If you can’t get parts, you can’t build cars.
And due to a coronavirus-related manufacturing halt in China, Hyundai to Shut Down Some Production.
Hyundai, the world’s fifth-largest carmaker, announced Tuesday that it was suspending production lines at its car factories in South Korea, one of the first major manufacturers to face severe supply-chain issues because of the coronavirus.
Many auto plants in China have already shut down because of the virus, including factories run by Hyundai, Tesla, Ford and Nissan. Hyundai plants in South Korea would be the first to shut down lines outside of China, and comes as Hyundai has ramped up production in China over the past two decades.
Economic Contagion
The Wall Street Journal comments on China’s Economic Contagion
More than 20,000 coronavirus cases have been confirmed worldwide—an eight-fold increase over the last week—and experts say hundreds of thousands may not yet have been diagnosed. Two dozen or so countries have reported cases, and many have restricted travel from China to limit the contagion. Companies are evacuating employees from China.
U.S. manufacturers such as Ford, Apple and Tesla have temporarily halted production. One-sixth of Apple sales and nearly half of chip-maker Qualcomm’s revenues come from China. So do 80% of active ingredients used by drug-makers to produce finished medicines. Because China is the world’s largest manufacturer and an enormous consumer market, the economic freeze will disrupt supply chains and reduce corporate earnings.
China’s GDP growth was already almost certainly lower than the official figure of 6%, and it is likely to fall by a third or more.
It’s probably too much to ask Mr. Trump to lift his tariffs on Chinese exports, though it would help. At the very least he could give Beijing more latitude to meet its promise to buy $200 billion more in U.S. products over the next two years. The last thing the President should want when campaigning for re-election is an economic pandemic.
Coronavirus Menace
The New York Times reports SARS Stung the Global Economy. The Coronavirus Is a Greater Menace.
Apple, Starbucks and Ikea have temporarily closed stores in China. Shopping malls are deserted, threatening sales of Nike sneakers, Under Armour clothing and McDonald’s hamburgers. Factories making cars for General Motors and Toyota are delaying production as they wait for workers to return from the Lunar New Year holiday, which has been extended by the government to halt the spread of the virus. International airlines, including American, Delta, United, Lufthansa and British Airways, have canceled flights to China.
Companies Warn On Impact
MarketWatch discusses the Earnings Impact.
- Wynn Resorts Ltd. has among the highest China exposure, as the company derived about 75% of total revenue from Macau over the last 12 months, according to estimates based on FactSet’s proprietary algorithm.
- Sony Corp. CFO Hiroki Totoki, said the fallout from the coronavirus slowdown on the company’s manufacturing, sales and supply chain operations could wipe out its revised guidance for 2019.
- BP said current demand for the year is between 300,000 and 500,000 barrels a day, not the 1.2 million it had anticipated for the year. “There is no question coronavirus, I suspect, will impact demand this year,” a BP executive told investors.
- Jewelry retailer Pandora said it’s already struggling in China in 2020 but the virus is presenting other threats. “China is currently also challenged by the coronavirus that have left streets empty and forced store closures,” Pandora CEO Alexander Laxik said. “China is the biggest jewelry market in the world and we’re not going to walk away from this.”
- Royal Caribbean Cruises Ltd. estimated that cruise cancellations and itinerary modifications as a result of the coronavirus will have a 25-cents-per-share impact on earnings. The company has already canceled eight cruises out of China.
Known Disruptions
Major disruptions include Ford, Apple, Tesla, Qualcomm, Hyundai, Wynn resorts, Sony, BP, Pandora, Royal Caribbean, GM, Toyota, Nike, all the airlines, and many drug makers.
If it’s “Made in China” there will be an economic hit.
This is on top of the Trump-sponsored manufacturing slowdown. Trump’s steel tariffs have started a Rolling Cascade of Downstream Pain
Freight shipments have collapsed: Cass Year-Over-Year Freight Index Sinks to a 12-Year Low
And GDP Internals show business investment contraction: Ignore the Headline, Real GDP is Much Worse Than It Looks
So forget about Trump’s Trade War Ceasefire with China. All that did was halt escalations.
Due to the coronavirus China cannot possibly honor commitments. And it’s highly doubtful they could have or would have anyway.
Mike “Mish” Shedlock
Well, it automatically gives everyone who misses their quarterly number a get out of jail free card for the next earrings call. I was passing through Las Vegas Sunday night, and thought I’d hit one of the strip buffets. Granted, it was Super Bowl Sunday, but I’ve never seen a buffet so empty. Seriously, the staff was just standing around talking to each other. The walkways and casino floor looked like it was 8:00 in the morning, but with lots of open tables and dealers standing around looking bored. I could clearly hear the background music. As I was heading back to the parking lot, I saw a few bright red banners with Chinese script. At the bottom they had the English translation: “Happy New Year!” Whoops!
Historically, normal business cycle recessions provided the CEO/CFO with “kitchen sink quarters,” or windows of opportunity within which they could jettison failed business units and generally clean up balance sheets, all under the cover of external events ostensibly beyond their control, typically rising interest rates.
Central bank repeal of the business cycle for more than a decade now has grown a fine crop of zombie corporations, worldwide.
I haven’t had as many thirty somethings telling me I don’t understand since Enron.
It’d be the height of irony if pandemics restored the business cycle by killing as many zombies as people.
Spot On.
“Made in China”
…
Heh. China has been one of my top candidates for pin-to-the-bubble. Fitting.
And the stock market is booming. No products to sell and customers who won’t buy anything. Great for fundamentals.
Patience
Insane world.
Kinda odd, isn’t it? Two days ago Apple announced factory shutdowns in China and guess what? Between 3-5AM that night the Dow Futures Market went parabolic, jumping 330 points in a little over 2 hrs. I guess supply chain disruptions are very bullish. Whudda thunk? So this tells me that we have “nothing to worry about”. “Move along folks, nothing to see here. The market is going up and up so how could this pandemic possibly be serious”?
“Someone would know and say something”. Well, truth be told, they are. The problem is that most people just aren’t listening.
The effects will be in many ways very different from a regular recession, where a collapse in demand and large inventories of stuff usually trickles down to everything else. This time, lots of the issues will be due to the lack of supplies, like during a war.
Do you think that will be inflationary?
I don’t know. Too many variables. I am just pointing out the one big difference compared to what we have seen over the past few decades.
Stagflation on the way maybe. BBC 6 O’clock news just saying food prices in China have risen 20% & pork has doubled (I think I heard them say since early January But might have misheard). In the same clip they showed a UK manufacturer that usually sources components from China. They explained they can source them elsewhere but they’re 3 times as much!
No doubt there will be secondary effects but not all bad. China’s rogue ‘running dogs’ like Iran, Venezuela and North Korea will be facing the US alone for the duration as China is in no position to project power and influence. Even Russia will have its wings clipped.
I have seen people expressing hopes that this will put the breaks on globalization and return some manufacturing jobs to the US. Who knows…
Except we depend on China NOW for a lot of our “things”. And let’s not get overconfident that we’ll escape this virus’s wrath. Two months will be a good tell.
Speaking of Tesla, this guy Chanos was WAAAAY off. Not sure what kind of crack he is smoking.
Was $350, now $920.
Amazing, I wasn’t paying attention to TSLA. Mish bought some puts if I remember correctly. After they expired, he stayed away, though.
I wonder if now is the right time to buy some puts.
Yep – My puts expired worthless although I had a profit on them at one time. Never bought more and never shorted.
Way out of the money calls a week ago soared 10,000%
Time for way out of money puts now.
Tesla is ZZZZ Best!
They say TSLA is the most popular short. Is that what enables it to shoot up like this, as it climbs a ladder of short squeezes?
More than 30% of its share float was sold short a few months ago, so it was primed for a major short squeeze. I imagine most of these shorts were forced to cover in this run-up. It sure looked like forced closing out of short positions over the past few days.
It suddenly dropped 80 points at the day.
end of the day.