Businesses are in good shape to brace against potential supply chain disruption from China’s coronavirus outbreak, according to Wells Fargo Securities, but risks remain if factory shutdowns and transportation challenges drag on.
Relative to prior periods of supply chain shock, inventory input levels in the U.S. are set to absorb near-term fallout from the global health emergency that emerged in the Chinese city of Wuhan as factories began winding down and workers streamed out of urban centers to celebrate the Lunar New Year holiday last month.
The Chinese government’s decision to curtail transportation in an attempt to curb the fast-spreading outbreak dovetailed with factories shipping orders ahead of time in anticipation of the factory closures.
In fashion, most spring and early summer orders have been shipped, and should still be in transit to U.S. ports. At New York City fashion trade shows earlier this month, many apparel vendors said they already have their orders in warehouses ready to ship to retailers and specialty stores once orders are finalized. Others confirmed that their orders were en route to wholesale partners.
And while some fashion vendors expressed concern about future orders for late summer and fall, several cited contingency plans in the case of continued China delays. One option is sourcing elsewhere, even if that means a temporary hit on margins. Another vendor would wait to review production timing and then expedite orders by air.
For other manufacturing sectors, early shipment also meant that inputs needed for production were sent before the new year factory closures.
“Most industries are entering this period with high levels of input inventories so, generally speaking, most American industries have more cushion against production being disrupted than prior periods of supply chain shocks,” Jay H. Bryson, acting chief economist at Wells Fargo Securities, said.
Most Chinese factories were set to reopen over the weekend, presuming they received government clearance. Factories were required to inspect machinery and operations, and sanitize facilities before resuming production.
The coronavirus outbreak doesn’t compare evenly to China’s 2003 SARS epidemic, given the extent to which U.S. supply chains are now intertwined with the ‘world’s factory.’
“The effect on the U.S. manufacturing sector from the coronavirus comes down to how integrated production is with China specifically, and the global economy more broadly,” Bryson said. “If manufacturers source inputs from China, then their production could be at risk [from] Chinese factory closures, or transportation delays in getting goods stateside. But if U.S. manufacturers have high levels of inputs on hand, production should be able to weather a supply disruption, at least for a time.”
Wells Fargo estimates that the U.S. input inventory ratio has trended steadily higher since the advent of the Great Recession, and currently stands at an all-time high.
“The ratio today stands at a significantly higher level than in prior periods of supply chain shocks, such as during the 2003 SARS outbreak, the 2011 Tohoku earthquarke and the 2015 West Coast Port Strikes, which should provide some cushion to manufacturers’ production processes,” Bryson said, adding that with the exception of the chemical products sector, the input inventory ratios in most other sectors “stand above levels at prior disruptions.”
Because the health crisis in China remains fluid, questions remain over how much longer most American industries can withstand supply chain disruptions resulting from the epidemic.
“As Chinese production and shipments are delayed, U.S. inventories will be pared down more quickly than they otherwise would be,” Bryson said. Shutdowns of a month or more, he added, could have an adverse impact as “it may only take one part running out of stock to shut down production of certain products.”