To understand the potential painful impact of the coronavirus on the Fortune 1000 takes just one word: resin.
When the 2011 earthquake and tsunami struck the Fukushima Prefecture of Japan, the electronics industry had a huge problem on its hands. Two Mitsubishi Gas Chemical factories in the affected area made almost the entire world’s supply of an epoxy resin called bismaleimide triazine, or BT. Electronics chip manufacturers regularly used BT to seal their components. No BT, no chips, without a major manufacturing overhaul.
“It was buried within a supply chain—a component of a component,” said Josh Nelson, a principal in strategy and business transformation practice of The Hackett Group, a strategic consultancy.
Now, as coronavirus continues to spread, the region of China most heavily affected by the outbreak is a hub of global supply chains. A new Dun & Bradstreet study estimates that 163 of the Fortune 1000 have tier 1 suppliers—those they do direct business with—in the area. And 938 have tier 2 suppliers, which feed the first tier.
“That’s where it becomes troubling,” Nelson said. “It’s going to be that [item] where only one plant is qualified to make that and it’s going to interrupt a whole production line.”
The pinch is already being felt. Amazon has been stockpiling Chinese-made goods, Under Armour warned of a $50-$60 million potential shortfall in Q1, multiple automakers have shut down factories in China, and Nintendo expects “inevitable” production and shipment delays. And a growing number of companies have issued earnings warnings related to coronavirus.
Beyond the already announced effects, many Fortune 1000 companies still don’t know how seriously their operations will be affected. Although likely aware of tier 1 suppliers’ statuses, they (and 5 million other companies globally, by Dun & Bradstreet’s estimation) have little interaction with the tier 2 level they indirectly use, all of which happen to be in the same part of China.
“The waters get murkier,” said Brian Alster, general manager of third-party risk and compliance for Dun & Bradstreet. Plus, China’s impact on the world’s commerce has grown. “When you look at SARS outbreak in 2003, they were 2% of global GDP,” Alster said. “Today they’re 20%.”
Already feeling the impact, according to the study, are the automobile and electronics industries, which face the largest first quarter effects on earnings. Then come retail and financial services, followed by total services, with a heavy emphasis on disrupted tourism.
“We have seen reports of customers paying air freight to get the parts out of there at a substantially increased cost,” said Ann Marie Uetz, a partner with Foley & Lardner and co-chair of the law firm’s national automotive crisis response team. “But we haven’t seen lines shutting down here in North America.” Auto manufacturers are doing what they must to keep producing their most profitable vehicles. “To be blunt, I think GM is going to keep building trucks—the Silverado in particular,” she said.
Doing what is necessary can result in big spending. “A lot of times [manufacturers are] working on 5% or 10% margins,” said Richard Lebovitz, CEO of LeanDNA, which provides supply chain management services to large companies in the aerospace, automotive, and industrial controls sectors. Air freighting parts in gets expensive. “You could be adding a cost of parts of 10% to 30% in some cases,” Levovitz said. That can become a big bottom-line hit.
But the alternative is worse. Stop production and a company could lose customers. Like BT epoxy resin, it only takes a single automobile panel or one industrial motor to keep a product from shipping. Because increasingly work has become custom, rather than using off-the-shelf parts, finding an alternative source may be at best costly and at worst nearly impossible.
“The tooling [to make the part] could be in the $10,000 range, but it could be in the several hundred-thousand-dollar range” for larger items, Lebovitz said.
Beyond customer loss, a factory shutdown has another long-term implication. A company can easily stop production. Restarting, though, means reengaging the entire supply chain and getting it to work again on all the necessary components. The participating companies likely have shifted attention elsewhere to keep their own revenue streams alive.
While there is concern now, the great unknown is how long the situation in China could last. Some manufacturers and their suppliers have more options than others. “If you’re a Fortune 50 or Fortune 100, you’re going to have a lot of resources to identify and mitigate risk,” Nelson said.
On the other hand, corporations in the bottom half of the Fortune 1000—which individually still have billions in annual revenue—frequently run with less inventory and more reliance on components, ingredients, and products arriving only when needed. That could mean having “only 30 to 40 days of materials on hand,” Nelson said. Anticipation of the lunar new year probably meant that companies had already laid in additional inventory because of planned shutdowns, adding perhaps two more weeks of production capacity.
“Another month beyond that you’re going to see some of the companies having issues,” Nelson said.
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This content was originally published here.