As you read this post, the coronavirus will have upended more business activity than reported in this article.
British Airways, Air Canada, Apple, Starbucks, Ikea, and other international, corporate giants have already frozen some of their operations in China as the coronavirus claims more lives and increases business risk as well as uncertainty. The crisis highlights the role of China as an engine of global economic growth. Foreign companies’ investment concentration in Wuhan, the epicenter of the outbreak, challenges the notion of an easy pullout. In the same vein, the travel restrictions placed on Chinese citizens underscore Chinese tourists’ economic impact all over the world.
Video Spotlight: Business Impact of Coronavirus
This post is based on The New York Times article, Coronavirus Outbreak Tests World’s Dependence on China, by A. Stevenson, January 29, 2020, and the YouTube video, Coronavirus to Pose a Threat to Global Supply Chains: Economist, by BNN Bloomberg, January 29, 2020. Image source: Mick Ryan/Cultura RF/Getty Images.
1. How does halting manufacturing in China affect economic growth in the United States?
Guidance: US manufacturing firms with production facilities in China may have a lower output and therefore productivity. Furthermore, their sales to Chinese consumers may decrease, thereby lowering their profits and capacity for further investment. As the supply from China dwindles, US firms may have to seek alternative sources, perhaps with a less skilled workforce. Although the search for other sources has already been under way, its renewed urgency exacerbates uncertainty and hasty decision making. As the Chinese economy slows as a result of plant closures and restricted transfer of goods and services, the purchasing power of its population will decrease and affect US exports to that country.
2. What is Starbucks’s business rationale for temporarily closing more than 2,000 locations in China?
Guidance: Starbucks has been expanding its operations in China. As the threat of the coronavirus intensifies, the company wants to ensure the safety of its staff members (both American and Chinese) by minimizing their exposure to potentially contagious individuals. The company also wants to protect itself from potential lawsuits because normal hygiene protocols are insufficient to prevent contamination. As flights to China are cancelled, the supply chain and Starbuck’s menu are becoming constrained as well.
3. The virus has already spread to several countries. If they are unable to contain it, what are the repercussions on the global economy?
Guidance: Besides paralyzing global supply chains, fear and uncertainty are likely to lower consumption and roil financial markets, which could trigger capital shortages, halt global growth, and even plunge the world into a recession. The precautionary, drastic measures taken by governments and businesses are designed to ensure that the crisis is contained and short-lived.