Economic Impact of COVID-19 on Manufacturing Industry

A slowdown in the manufacturing practices due to COVID-19 outbreak has been disrupting the global trade. It is affecting the whole value chain ranging from raw material supply and manufacturing to retail sector. China is becoming a central manufacturing hub of several global operations. The GDP (PPP) share of China across the globe was nearly 19.3% in 2019. This represents the largest amount of industrial operations in the country. As a result, the slowdown in Chinese manufacturing operations due to factory shutdown has been affecting the countries that are reliant on Chinese suppliers. As per the data published by the United Nations Conference on Trade and Development (UNCTAD) on 4th March, the outbreak of COVID-19 could result in a $50 billion decrease in exports across global value chains. In February 2020, China’s manufacturing Purchasing Manager’s Index (PMI) – a critical production index – decreased by nearly 22 points to 37.5, which is the lowest reading since 2004.

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This output reduction signifies a 2% drop in exports on an annual basis. Highly affected sectors include automotive, machinery, communication equipment, and precision instruments. The economies that are mostly affected by the COVID-19 outbreak include EU ($15.6 billion), the US ($5.8 billion), Japan ($5.2 billion), The Republic of Korea ($3.8 billion), Taiwan Province of China ($2.6 billion) and Viet Nam ($2.3 billion). Due to the epidemics of COVID-19 across the globe, the manufacturers of the automobile, chemical, electronics, and aircraft are facing concerns regarding the availability of raw material. In the electronics sector, smartphones and consumer electronics companies have commenced production cuts and delay in the launch of new products due to the COVID-19 outbreak that has interrupted the supply of components. 

In addition, electronic companies are shifting their production to countries with less epidemic conditions. For instance, Samsung Electronics Co., Ltd. declared to shift some portion of its domestic production of smartphones to Vietnam coupled the fastest growth in the spread of coronavirus in South Korea. This aims to minimize the potential effect of coronavirus on their manufacturing operations. China accounts for nearly 75% of the total value of components utilized in televisions and nearly 85% in the case of smartphones. All critical components, such as printed circuit boards, mobile displays, LED chips, memory, open cell TV panels, and capacitors are imported from China. 

Washing machine motors and air conditioner compressors are also sourced from China. Chinese vendors have increased component prices by nearly 2-3% owing to shortage of supplies due to factory shutdown. This results in the negative effect of coronavirus on the electronics manufacturing industry. Factory shutdowns have also reported in other countries due to the COVID-19 outbreak. The automakers are planning to temporarily suspend their production facilities in Europe. For instance, Daimler, Ford Motor Co., and Volkswagen declared recently that they will temporarily shut down production of vehicle and engine at its factories in Europe. The decision regarding automakers’ shutdown is followed by the World Health Organization’s designation of Europe as the new center of the coronavirus outbreak.

Likewise, in the US, the spread of COVID-19 has been financially impacting the manufacturers of the country. For instance, as per the National Association of Manufacturers (NAM) survey conducted from Feb. 28 to March 9 2020, 78.3% of respondents say that the epidemics of COVID-19 is expected to have a financial impact on their businesses and 35.5% say that they are already facing disruption in a supply chain process. The US is the major economy with remarkable industrial output. As noted in the recent US Department of Commerce's Bureau of Economic Analysis (BEA) report, manufacturers produced a total of $2.3852 trillion worth of goods for the economy in the first quarter of 2019, up from $2.3845 trillion in the fourth quarter of 2018. In the US, manufacturing accounted for 11.3% of real GDP in the first quarter of 2019. The financial losses to the US manufacturers will, in turn, affect the production capacity and foreign trade operations in the country and will disrupt the GDP growth rate.