Coronavirus outbreak underscores global economic connections

In times of heightened uncertainty, making a decision gets put off.

February 10, 2020 at 5:09PM
People queue up to buy face masks in Hong Kong, Friday, Feb. 7, 2020. Japan on Friday reported 41 new cases of a virus on a quarantined cruise ship and turned away another luxury liner while the death toll in mainland China rose to 636, including a doctor who got in trouble with authorities in the communist country for sounding an early warning about the disease threat. (AP Photo/Kin Cheung)
Wuhan, the epicenter of the coronavirus, is a big manufacturing and transportation hub in the center of China. (The Minnesota Star Tribune)

Protolabs Inc. last week became the latest manufacturer to report only so-so financial results for the fourth quarter of last year, a weak end to what had generally been an off year industry wide.

It wasn't a Minnesota problem, of course, as the only flat spot in an upbeat national jobs report on Friday also came in manufacturing.

It's been called a manufacturing recession, a "mini recession" or simply a slowdown, but already this year there were signs business conditions had started to get much better. The closely watched PMI manufacturing index had swung back into growth territory and a Federal Reserve Bank of Minneapolis survey of 351 manufacturers in our region revealed expectations of moderate growth in 2020 after mostly going sideways last year.

Then came the Chinese health crisis.

Now a lot of manufacturers probably have to admit they really don't know what's going to happen. Some countries are far more reliant on trade with China than we are, but our world is too connected for a slowdown in Europe or elsewhere in the Americas to not affect ­business here, too.

And in times of heightened uncertainty, making a decision — on hiring for open jobs, buying new equipment and inventory from other manufacturers and so on — gets put off.

The forecasts of 2020 global economic growth have already started to get pared back, primarily because of Asia but also including countries in the Americas and in Europe. "Global growth is now likely to slow further in the first quarter of this year, taking it to the weakest rate since the global financial crisis," analysts from London-based Capital Economics wrote last week.

In a way it seems wrong to even talk about jobs and business trends when there's an outbreak of disease that's claiming lives, in the hundreds as of late last week with more than 30,000 confirmed cases. But pointing out the economic repercussions is another way to be reminded that we all share one world.

The outbreak of disease from a novel flulike virus is centered on Wuhan, China, a big manufacturing and transportation hub in the center of the country, and home to around 11 million people. Hoping to contain the spread of the virus, Chinese authorities have suspended some business activity after a long holiday break.

Among other things, Wuhan has become one of the leading centers in China for automotive manufacturing, including parts and subassemblies shipped to the final assembly sites outside of China.

A lot of auto-assembly plants have been opened in China, too, and Detroit-based General Motors Corp. is second only to Volkswagen Group in market share of international producers in China.

Last year was a disappointing year for GM in China and even worse for Ford Motor Co. Yet, with its partners, GM still sold more than 3 million units in China and Ford more than half a million.

Yet last week South Korea's Hyundai Motor Group became the first major automaker to suspend operations outside of China due to a lack of parts.

The Hyundai situation shows how flipping over an item in a Target store to look for the "Made in China" sticker isn't the best way to get a handle on the country's importance in global trade. Almost two-thirds of U.S. imports from China are parts or materials for products that get "made" here.

As the trade war really heated up last year, research published by the Federal Reserve Bank of San Francisco tried to look carefully at the content of American-made products, and where the value was created.

A pair of Nike shoes that sell here for $100, for instance, are undeniably made in Asia, even though only maybe $25 goes to the Asian manufacturer. The rest goes to U.S. retailers, distributors, shippers and covers Nike's own design, marketing and so on.

On the other hand, a Jeep Patriot compact crossover vehicle assembled in Illinois by Fiat Chrysler had at least 17% of its cost in parts that were made abroad.

Automotive seems to be one of the industries that relies the most on parts from China, but there are a lot of other industries that lean on suppliers in China, too, like for electronic parts.

Companies you may not think of as "global" have long had a presence in China. Bloomington-based Toro Co. has two plants in China, for example, one of eight countries where it manufactures products outside of the United States.

Polaris Inc., based in Medina, has a relatively small plant in Shanghai, but because it has been so vocal about U.S. tariffs on Chinese goods, investors know its supply chains for other plants extend into China.

In its most recent conference call for investors after announcing financial results, Polaris executives walked investors and analysts through 2020 expectations for tariff rates and how they have managed the additional cost burden of U.S. tariffs. An analyst then asked a follow-up question on the effect of the virus.

"It's no secret that we have a strong team and business there, and we do source some parts there, and we don't see a disruption from that," CEO Scott Wine replied. "The restrictions that they have are more on people moving, not parts moving. So, we feel good about our supply chain being able to continue to function smoothly."

That call was almost two weeks ago.

Last week, Ford Motor CEO, Jim Hackett, told investors, "Most experts are already saying, and we agree, that it will take weeks to begin to understand the implications of the outbreak."

lee.schafer@startribune.com 612-673-4302

about the writer

about the writer

Lee Schafer

Columnist

Lee Schafer joined the Star Tribune as a columnist in 2012 after 15 years in business, including leading his own consulting practice and serving on corporate boards of directors. He's twice been named the best in business columnist by the Society of American Business Editors and Writers, most recently for his work in 2017.

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