Investigating the China supply chain risk facing UK firms
The number of deaths from China’s coronavirus has exceeded those from the 2003 SARS outbreak and the restrictions imposed in the country are already wreaking havoc with the domestic economy as well as the supply chains of businesses based outside China.
Shares has done some digging to discover to what extent UK-listed companies have been affected by the escalating crisis.
IT’S BIG (IN EVERY SENSE)
China accounts for a quarter of global value-added manufacturing according to research from Bank of America and is the world’s second largest economy, making the current disruption a big event. Yet, so far, not many companies have given a clear picture of how it affects them.
Ground zero for the coronavirus is Wuhan, a city of around 11m in the province of Hubei in the mid-west of China. It is known as the ‘Chicago of the east’ a reference to the ‘windy’ city’s industrial importance to the US economy.
Wuhan has become an economic powerhouse, producing a tenth of all cars made in China and is home to the second largest steel company in the world. It is also a very important high-tech hub.
The effects of virus outbreak reach beyond the immediate environs of Wuhan as the profit warning from Burberry (BRBY) demonstrated last week.
The trench coats-to-handbags seller said 24 of its 64 stores in mainland China are currently closed, while the remaining stores are operating with reduced hours and seeing ‘significant’ footfall declines and dwindling sales.
Global household names such as McDonalds, Pfizer, Walmart, Hennes and Mauritz and IKEA have operations cross China which will be seeing some sort of disruption from the current virus outbreak.
Hubei produces over 2.4m cars a year while there are also over 500 auto-parts manufacturers in the region. Italian manufacturer Fiat announced recently it was considering the closure of some Italian factories because it couldn’t source the required Chinese parts.
General Motors sold over 3.1m cars in China last year and has a Shanghai-based joint-venture with SAIC Motor Corp. It announced on 10 February it would re-start production over the next two weeks depending on the ‘readiness of the supply-chain’.
SHOOT FIRST APPROACH
In the absence of direct guidance from companies, investors have in some cases voted with their feet and begun to mark-down shares where there is suspicion of a direct impact from the virus.
For example, Telford-based electronics components and LED firm Luceco (LUCE) said as recently as 28 January that it is trading ahead of expectations and will beat market forecasts for adjusted operating profits for both 2019 and 2020, pushing the shares up on the day of the announcement.
However, since the positive update the shares have fallen 19% to 120.1p on worries that protracted Chinese Lunar holidays will hurt the recent trading momentum.
In the same sector electronic assemblies and power supplies company Volex (VLX) said on 10 February, ‘as a result of the outbreak of coronavirus in Wuhan, all major operations in China have been subject to an extended and mandatory closure over the Chinese New Year holiday period.’ The shares fell 2% in response.
Affordable homeware brands company UP Global Sourcing (UPGS), better known as Ultimate Products saw its shares fall more than 8% after it warned (10 Feb) that it is closely monitoring developments of coronavirus in China, where the majority of its manufacturing is based.
To be fair it must be difficult for companies to make an assessment so soon after the New Year holidays, when trading is traditionally light, but those firms providing clear guidance will surely get a better ‘hearing’ from investors than those refusing to say anything.
Shares contacted some companies with known operations in the Hubei province and those relying on Chinese supply chains.
Gift packaging and greeting card company IG Design (IGR:AIM) falls into the ‘it’s too early’ camp.
A spokesperson told Shares that ‘due to the nature of operations around Chinese New Year, the immediate effects are negligible as vendor manufacturing and despatches will ordinarily be minimal in the couple of weeks immediately following Chinese new year. Naturally the company is monitoring developments closely.’
The shares have been stable around 750p over the last couple of weeks.
Thermostatic kettle controls company Strix (KETL:AIM) which has a large presence in China declined to make a comment at such an early stage as did auto specialist TI Fluid Systems (TIFS). Strix shares are off 10% in the last two weeks while TI Fluid Systems are flat.
MORE CLARITY REQUIRED
There will be winners and losers from the current disruption hitting the Chinese economy and worldwide supply chains. Some companies will be able to make alternative arrangements and navigate the choppy waters successfully. In such cases a falling share price might ultimately represent a buying opportunity.
History suggests previous outbreaks like SARS ultimately had a one-off impact and business soon got back to normal, but until a greater number of companies give more details about the current situation, investors remain in the dark.