Coronavirus impact on China and its likely outcome on the world economy

Business Standard explores how the outbreak could particularly impact six key sectors in India

There are various estimates of the impact on the world economy, of the spread of the deadly Novel Corona Virus (NCOV) that broke out in Wuhan in central China. The virus has so far taken more than 1,000 lives, mostly in China. It is widely believed that it would impact the information technology, telecom, electronics, auto, tourism, pharma and aviation sectors in other countries, apart from shrinking China's economic growth.

Pan Gongsheng, vice governor of the People’s Bank of China, recently said at a news briefing that the outbreak will be temporary and will not change the long-term prospects of China’s economy.

Before the outbreak, the International Monetary Fund (IMF) pegged China’s economic growth rate at six per cent for 2020, which is marginally lower than 6.1 per cent in 2019.

What's at stake

If the growth in China gets hit, it would have repercussions for the world economy, including India.

According to IMF data, China’s economic size stood at $13.6 trillion in 2018. The world economy was at $85.91 trillion that year. This meant that the Chinese economy constituted 15.8 per cent of the global economy.

According to the consultancy Oxford Economics, the Chinese economy will grow less than four per cent in the first quarter of 2020 against six per cent expected earlier. For the full year, the forecast is an average growth of 5.6 per cent. The growth for the full year was earlier also expected at six per cent.

The consultancy firm also expected the global economy to grow slightly less by 0.2 percentage points in 2020 than it would have done otherwise.

Analysts at Nomura led by Rob Subbaraman, the firm's head of global macro research and co-head of markets research, along with Sonal Varma and Rebecca Wang, expected GDP growth in China to sink to 3.8 per cent during Q1 of 2020, from six per cent in the previous corresponding quarter. They, too, expect this to rebound in Q2-2020 to 6.4 per cent on pent-up production and demand.

As far as global economic growth is concerned, Arend Kapteyn, global head of economic research at UBS, believes that it will take a serious knock and slip to 0.7 per cent in Q1 of 2020

from 3.2 per cent in Q4 of 2019. Though he expected growth to rebound in the second quarter of the current calendar year, the impact could slow the overall 2020 GDP growth by 20 basis points (bps) to 2.9 per cent.

The main channel of economic disruption at this stage, according to UBS, is largely via reduced tourism flows (in and out of China), reduced import demand from China, particularly of consumption goods, and restrictions imposed by third countries to prevent the virus from spreading.

“We expect import growth in China to fall from 3.2 per cent in Q4 of 2019 to a negative four per cent in Q1 of 2020. The rebound we hope for in Q2 largely reflects delayed consumption effects in China, while the improvement in Q3 reflects the lagged impact of stimulus coming on line, particularly in China,” the UBS report said.

All these estimates are based the assumption that the “worst-case scenario” will be avoided.

According to the World Health Organization (WHO), the total cost of SARS Corona Virus was $40 billion in 2003, which according to SBI Research equals $57 billion today. The cost of Wuhan corona virus is yet to be estimated as it is in an ascending phase.

Impact on India

As far as India is concerned, China is the country’s second biggest trading partner, after the US. It accounted for 14 per cent of India’s imports and five per cent of India’s exports in 2018-19.

The main items of imports from India are electrical machinery, nuclear reactors, plastics, chemical products, fertilisers, and organic chemicals and those of exports are mineral fuels, mineral oils, ores, and pharma.

In India, three cases have been confirmed so far, all in Kerala. No casualties have been reported so far. Over 2,400 people are under watch at homes and in hospitals in Kerala.

Let us examine impact of the deadly virus on India's economy through various sectors:

Information Technology: The IT industry is one of the biggest Indian employers in China, with over 22,000 heads in the country according to industry sources. This includes both, locals and Indian expatriates. Of these, Tata Consultancy Services has over 4,000 employees, while Infosys and Wipro have more than 2,000 staffers in the Asian nation.

Software services industry body, National Association of Software and Services Companies (Nasscom), is sending advisories and keeping in touch with the people of its member companies through groups formed on WeChat. The member companies have also formed their own WeChat groups in order to keep in touch with their employees. 

Gagan Sabharwal, Senior Director, Global Trade Development at Nasscom, said while there has been no information of employees being affected by the virus so far, member companies have been requesting face masks which have been in short supply since the virus began spreading. 

He said there were very few IT industry professionals in the Wuhan area, who moved out successfully before the Chinese government's lockdown of the region. 

As part of its efforts to reduce its dependence on the US and UK, which together make up over 70 per cent of Indian IT exports, the IT industry has upped its efforts in the past few years to create more opportunities in China. Asia currently constitutes eight per cent of IT export revenue. It has programmes that have been put in place with help from governments on both sides, in addition to companies with IT spends in excess of $35 billion setting up their own centres in China. 

"Wipro has suspended travel to and transit through mainland China, including Hong Kong and Macau, until further notice," a company spokesperson said.

The spokesperson said the company has advised its employees based in China and those who have visited the country recently to be vigilant. 

According to the company, its China unit has over 2,000 staff, though over 98 per cent of them are local.

HCL Technologies, India's third-largest IT firm, also has a workforce in China and said it is following the advisories of the World Health Organization and the local Chinese government. 

TCS and Infosys are also encouraging their employees to work from home. "As a measure of precaution, TCS has encouraged employees in China to work from home and halted all non-essential travel. Our business continuity plan is ensuring that there is no disruption of our services to clients," a spokesperson TCS said. 

Similarly, sources in global IT services firm Capgemini said that travel restrictions have been imposed to China and adjacent regions in the wake of this outbreak.

       

Electronics and Telecom: Sales of electronics majors and smartphone makers such as Apple, OnePlus and Xiaomi, especially those on e-commerce platforms like Amazon and Flipkart, are likely to be impacted by the epidemic. 

Business in China was scheduled to re-open on Monday, after the government asked for the New Year holiday to be extended. However, reports suggest that some provinces and districts have told companies not to resume work until March 1. 

Last year, 152.5 million units were sold in India, making it the second-largest smartphone market after China, according to data from International Data Corporation (IDC). 

Of this, online selling accounted for 41.7 per cent of total sales, and grew by 18.4 per cent over the previous year, while offline sales grew only by 1.6 per cent.

E-commerce industry executives in India say the industry has already started to feel the pain as a lot of manufacturing happens in China. 

"This is a double whammy, as it is not just the final product that comes from China but also a lot of raw material that is used to make electronics products like phones. We are definitely feeling the heat of this strongly at the moment," said an executive from the e-commerce industry, who did not wish to be quoted. 

Analysts and industry experts have time and again said that since most vendors make provisions for inventory due to the Chinese Lunar New Year holiday, there may not be an immediate impact. 

"At present, the situation is that Q1 might not be impacted to that extent, but new launches might see an impact," said Upasana Joshi, Associate Research Manager, Client Devices, at IDC India. 

She added that though factories haven't yet opened, there could be a "big drop in  mobile phone supply if this goes on for another month. It is also too short a time frame to shift everything to another location, because almost all production of ships, camera modules and so on happens in China".

However, your phones may not be getting more expensive anytime soon. Given the modest growth of eight per cent in smartphone market last year, and similar single digit growth predicted for the current year according to IDC estimates, Joshi said a price increase in smartphone cost might not be well received from consumers.

There is however, likely to be a bigger impact due to non-availability of other electronic items such as LED chips, compressors for refrigerators and air-conditioners, and television panels.

"There has been no communication from Chinese vendors about an extension on suspension of production. But if it get extended till end-Feb, production activity in India will be disrupted in March. It is worrisome because in that case supply will be hit in April. Most of the compressors for ACs are imported from China and so are those for refrigerators. Also, we are heavily dependent on them for electronic components," said Kamal Nandi, president, Consumer Electronics & Appliances Manufacturers Association and executive Vice President, Godrej Appliances.

So far, the Indian government is yet to impose any restrictions on overall imports from China.

Arjun Bajaj, Founder of Shinco India, a brand by Videotex International said the Chinese government's extension of the shutdown is causing uncertainty. "This, in turn, will cause a humongous delay in shipments and disrupt the production plans of the TV as well as mobile industries," he added.

Automobiles: The industry is already battling declining sales. Car sales fell 19 per cent in 2019, while those of two-wheelers declined 14 per cent. The sluggish trend continued in January this year as well with car sales declining eight per cent and those of two whellers by 16 per cent. 

Car makers, including Maruti Suzuki, import components and raw materials from China. 

Though Maruti’s chairman thinks the virus will not impact the sector. “It’s not a large amount,” R C Bhargava told a TV channel. However, he added,"Total imports are small, but the point is that for a car, even if one component is not there, I can’t put the car on the road.”

The coronavirus outbreak has also hit the ongoing Auto Expo 2020 in Delhi. India had issued an advisory temporarily suspending e-visa facility for Chinese travellers and foreigners, following which, Chinese manufacturers decided to let their Indian representatives manage the stalls at the auto expo.

Also, the shutdown of factories and logistics hubs in China is slowly hampering business of Chinese auto majors that have recently entered India.

The pressure on supply chain, in which most Chinese companies depend on the Indian market, is likely to lead to delayed deliveries for some and postpone launches for others.

“It’s an unfortunate development. Since we are dependent on China for supply of major components, we will be impacted for a while. So, deliveries for our MG Hector in February will be delayed. We have relayed that to our customers,” Gaurav Gupta, chief commercial officer at MG Motors said. 

The company, a unit of SAIC Motor Corp, had launched the mid-sized SUV, Hector, in June. Soon, it overtook most competitors with retail sales of more than 3,000 units per month.

The government of China-owned Haima Automobile, which has planned an India launch of its first electric vehicle by 2021, said it is gauging the impact of the viral outbreak on its strategic plan.

“Since we will be importing a completely-knocked-down version of the vehicle, we may expect some disruption due to closure of many supply chain points. However, as of now, there is no change of plan,” said a senior executive of Bird Electric with which the company has partnered for its India foray.

The auto maker, on Wednesday, showcased two of its globally most successful passenger vehicles – 7X and 8S – at the Auto Expo 2020. It is yet to firm up its investment plan for India.

The outbreak of the deadly disease is also likely to hit plans of Great Wall Motors, which had entailed an investment of $ 1 billion for the Indian market, said Kaushik Ganguly, director strategy and planning of the company.

Great Wall plans to enter the Indian market by bringing premium SUVs under the Haval brand in the next calendar year. The company announced its India entry plans with the acquisition of General Motors’ Talegaon plant last month. It is presently in talks with various suppliers in China and India to firm up a sourcing strategy.

After years of giving free passes to counterparts from Korea, Japan, US in the Indian auto market, Chinese automakers had planned a major push to grab the fifth largest car market in the world.

Pharma: The country's pharmaceutical companies are heavily dependent on China to source fermentation-based active pharmaceutical ingredients (APIs) and intermediates to manufacture these medicines, but the coronavirus outbreak  has disrupted the supply.

As such there may be shortage of antibiotics, vitamins and  diabetes medicines if alternative source of raw material for these drugs is not found soon. 

The prices of certain APIs have already jumped 25-30 per cent in the domestic market, according to industry sources. Plants manufacturing these APIs in China are shut in view of lockdown there. Indian formulation units (medicine manufacturers) typically have a buffer stock of around two months, and some medicines from the stock are already in circulation.

“My supplier in Hebei province in China which does not even share a border with Hubei province, where Wuhan is in a lockdown, informed that people are confined to their homes and factories are shut until further notice. I am not receiving regular supplies of chemicals and intermediates from China,” said an API manufacturer in India. He apprehended a shortage of antibiotics, vitamins and diabetes drugs if the supply disruption continued.

For metformin, the most-common prescribed diabetes medicine in India, the entire supply of fermentation APIs comes from China.

A senior industry executive, who was a part of the meeting, doubted if Indian API units could switch their products so swiftly. “It would take some time for the Indian units to start making the APIs which are currently imported from China. They have their own export commitments and other contracts,” he said.

A senior official admitted that the government had already checked if there were alternative sources to procure these APIs. “For fermentation APIs, there is no other option. We have to wait and see how the situation pans out. We are considering the industry proposal to relax pollution norms to step up supplies here if needed,” he said.

Aviation: India has seen nearly all flights to the mainland China cancelled. Mainland China represents a largely untouched market for Indian carriers. Prior to last year, the only Indian carrier that flew to China was Air India’s service to Shanghai. The newer hub cities such as Guangzhou, Chengdu, and Shenzen, had no direct Indian services. IndiGo was the first one to tap these routes, introducing flights to Guangzhou and Chengdu in late 2019.

The coronavirus has affected all of these routes for the next month or so. IndiGo has canceled both its flights to the mainland and to Hong Kong. Air India has suspended its Shanghai and Hong Kong routes. SpiceJet continues to operate its Hong Kong route but is monitoring the situation closely and is offering refunds to passengers.

According to CARE Ratings, Indian airlines are losing Rs 52-72 lakh ($80,000 – $100,000) per cancelled flight. On pro-rata basis, this means losses in the millions over the next few months. 

Tourism: Total foreign tourist arrivals (FTA) in the country stood at 10.9 million in 2019, of which Chinese travellers accounted for 3.12 per cent. 

“Despite it being marginal, FTA share from China has been increasing for the past few years. Therefore the Indian tourism industry is expected to be negatively impacted during 2020,” CARE Ratings said in its report.

Kerala, which reported all the three positive cases of the epidemic in the country, has witnessed mass cancellations of hotel bookings and tour packages. A senior official of the state Tourism Department said the exact number of cancellations was not yet available, but agreed that repeated instances of floods and epidemics were affecting the industry.

"As of now, the exact numbers are not available. But industry sources told us that many hotel bookings, including that of KTDC (Kerala Tourism Development Corporation), have been cancelled," the official told news agency PTI.

KTDC help desks at various centres were receiving enquiries from people wanting to know the situation in the state, he said.

"As of now, the situation in Kerala is under control. There is no need to worry. But still the people are worried and some have cancelled their bookings," the official said.

"There are 15-20 per cent cancellations after the reporting of the coronavirus cases. But there are bookings also," Jose Dominic, CEO of the CGH Earth Group of Hotels, said. 

"We (Kerala) have a reputation that we will put travellers' health first before commercial interest," he added.

Travel and tour operators, however, fear the state's tourism sector is likely to be severely hit, especially because the Kerala government has declared the outbreak a 'state calamity' and Tourism Minister Kadakampally Surendran recently admitted that the sector has suffered a setback.

E M Najeeb, senior vice president, Indian Association of Tour Operators (IATO), said tour programmes and packages are being cancelled widely in the state and declaration of the epidemic as a 'state calamity' by the government would adversely impact the economic situation.

'God's Own Country' has been hit by the coronavirus just as it was recovering from the Nipah outbreak and two consecutive monsoon floods during the last two years, the worst in a century.

The tourism industry accounts for over 10 per cent of the gross state domestic product of Kerala and provides employment to over 1.5 million people in the state.

(with inputs from BS Team)