The sudden spurt in coronavirus (COVID-19) cases over the past few weeks across the globe has not only cast its shadow on global financial markets, but has also derailed economic activity in major countries, especially China, which was in the middle of a trade spat with the United States before the coronavirus’ outbreak.
Most analysts have revised downward their global growth projections as measured by the gross domestic product (GDP) in this backdrop. A number of companies, they say, are now increasingly looking to diversify their manufacturing base out of China.
A recent report by UBS says a number of respondents / companies are looking to diversify from China, suggesting a manufacturing shift from the country is more structural and long-term in nature. UBS’ Evidence Lab’s sixth US CFO survey findings released recently suggest over 76 per cent of respondents are looking to shift supply chains as a response to protectionist policies such as trade tariffs.
“That apart, 66 per cent of the respondents said they are moving production facilities, too, as a response to protectionist policies, though this number is lower than 74 per cent and 76 per cent in the past two surveys,” the UBS report Gautam Chhaochharia, their head of India research along with Dipojjal Saha and Tanvee Gupta Jain says.
In the midst of this long-term structural shift from China, India has dropped a few notches in the companies’ preference to relocate manufacturing, while ASEAN countries have gained. For India, sectors are divided into manufacturing and services-oriented.
“10 per cent of the respondents are considering India for new incremental investment, compared to 14 per cent in the past two surveys. At the same time, ASEAN countries have seen some pick-up from 11 per cent in the last survey, to 15 per cent in this survey. It appears that respondents looking to make incremental investment in India have declined more in manufacturing,” the UBS report says.
Drop in consumption demand, manufacturing
The lockdowns imposed in mainland China to prevent coronavirus from spreading has resulted in a sharp fall in consumption demand. According to Nomura, the evidence on growth suggests a nearly 50 per cent (if not higher) hit to economic activity so far in the first quarter of 2020 (Q1-2020) due to weak China demand, supply chain disruptions, weak tourism and reduced local services activity.
China’s consumer demand proxies, according to Nomura, are projected to decline by nearly 50 per cent y-o-y in Q1, before pent-up demand picks up starting in Q2-2020, but full-year 2020 estimates have still been revised downward.
“Tech and auto sectors are the most affected and bottom-up evidence suggests that Chinese factories may return to full production only by mid-April due to labour and logistical bottlenecks. In contrast, overseas suppliers have inventories only until mid-March and thus may have to cut production from February until April or May, so the growth slowdown risks spilling into early Q2,” Nomura says.
Meanwhile, China's Markit Manufacturing Purchasing Managers' Index (PMI) came in at 35.7 for February - the lowest reading since the survey was launched in 2004. The non-manufacturing gauge, too, tumbled to its lowest ever at 29.6. A level of 50 for both these indexes denotes contraction.