Market Insight

The factory of the world is ill: Coronavirus in China disrupts production and supply chains around the world

February 13, 2020


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Already forecast to be on a slow road to recovery this year, machinery production and component manufacturing will suffer a further setback as the human toll rises and factories shut down from the dangerous coronavirus outbreak in China. The city of Wuhan, a major manufacturing hub and the largest metropolis in central China with a population of 11 million, is at the epicenter of the occurrence.

As one of China’s largest manufacturing production centers, Wuhan serves a key role in industries such as automotive, iron, and steel. It is also increasingly important in manufacturing high-end equipment for electronic and optical communications, biomedicine, and the wider medical sector. 

Beijing has imposed a lockdown on the city in an attempt to contain the outbreak, which to date has killed more than 900. Manufacturers in Wuhan and in cities in the neighboring provinces had little choice but to shut down factories, which could remain shuttered for an indefinite period of time. The closures, however, are causing a ripple effect that is slowly spreading across Asia, with the potential to reach the rest of the world.

All told, the Wuhan stoppage is causing shortages in areas of industry vital to the manufacturing of electronics and automobiles. The shortages are on top of production cutbacks adopted earlier by manufacturers in tandem with clearing their backlogs, undertaken in response to existing poor market conditions.

Key disruptions and current situation in China

To date, the coronavirus has been responsible for a number of factory closures and delayed production in industrial and manufacturing segments including the following:  

  • Dongfeng Honda extended its closure of three factories in Wuhan, with no decision on when the plants would reopen.
  • Nissan Motor won’t restart production in China until after 17 February at the earliest, and restart dates may well vary from plant to plant.
  • The Ford Motor Company has resumed vehicle production at its plants in Chongqing and Hangzhou, with a gradual ramp-up in production to be based on market demand.
  • Apple iPhone supplier Foxconn announced on 8 February a delay of at least another week before it resumed full production.
  • Delays in operations have been announced across the manufacturing spectrum in key electronic companies, including memory maker Yangtze Memory Technologies; wafer foundry Hongxin Semiconductor Manufacturing; panel display makers China Star Optoelectronics Technology, Tianma Microelectronics, and BOE; and fiber entities Yangtze Optical Fiber and Cable.

What are the possible impacts of the coronavirus on the machinery production and industrial automation equipment market? Below is Omdia’s take and analysis.

Dashed hopes

In our Q4 2019 Machinery Production Market Tracker, Omdia projected marginal growth in 2020 for Europe, the Americas, and Asia Pacific at 0.6%, 1.4%, and 1.3%, respectively. The year just past in 2019 had been one full of uncertainty in light of Brexit and US-China trade skirmishes. As a result, 2020 was not predicted to be a strong year for manufacturing. Yet the hope was that the markets would start to recover this year—hope that has been largely dashed because of coronavirus. Whether a recovery might manifest as the year unfolds is unclear, a question highly dependent on the remainder of 2020 and on the severity of the virus outbreak across the rest of the world.

Disruption on a global scale

  • Factories of the world are grinding to a halt, and the domino effect has disrupted global supply chains as major factories in China have to cease operations until further notice.
  • From a machinery production perspective, any gains made in Q4 2019 and Q1 2020 will be wiped out. Hardest hit will be the production of machine tools, semiconductor machinery, and robotics.
  • The expected recovery of the automotive and electronics sectors is now forecast to be delayed. Electronic gadgets, next-generation smartphones such as the Samsung Galaxy series and Apple iPhone, and gaming consoles like the Sony PlayStation and Microsoft Xbox are likely to face delays in production and set back their launch dates.
  • Since china is the leading food producer in world, the negative effects will then trickle down to the production of food and beverage and packaging machinery before affecting the logistics industry, which includes materials handling machinery.

Our analysis:

According to the Wuhan statistical yearbook for 2018, computer and telecommunication equipment, automobile manufacturing, and electronic equipment accounted for total production output in the city in excess of 40% in Wuhan. There were 380 automobile manufacturing enterprises in Wuhan, including parts and accessories manufacturers. Given the number of industrial and manufacturing companies in the area, the ongoing shutdown will have a severe impact on the entire Wuhan automotive industry in the first quarter, cutting drastically into production whose effects will reverberate across the entire Asia Pacific regional market. Here are a few examples of the effect from the virus on various segments of industry and manufacturing across Asia Pacific:

  • Hyundai temporarily closed its factories in South Korea last week due to a shortage of Chinese parts.
  • For the same reason—the shortage of Chinese parts--Nissan announced it would shut its factory in Kyushu, Japan.
  • Kia Motors plans to suspend production at two of its plants in South Korea for at least two days, likewise because a shortage of parts coming from Chinese factories. 

In turn, the harm sustained by the automotive industry will reduce demand in the immediate future for upstream equipment, such as machine tools and industrial robots.

The coronavirus may turn out to be a short-term disruptive agent, but it is likely that machinery production in the three major regions—Europe, the Americas, and Asia-Pacific—could be lower than initially forecast for 2020. And while production and machinery investment is expected to instantly ramp up once factories are given the green light to resume operations, market recovery this year is going to be an uphill battle. Under the most optimistic scenarios, recovery is likely to occur at the end of 2020 or in early 2021, but such an outcome will depend on how well the virus is contained around the rest of the world.

Omdia will continue to track and offer its insights on the impact of this virus on machinery production and industrial automation equipment as we continue to collect and interpret the pertinent data. For more information, please inquire about our Machinery Production Market Tracker.

Geography
China World
Research by Market
Manufacturing Technology
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