“It looks like a roller coaster, but the dive is followed by another dive,” said Jay Foreman, CEO of Basic Fun, a toy distributor in Boca Raton, when the coronavirus epidemic started to ruin his business. “We are waiting for the carriages to start moving up, but I think we will have to wait a little longer.”
Like many US companies, Basic Fun relies on China for its production. Foreman receives updates daily from its suppliers in China, where about 85% of the products for the $ 80 billion global toy industry sources are found. And every day, the supply chain problems related to the global outbreak of Mount Covid-19.
Around 400 million Chinese workers are expected to return to factories at this time of the year after the lunar new year, but this year it makes no sense that even if they do, Chinese suppliers will have materials or transportation to restart production.
“There are challenges with truck drivers who cross provinces to ports, there are too many containers and not enough boats, or too few containers and not enough boats. There is upheaval and uncertainty, and everyone is on pins and needles until we understand the meaning 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 in May, when summer requests resume, or in the Christmas holidays, when it gets up, the story may be very different.
With toy production centered in China, opportunities to quickly reconfigure the global offering are limited, said Steve Pasierb of the New York Toy Association. “The story is changing day by day, but luckily we still have another 40-60 days before it becomes a crisis.”
Jessica Alcalde, New York Product Procurement Consultant, echoed that sentiment. “If it continues until July and August it will become a serious concern for many people.”
According to Foreman, Chinese distributors may be open to trade, but production lines are not necessary to be managed. Many factory owners, he said, report that their workers will need to be quarantined before starting work, but it is unclear where that quarantine is taking place except in what the Chinese authorities call “special places”.
With 100 employees in the United States, 85 in Hong Kong and 10 in China, Basic Fun will have no choice but to cut costs and jobs if supplies run out. Nor can the company simply move towards other toy-producing nations, since most get their components from China.
“If we can’t get a product, we will be turned upside down, and if turned upside down, there is only one way to stabilize the budget and that is to cut costs,” Foreman said. “We are in an uncharted territory, that’s for sure.”
This story is told in all sectors, with every type of consumer product, from wedding dresses to mobile phones, from cars and luxury products to pharmaceutical products, observing potential interruptions in the coming months.
A series of warnings about supply chain problems earlier this month became a cascade of warnings. Almost no globally integrated sector appears immune, triggering US stock indices to record their worst US weekly drop since the 2008 financial crisis, down about 12%.
It is too early to predict the full impact of the crisis on the American economy. The course in the stock markets suggests that it could be severe but could evaporate just as easily if the Covid-19 epidemic wanes. But already Federal Reserve officials report that they are open to an interest rate cut if the epidemic worsens.
And the interruptions of the global supply line, such as those experienced by Basic Fun, are one of the clearest indicators of economic damage.
“Every single segment of the supply chain is exposed to disruption,” said Richard Wilding OBE, professor of supply chain strategy at Cranfield University. The interruption, Wilding said, is governed by unwanted consequences. “With Italy, for example, trains to Austria have stopped. As soon as this happens, you have to ask if the freight also stops. “
Even if production in China is restored, transportation can remain seized. Shipping containers are piling up in Chinese ports, leading to shortages in other parts of the globe.
More tons of container ships are currently inactive compared to the global financial crisis, according to Alphaliner, a shipping data service. Rental rates for tankers and merchant ships have plummeted by over 70% since the beginning of January, according to Mandarin Shipping, based in Hong Kong.
The knock-on for the industry is already evident. The global auto sales volume forecast by the credit agency Moody could drop 2.5% year-on-year, with a 2.9% drop in Chinese sales. On Wednesday, Microsoft shares fell 2% after the company said it did not expect to comply with the quarterly revenue guide.
Apple, with nearly 290 of Wuhan’s 800 Chinese component suppliers, said it did not expect to reach its quarterly revenue guide following the impact of Covid-19.
The luxury goods industry, hit by virus epidemics in the production centers of northern Italy and by a sharp drop in Chinese consumer spending which represents 30% of global sales, could be more serious.
Global luxury manufacturers suffered a hit of $ 25.5 billion, with LVMH industry leader Moët Hennessy – Louis Vuitton contributing more than half of that decline, as dozens of other industry leaders issued warnings of loss of earnings.
For the moment, the resilience of supply, production and transportation systems remains the key to mitigating economic damage.
However, disruptions to global supply chains are often not easily or quickly countered.
Detroit-based auto parts maker American Axle & Manufacturing said it expected about $ 25 million in sales lost in February and early March due to the slump in auto manufacturing in China. Tesla, who recently opened a Shanghai factory to build models for Chinese customers, said that the outages were expected to “slightly affect” profitability last month.
With nearly 1,600 Covid-19 cases reported in South Korea and community outbreaks reported in Germany and the United States, supply chain problems could intensify, said Wang Tao, chief economist at UBS, China. Companies discounting potential outages due to the annual lunar new year “are waking up to the fact that there will be delays from China but also new areas.”
A recent Fung Business Intelligence report feared that the countries just affected by the virus may not be able to deal with a coronavirus outbreak with the same efficiency as China, where the rate of new infections appears to be decreasing.
“For a variety of reasons, be they political or economic, these countries may not be able or willing to take stringent containment measures such as China, which could condemn their efforts to contain Covid,” says the report.
“Covid-19 is no longer a Chinese or Asian problem, but a global problem,” he added.