The first two months of the New Year 2020 were critical for China when the country saw a tremendous slowdown in its business. 

The first case of coronavirus in India was confirmed in January 2020 that spiked panic in people and shook up the manufacturing sector which is dependent on the procurement of raw materials from China. But, India’s dependence on procurement of raw materials from the country across sectors including automobile, electronic gadgets, pharma, and many more, created a slowdown in the Indian manufacturing units as well.

 On March 19, the Federation of Indian Exports Organizations (FIEO) issued a press release stating that the micro, small, and medium enterprises (MSMEs) are likely to be worst-hit due to the coronavirus outbreak, particularly in the first quarter of FY 2020-2021.

The release said the export sector has started feeling the pinch with many requests from buyers to hold back shipments till further instructions and a significant number of such requests may eventually lead to cancellation of orders. According to FIEO, in cases where Indian exporters are adhering to the terms of the contract, the force majeure clause is likely to be invoked by buyers to deny claim/liability raised by exporters.

With exporters hit hard and imports from many countries including China and Italy being halted, the manufacturing sector in India is likely to be worst affected.

Sailing through one of its worst times in India, where every day, new cases of coronavirus cases are being reported. The virus has not only affected human beings but has also shaken the economy, disrupting almost every industry and sector. It is difficult to estimate how the country will keep up the pace to be a five trillion economy by 2024. 

One of the hardest-hit segments is the manufacturing sector which had not yet seen much slowdown. However, the coronavirus outbreak has made the entrepreneurs scared stiff. 

In the chart below, plotted company income elasticities weighted by company country/category exposure against the stock market performance over 21 February-17 March 2020. The riskier companies as measured by income elasticity are on the right, such as Adidas and Estée Lauder. Companies on the left of the chart have lower income elasticity, like Kimberly-Clark and Kraft Heinz.

Source: Stock prices from Yahoo! Finance, company elasticities calculated by Euro monitor International based on Passport market sizes

The National Association of Manufacturers conducted a survey of its member companies on the impact of the COVID-19 outbreak to manufacturers. The survey was in the field from Feb. 28 to March 9, 2020. The 558 respondents were asked about effects to their supply chain and operations, their financial expectations and their emergency response plans:

Manufacturing Impact in other parts of the world

Manufacturing gauges also tumbled in Indonesia, Vietnam and the Philippines, Purchasing Managers’ Index (PMI) surveys showed on Wednesday, underscoring the widening damage brought by the pandemic that has infected more than 700,000 people, upended supply chains and led to city lockdowns worldwide.

China’s factory activity improved slightly more than expected in March after plunging a month earlier, a private business survey showed, but growth was marginal, highlighting the intense pressure facing businesses as domestic and export demand slumps.

While factories in China gradually restarted operations after lengthy shutdowns and a fall in virus cases allowed the country to start relaxing travel restrictions, activity in South Korea shrank at its fastest pace in 11 years as many of its trading partners imposed dramatic measures to curb the virus’ spread.

“If you look at the Korean numbers, they’re fairly bad … They’re likely to get worse still because Korea will be dependent on parts from Europe and the United States,” said Rob Carnell, Asia-Pacific chief economist at ING in Singapore.

“(Policymakers) have to accept the inevitable that there is a massive global pandemic here, there is an outbreak in almost every country globally and certainly in our region, which is getting to levels that if they don’t take very dramatic action, it’s going to get much worse,” he said.

Japan’s factory activity contracted at the fastest pace in about a decade in March, adding to views that the world’s third-largest economy is likely already in recession.

The whiplash has been beneficial to some industries, such as retail FMCG (fast-moving consumer goods) and medical commerce, mainly because of unanticipated demand growth due to panic buying, while for some other sectors, such as hospitality and civil aviation, the pandemic has resulted in a grave downturn. It’s very important to note that while for some types of businesses the effect of the pandemic will be very pronounced in the short term, for others the effects may take more time to manifest. The latter is especially true for industries that are exposed to a large number of externalities – political, economic, and social. The defence industry falls into this category.

Defense Industry

A case in point is Fincantieri of Italy, which has currently suspended its shipbuilding operations until March 29, 2020. The company builds warships of complex design and is a major participant in Qatar’s naval expansion program. It is contracted to deliver four corvettes to the Qatari Navy. Though one of the ships was delivered earlier this year, other deliveries could be pushed back if the company extends the closedown of its facilities – a probable course of action if Italy is not able to flatten its COVID-19 growth curve soon. If operations remain suspended for a protracted period of time, the company could potentially lose out on foreign opportunities at a time when naval modernization is gaining precedence. With COVID-19 cases on the rise in Western Europe, operations of many other defence firms in Europe, such as Navantia and Indra in Spain, for example, maybe affected by partial or complete shutdowns or regulated functioning, thus affecting production queues and deliveries.

The nature of the supply chain and resourcing patterns of the defence technology industry base (DTIB) will also affect production, as production queues with branched-out supply chains are more likely to face supply-side constraints. The European DTIB has a fair share of branched-out supply chains, with different components and subsystems from different sources of origin going into a final platform or solution. Regulation and reprioritization of production functions of such supply chains could affect defence production. The plausibility of such actions cannot be ruled out, especially if governments divert facilities to manufacture medical equipment such as ventilators.

Technological factors and manufacturing paradigms also have a part to play in understanding the level of impact. For example, defence firms with highly automated plants are likely to be less affected by social distancing. Similarly, those companies that have not completely transitioned into certain manufacturing paradigms such as just-in-time production may have a greater level of inventory, and thus could be able to cope with supply-side shocks for a longer period of time.

Related Post

Leave a Comment