As the coronavirus continues to spread around the world, and luxury brands, in particular – with their extensive dependence on high-spending Chinese consumers, who account for 35 percent of total global luxury goods sales, making it the second-largest personal luxury goods market after the U.S., per McKinsey – continue to cut their earnings projections, economists are increasingly concerned about the impact on the U.S. economy.
In addition to brands like Burberry, which generates 40 percent of its sales from China’s shoppers at home and abroad, according to Bloomberg, warning investors that the deadly virus is wiping out “as much as 80 percent of sales at stores that remain open in China” (the British brand has closed one-third of its Chinese outposts), and American groups like Coach’s parent Tapestry and Versace and Michael Kors’ owner Capri announcing expectations of reduced revenue, the Federal Reserve warned of the disruptions from the coronavirus in a recent report to Congress. Meanwhile, Wall Street lender Goldman Sachs estimates that the virus will cut as much as half a point off of U.S. economic output in the first quarter of 2020.
With such mounting concerns in mind, and given how dependent upscale U.S. companies have become not only on Chinese consumers but companies across the board have come to rely on manufacturers and suppliers in China, here are three ways the outbreak could impact the U.S. economy, and one potential that could mitigate that impact.
1. Sales to China
China is one of the largest markets for U.S. products, especially electronics and fashion. For example, about 47 percent of Qualcomm’s annual revenue and 28% of Intel’s income comes from China, making it the most important region for both chipmakers. China is also the second-largest market for iPhone-maker Apple, and the outbreak has the potential to severely depress its sales. Apple extended the closureof its corporate offices and all of its stores in China until at least February 14.
Many cities and provinces have told businesses to stay closed, and residents throughout China have been staying off the streets. That has resulted in deserted shopping centers with closed stores, including those run by American fast food companies and fashion and apparel retailers – from Starbucks and McDonald’s to Nike and Coach, just to name a few.
As Jide Zeitlin, the Chairman and CEO of Tapestry, the New York-based group that owns Coach, Kate Spade, and Stuart Weitzman, said in an earnings call on February 6, “The escalating coronavirus outbreak in China is now impacting our business, resulting in both significant traffic declines and the closure of the majority of our stores on the mainland.”
2. Constrained and disrupted supply chains
The Chinese economy has effectively shut down, which is taking a toll on U.S. manufacturers through their supply chains. Manufacturers that use components in their products that are mostly sourced from infected areas in China such as Wuhan, where more than 500 car parts manufacturers operate, have two options: find alternative sources outside of China or shut down production. Automakers including Tesla, Ford and Volkswagen have shut down plants in China. Hyundai has gone a step further and temporarily closed production lines in South Korea because of a shortage of parts, a hint of more trouble for other manufacturers.
U.S. companies, such as Apple, that have outsourced most of their manufacturing facilities to China have been affected by widespread closures. And even when components or products remain generally available, the disruption to established supply chains is limiting access for some companies, something that fashion brands, among others, fear will linger even when factories reopen.
Anne Harper, founder of OMG Accessories, a lifestyle brand which produces out of Guangzhou, “expects production to be delayed from two to four months,” according to Vogue Business. Womenswear designer Xuzhi Chen, who employs 10 people in Shanghai, told the BBC that “even when the factories reopen, not all of the workers will return immediately, so we’re not sure they’ll be working at full capacity.” The BBC notes that he “expects a two to three week delay to deliveries, throwing off product launches that were due to take place in March and April.”
3. U.S. tourism will take a hit
Chinese tourism has in recent years become an important driver of U.S. GDP, and an important avenue for consumption, as the majority of their spending on fashion and luxury goods has taken place outside of mainland China to date, in an attempt to avoid the steep import tariffs and value added taxes passed onto them if they buy Western luxury goods at home.
Then the trade war arrived, and that caused a large drop in Chinese visits. Now, the coronavirus is expected to deal another blow to the industry. Many airlines have have canceled all flightsin and out of China, and the Trump administration has imposed travel restrictions that bar any foreign national who has recently traveled to China from entering the U.S.
The number of visitors coming to the United States from China could drop by as much as 28% in 2020, which could translate into $5.8 billion in less spending this year and $10.3 billion less through 2024.
Trade war’s silver lining
One consequence of the U.S.-China trade war is that many U.S. companies have moved all or most of their manufacturing facilities out of China to other countries in the region, such as Vietnam, Taiwan, Bangladesh and South Korea. In a May 2019 survey, about 40% of American Chamber of Commerce member companies said they have relocated manufacturing facilities outside China or were considering doing so. This could mitigate some of the impact as a result of disruptions in mainland, but the outbreak is spreading to other countries in Asia – though not as fast as in China – so their new manufacturing facilities could still be affected.
Robert Aboolian is a Professor of Operations and Supply Chain Management, California State University San Marcos. Edits courtesy of TFL.