The Washington PostDemocracy Dies in Darkness

Virus threatens U.S. companies’ supply of Chinese-made parts and materials

Medical workers hold a strike near Queen Mary Hospital in Hong Kong on Feb. 3 to demand the government shut the city's border with China to reduce the spread of the coronavirus.
Medical workers hold a strike near Queen Mary Hospital in Hong Kong on Feb. 3 to demand the government shut the city's border with China to reduce the spread of the coronavirus. (Anthony Kwan/AFP/Getty Images)

The battle to contain the Chinese coronavirus threatens to cut off U.S. companies from parts and materials they need to produce iPhones, automobiles and appliances and drugs to treat medical conditions including Alzheimer’s disease, high blood pressure and malaria.

Some of the United States’ best-known manufacturers such as General Electric, Caterpillar and the Big Three automakers, along with many smaller American businesses, depend on what is made in Chinese factories.

Now, they confront life without those items. Major airlines in the United States and Europe are halting their cargo and passenger flights to China for up to two months. Recent visitors to the country are barred from entering the United States.

After four decades of growing integration with the rest of the world, China almost overnight has become an economic island. Its temporary isolation — no one knows for how long — will hurt companies that depend upon Chinese inputs as well as those that sell to Chinese customers.

Health and Human Services Secretary Alex Azar declared the coronavirus a public health emergency in the U.S. on Jan. 31. (Video: Reuters)

Consumer electronics makers are among the most vulnerable, because many game consoles, smartphones and tablets are made in China. On Saturday, Apple announced that it had closed all of its corporate offices and retail stores in China — where it booked $44 billion in sales last year — until Feb. 9 because of the virus.

“The concern is not the zombie apocalypse with people dying in the streets. The concern is that a huge chunk of the global economy gets put out of commission as people wait it out,” said Patrick Chovanec, managing director at Silvercrest Asset Management in New York.

White House advisers so far have played down the disease’s effects, with President Trump’s top economic aide, Larry Kudlow, saying last week that he expects the virus to have “no material impact” on the U.S. economy.

Scientists have identified certain parts of the world as hot spots for emerging diseases. (Video: The Washington Post)

Most Wall Street economists, likewise, say the economic damage will be limited. Economists at JPMorgan Chase Bank on Friday cut their first-quarter global growth estimate by 0.3 percentage points to 2.3 percent. But they predicted a swift rebound that would return China and the global economy to their pre-crisis trends by midyear.

The sanguine forecasts are based in part on a disease outbreak from 2003: The Chinese economy recovered quickly after severe acute respiratory syndrome (SARS), another fatal flulike infection, temporarily emptied offices and factories.

But there is no guarantee that the coronavirus will trace a similar path. Already, there are indications that while the new virus is less lethal than SARS, it spreads more easily.

China’s $14 trillion economy also is four times as large as it was 17 years ago and far more globalized. About 150 million Chinese business executives and tourists took an international flight in 2018, the most recent data available, more than seven times the 2003 figure, according to JPMorgan. Globally, the number of shipping containers moving among the world’s ports has almost tripled, according to the United Nations.

In Youngstown, Ohio, Phantom Fireworks worries that a prolonged hiatus at its Chinese supplier may prevent it from importing sufficient inventory for the Independence Day celebration.

Though its vendor in Liuyang, about 200 miles from Wuhan, is scheduled to reopen on Feb. 10, Phantom executives say the shutdown will probably last at least an additional week and perhaps several more. Chinese officials also closed the southern port of Beihai late last week, severing a key export link. Few alternative producers exist outside China.

“We’re in a very precarious situation, no question about it,” said Alan Zoldan, the company’s executive vice president. “I’m not very confident at all. It’s pretty unprecedented territory.”

Precautions that the Chinese and American governments are taking to stop the spread of the coronavirus, justified on grounds of medical necessity, are raising the potential economic toll. An official quarantine will keep factories across much of China, closed since Jan. 24 for the Lunar New Year holiday, shut for at least one more week, maybe longer.

Three major U.S. airlines — United, American and Delta — suspended flights to China until the end of March. American grounded its planes immediately, one day after its flight attendants union sued the company, arguing that the virus made such trips unsafe. United and Delta will stop flying at the end of the week.

That means trans-Pacific airfreight shipments will be limited for at least two months even if Chinese factories return to normal operations before then. (Fed­Ex says that for now it is continuing its flights.) Some U.S. companies are drafting contingency plans for supply disruptions that linger into April or May, according to Craig Allen, president of the U.S.-China Business Council.

China is the largest export destination for 33 countries and the top source of imported goods for 65, including the United States, according to a 2019 McKinsey Global Institute study.

The accumulating uncertainty is unnerving investors. The Dow Jones industrial average fell more than 600 points, or 2.1 percent, on Friday.

The U.S. dependence on China was on display two years ago when American companies first sought to dissuade the Trump administration from imposing tariffs on Chinese goods.

Among those lobbying for relief was GE, which relies on its Chinese factories for parts to produce CT scanners, ultrasound and X-ray machines, oil field pumps, valves and motors, and aircraft engine components.

“There are certain inputs that cannot be readily sourced outside China,” Del Renigar, a top official in GE’s Washington office, wrote to the Office of the U.S. Trade Representative.

Finding a replacement for Chinese suppliers would not be easy. Dayco, a maker of engine parts and drive systems in Troy, Mich., said it would need two years to qualify new U.S. suppliers and to secure the needed approvals from its customers to use them.

Prinston Pharmaceuticals of Cranbury, N.J., depends on Chinese ingredients to make medications to treat high blood pressure, Alzheimer’s and depression. Novus Pharmaceuticals said its Chinese plant was the only source approved by the Food and Drug Administration for coartem tablets, a treatment for malaria.

Electronic component maker AVX of Fountain Inn, S.C., produces ceramic capacitors at its plants in Tianjin and Shenzhen, which its industrial customers in the United States use in automobiles, microwave ovens, washing machines, radios and television sets.

The impact of an interruption in Chinese supplies will depend on the duration of any cutoff, which is unknowable, and the size of current inventories, which companies generally do not disclose.

The number of people with the coronavirus has soared above 14,000, and more than 300 Chinese citizens have died. In response, Trump on Friday declared a public health emergency and barred foreign nationals who had been to China in the past 14 days from entering the United States. American citizens returning from the country will be subject to health screening and up to 14 days in quarantine.

The president’s decision came one day after the State Department warned U.S. citizens against all travel to China and the World Health Organization declared the outbreak a global health emergency.

China, which in recent years accounted for about one-third of global growth, is now radiating economic weakness. The immediate impact of the health crisis will slow its domestic economy. First-quarter growth will dip to an annual rate of 5.2 percent, down from 6 percent in the final three months of last year, the most abrupt slowdown in nearly 10 years, according to PNC Bank.

“It’ll bounce back when it’s over,” said Allen, the U.S.-China Business Council president. “But we don’t know when it will be over.”

Chinese consumers sheltering in their homes rather than engaging in traditional holiday activities will spend less, while factory closures affecting millions of workers threaten parts shortages for American electronics or auto plants, economists said.

In one sign that the virus will have enduring effects across the world’s second-largest economy, the Ladies Professional Golf Association late last week canceled the March 5-8 Blue Bay golf tournament on Hainan Island. That’s about 1,000 miles from Wuhan, where the virus originated.

More than 50 million Chinese residents remain under a lockdown. The government already extended the Lunar New Year holiday to Monday. Factories in Hubei province, the epicenter of the outbreak, have been ordered closed through Feb. 13. Other provinces plan to restart production on Feb. 10.

“We believe there will be a disturbance at least until the end of February and possibly into mid-March,” said Sebastien Breteau, chief executive of QIMA, a supply-chain consultancy. “We are not very optimistic.”

More than 450 U.S. importers use suppliers in Hubei province, according to London-based Panjiva. Electronics manufacturers rely on Chinese suppliers for up to 50 percent of their components, while automakers get 15 percent from China, according to Chris Rogers, a Panjiva supply-chain specialist.

Some U.S. and global manufacturers will face higher costs even after their Chinese suppliers resume normal operations. Airline cutbacks will mean less space available for the industrial shipments — known as “belly cargo” — that travel in the hold of commercial jetliners.

“The scale of the airline cutbacks really caught my attention,” said Phil Levy, chief economist for freight forwarder Flexport. “This is a big network. You carve China out of it and it’s going to affect goods to Europe and goods to the U.S.”

As health officials fight the virus, the earliest and most severe economic consequences will be felt by China’s Asian neighbors. Countries such as Thailand, Malaysia, Vietnam and the Philippines are tied into production networks centered on Chinese manufacturers and also have benefited from the past decade’s boom in Chinese tourism.

Aftershocks also are certain to be felt by major commodity-producing nations, such as Australia, which supplies China with much of its iron ore. The Baltic Dry Index, a gauge of bulk shipping costs, fell Friday for the 10th consecutive session and is now down 49 percent this year.

Of the advanced economies, nearby Japan and export-dependent Germany will feel the greatest chill.

Conventional economic forecasting is ill-equipped to calculate the impact of such an unpredictable health emergency, said Torsten Slok, chief economist for Deutsche Bank Securities. His baseline model for the U.S. economy relies on 200 equations.

“I just don’t know which equation I should be putting this in,” he said. “I just don’t have a good framework for assessing the risk.”