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January 30, 2020

Are commentators overreacting to coronavirus?

The world economy in general, and the apparel industry in particular, depend on hugely complex, globalised, supply chains. Here Mike Flanagan, CEO of apparel industry consultancy Clothesource, considers some of the consequences of the new 'Wuhan novel coronavirus'.

The world economy in general, and the apparel industry in particular, depend on hugely complex, globalised, supply chains. Here Mike Flanagan, CEO of apparel industry consultancy Clothesource, considers some of the consequences of the new ‘Wuhan novel coronavirus’.

On 2 January, Chinese doctors announced that 41 patients at a Wuhan hospital were infected with a new (‘2019-nCoV’) strain of a coronavirus. By 30 January, nearly 8,000 people were found to have been infected with the virus and about 170 had died.

The city itself – and about 15 others in Hubei province with a combined population of 45 million – is now quarantined, and some commentators’ reactions are verging on the hysterical.

But the world economy in general, and our industry in particular, depends on hugely complex, globalised, supply chains. Lots of experts have been warning for years that some catastrophe would eventually tip them over. Could 2019-nCoV be that catastrophe?

Wuhan is important to China’s economy

Wuhan has been a major Chinese transport hub for centuries. It’s where the river Yangtze meets the river Han, and it’s a major junction for much of China’s superhighway and high-speed rail networks. 

A Xinjiang-grown bale of cotton is likely to have travelled through Wuhan in some form at least once on its way to being spun, woven and made into a garment – although it probably won’t be sewn there. 

Three coastal provinces – Guangdong, Jiangsu and Zhejiang – still make at least 95% of China’s clothing exports and, with Hong Kong, are where most Chinese garment-makers’ head offices are based. Over the past 30 years, Wuhan has attracted a huge network of science research institutes as well as automotive and IT plants as it’s grown to 11 million people – but virtually no spinners, weavers or garment makers.

So even if a Western order does involve some Hubei manufacturing, and the factory’s workforce is prevented from working, the maker’s head office could still organise alternative production.

But we don’t know how long the scare will last, or how widespread it will become.

The nCoV virus may not be that deadly

So far, about one-quarter of the 8,000 people diagnosed with the nCoV virus are thought to be seriously ill, and about 2% have died. While there’s no drug to cure it, at least three-quarters of infections seem to be thrown off by peoples’ auto-immune systems.

It’s still early days, and things could get a lot worse. But, worldwide, about 3-5 million people get severe cases of flu every year and about 10% of them die. Every day of the year about 50,000 people in China die of some sickness or other, and most winters about 30,000 people are known to die from the flu in the US alone. Yet the world’s business goes on, however severe or mild each year’s flu outbreak is.

2019-nCoV isn’t a new Ebola (which kills almost everyone contracting it), Black Death (which killed 30%-60% of Europe’s population in the14th Century) or even a new Middle East Respiratory Syndrome (MERS), which has killed about one-third of its victims.

As far as we know at present, it just creates something like flu, but nastier. And the last similar virus (the 2003 SARS outbreak, which killed about 800 people, mostly in China) coincided with a 30% annual increase in the volume of China’s clothing exports to the West.

Indeed the biggest threat to business currently imposed by 2019-nCoV may come from efforts to tackle the virus.

Closing down whole cities and extending China’s New Year holiday may be the most effective way of stopping the virus spreading. But, along with the other anti-coronavirus measures from governments and businesses, commercial activity in central China might well be seriously disrupted for some weeks or even months to come. 

Not because, as some are suggesting, entire workforces may be wiped out – but because local governments or businesses may decide it’s safest to stop people getting together. Such disruption will probably ensure 2019-nCoV remains only a peculiarly virulent version of flu, probably still mainly limited to Central China.

I’m no epidemiologist. But the likelihood has to be that by Easter, the virus will be under control, new infections down to a trickle, and most manufacturing in China back to normal and flowing on to Chinese ports in the usual way. 

More than that: most of us will grudgingly admit that China’s preparedness to be ruthless will have been praiseworthy in this case.

All over by Easter, then?

Almost certainly not. By the end of March, we will probably begin to see the problem going away. But there will still be consequences:

  • Inevitably, some buyers will look for alternative sources – though if China can’t control 2019-nCoV, neither Vietnam or Myanmar will be able to either. I suspect we’ll see a temporary production shift to China’s neighbours, with most returning later in the year.
  • But the whole of China is now drifting into quarantine. The country is unhappy to let Chinese people out, and the rest of the world – even HK – is increasingly unhappy about letting China in. So luxury-goods stores in the West will have to cope without the Chinese customers they’ve come to depend on. In a year’s time, the luxury goods industry is likely to complain loudest that 2019-nCoV depressed its 2020 results.
  • However much retail buyers in mainstream apparel might resent the disruption from 2019-nCoV, they’re still likely to pass much of the financial cost onto suppliers. So expect poor 2020 results from mainstream Chinese manufacturers too.
  • Not all consequences will be commercially disastrous, though. For many Western clothing retailers, the biggest problem over the past five years – in my view – is how their gross margins have been eroded. Chinese disruption over the next few months will probably offer them a perfect opportunity to restore a little light consumer inflation. 2019-nCoV may provide a testbed for realistic pricing. And, with stable gross margins, a healthier apparel retail industry.

Stranger things have happened.

Click on the following link for additional insight: Is coronavirus a threat to the clothing industry?

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