direct flights to and from the country, joining a growing cluster of international carriers suspending service. Lufthansa canceled all flights to and from China until Feb. 9, though the German airline said it would continue service to Hong Kong.
American, Delta Air Lines and United Airlines extended their change-fee waivers through the end of February.
Passenger air traffic was about 35 percent lower at the SARS outbreak’s worst point for airlines in the Asia-Pacific region, according to the International Air Transport Association. And for 2003 as a whole, the association estimated that SARS cost those carriers 8 percent of their revenue, or roughly $6 billion at the time.
Chinese sales account for about 10 percent of the global revenue of Starbucks. Chief executive Kevin Johnson said he had planned to raise the company’s financial forecast for the year on Tuesday but decided not to because of the virus. Company shares fell more than 2 percent.
“We’re now managing a very dynamic situation in China. … We realize this is a temporary issue we’ve got to deal with,” Johnson told CNBC.
McDonald’s, KFC and Apple have also announced closures, which will probably dent their financial results. Walt Disney said it would temporarily close its Disneyland and Disneytown parks in Shanghai. Ikea said it would close nearly half of its 30 Chinese locations.
Smaller manufacturers that lack multinationals’ global support staffs are scrambling to assess the threat to their operations. “They are freaking out,” said Dan Harris, a Seattle-based attorney whose clients operate in China. “It’s extremely difficult to plan because nobody knows what’s going to happen.”
Finding alternatives to Chinese suppliers cannot be done quickly or easily, as companies that tried to escape President Trump’s tariffs learned. Other countries such as Vietnam, Thailand or Malaysia lack China’s mix of qualified suppliers, trained workers and modern logistics.
“If this virus is not contained within the next few weeks, some companies are going to die because of this,” Harris said.
Trump’s tariffs prompted many companies to begin looking for replacement suppliers, according to Jake Parker, senior vice president of the U.S.-China Business Council. Coupled with the continuing tariff uncertainty, the virus has triggered “an increased sensitivity to the risk exposure of the Chinese market,” he added.
Some industries could be especially hard-hit. China accounts for about 80 percent of raw pharmaceutical ingredients sold to manufacturers, according to specialists. Drug manufacturers and the Food and Drug Administration have yet to report any shortages, but the potential for such issues exists if the crisis persists.
``The coronavirus is a warning shot across the bow that we have to rethink and diversify the sourcing of the core raw materials, chemical intermediates and active ingredients for our generic drugs," said Rosemary Gibson, author of “China Rx” and a senior adviser at the Hastings Center, a nonprofit bioethics research institute.
Switching to an alternative supplier in India would not solve the problem because Indian drugmakers depend on China for their raw ingredients.
Most factories and businesses in China are closed as the nation celebrates the new year. For now, the most visible disruption has been to consumer-oriented industries such as travel.
This year, about 3.1 million cars and trucks are expected to come off the assembly lines in Hubei province and nearby Shanghai, said Carla Bailo, president of the Center for Automotive Research. Those vehicles account for about 12 percent of China’s output. But if manufacturers in Hubei and Shanghai — Honda, Toyota, Renault-Nissan-Mitsubishi and Volkswagen among them — delayed operations for a five-day workweek, that could result in 150,000 lost units, Bailo said.
Hannah Knowles, Heather Long, Christopher Rowland and Jeff Stein in Washington, Reed Albergotti in San Francisco and David Crawshaw in Hong Kong contributed to this report.