“It feels like a rollercoaster, but the dip down is followed by another dip down,” said Jay Foreman, chief executive of Basic Fun, a toy distributor in Boca Raton, as the coronavirus outbreak started to play havoc with his business. “We’re waiting for the carriages to start going back up, but I think we’re going to have to wait a little longer.”
Like many US businesses, Basic Fun is reliant on China for its manufacturing. Each day, Foreman receives updates from his vendors in China, where about 85% of products for the $80bn global toy industry sources are located. And each day, supply chain problems related to the global outbreak of Covid-19 mount.
At this time of year about 400 million Chinese workers should be returning to factories after the lunar new year, but this year there’s no sense that even if they do, Chinese vendors will have materials or transportation to restart production.
“There’s challenges with truckers getting through provinces to the ports, there are too many containers and not enough boats, or too few containers and not enough boats. There’s upheaval and uncertainty, and everyone is on pins and needles until we understand the significance of this.”
For the time being, US toy consumers – children – have little to fear. This is a slow period for the industry, and stocks are plentiful. But come May, when summer demands picks up, or into the holiday season, when it peaks, the story could be very different.
With toy manufacturing centered in China, opportunities to reconfigure global supply rapidly are limited, said Steve Pasierb of the New York-based Toy Association. “The story is changing day to day but fortunately we’ve still got another 40 to 60 days before it becomes a crisis.”
Jessica Alcalde, a product sourcing consultant in New York, echoed that sentiment. “If it keeps going on through July and August it will become a serious concern for a lot of people.”
According to Foreman, Chinese vendors may be open for business but production lines aren’t necessary running. Many factory owners, he said, report that their workers will need to be quarantined before starting work, but it’s unclear where that quarantine is taking place except in what Chinese authorities describe as “special places”.
With 100 employees in the US, 85 in Hong Kong and 10 in China, Basic Fun will have little choice but to trim expenses and jobs if the supplies dry up. Nor can the company simply pivot to other toy-producing nations, since most get their components from China.
“If we can’t get product, we’re going to be upside down, and if we’re upside down, there’s only one way to stabilize the balance sheet and that’s by cutting costs,” Foreman said. “We’re in uncharted territory, that’s for sure.”
This story is being told across industries, with every type of consumer product, from bridal dresses to mobile phones, cars and luxury products to pharmaceuticals, looking at potentially severe disruption over the coming months.
A trickle of warnings about supply chain issues earlier this month has become a cascade of alerts. Almost no globally integrated industry appears immune, triggering US stock indices to register their worst US weekly drop since the 2008 financial crisis, down about 12%.
It’s too early to predict the full impact of the crisis on the US economy. The rout in stock markets suggests it could be serious but could just as easily evaporate if the Covid-19 outbreak wanes. But already Federal Reserve officials are signaling they are open to an interest rate cut if the outbreak worsens.
And global supply line interruptions, like those experienced by Basic Fun, are one of the clearest indicators of economic damage.
“Every single leg of the supply chain has exposure to disruption,” said Richard Wilding OBE, professor of supply chain strategy at Cranfield University. The disruption, Wilding said, is governed by unintended consequences. “With Italy, for example, they stopped trains going into Austria. As soon as that happens, you’ve got to ask if freight is also stopping.”
Even if production in China is restored, transportation may remain seized. Shipping containers are stacking up in Chinese ports, leading to shortages in other parts of the globe.
More tonnage of container ships is idled now than during the global financial crisis, according to Alphaliner, a shipping data service. Charter rates for tankers and bulk freighters have plummeted more than 70% since early January, according to Hong Kong-based Mandarin Shipping.
The knock-on to industry is already apparent. Credit agency Moody’s predicted global auto sales volume could drop 2.5% year-over-year, with Chinese sales sinking 2.9%. On Wednesday, Microsoft shares fell 2% after the company said it doesn’t expect to meet the quarterly revenue guidance.
The luxury goods industry, affected by virus outbreaks in northern Italian production centers and by a sharp drop in Chinese consumer spending that accounts for 30% of global sales, could be more severe.
Global luxury manufacturers have taken a $25.5bn stock hit, with sector leader LVMH Moët Hennessy – Louis Vuitton accounting for over half of that decline, as dozens of other industry leaders have issued missed earnings warnings.
For the time being, the resilience of supply, production and transportation systems remains key to mitigating economic damage.
Still, interruptions to global supply chains are often not easily or quickly countered.
American Axle & Manufacturing, an auto parts maker based in Detroit, has said it expects about $25m in lost sales during February and early March as car manufacturing slumps in China. Tesla, which recently opened a Shanghai factory to build models for Chinese customers, said last month it expected the disruptions to “slightly impact” profitability.
With nearly 1,600 cases of Covid-19 reported in South Korea, and community transmission outbreaks reported in Germany and the US, supply chain issues may intensify, said Wang Tao, chief China economist at UBS. Businesses discounting potential disruptions because of the yearly disruption of lunar new year “are awakening to the fact that there will be delays from China but also new areas”.
A recent report from Fung Business Intelligence worried that nations newly affected by the virus might not be able to deal with a coronavirus outbreak as efficiently as China, where the rate of new infections appears to be dropping.
“For a number of reasons, be it political or economic, these countries might not be able or willing to take containment measures as stringent as China, which could doom their efforts to contain the Covid,” the report said.
“The Covid-19 is no longer a China issue or an Asian issue, but a global issue,” it added.