Why The Coronavirus Will Continue To Shock Global Markets

On Jan. 1, the South China Morning Post reported that the World Health Organization was speaking with Chinese authorities about a mysterious viral pneumonia outbreak. Today, there are more than 100,000 confirmed cases of the coronavirus, and the city of Wuhan, once a global manufacturing hub, is struggling to reopen factories to meet global demand after nearly eight weeks of closures. The market is facing historic lows and will continue to shock the global economy as more areas are affected. 

The coronavirus lays bare the scope of the complex supply chains that bring products to our shores every single day, and the difficulty of “turning on” operations after an event such the COVID-19 pandemic, or any natural or manmade disaster that causes unexpected disruptions to suppliers.

Factories across China are having to change their standard operating procedure to sterilize and inspect their facilities, wait for their employees to clear the quarantine, and run at reduced staff levels to prevent the further spread of coronavirus. These new protocols are hitting labor-intensive sectors. The microchip and battery industries have been hit particularly hard, and the effects will continue to delay and stall factories’ ability to resume operations. According to a Chinese health official, 28 days without new cases of the coronavirus are needed to declare an area free from outbreak.    

The standard operating procedure is essential to the smooth functioning of a factory and the additional safety layers required to prevent another outbreak will continue to plague plants as they attempt to resume operations.

The industry is already experiencing the impact – several original-equipment manufacturers, middlemen of the supply chain, were forced to re-source their entire supply chain after trying to recover from halted operations before the Chinese New Year. It is expected that more firms across China will feel the effect of the coronavirus hiatus as they resume operation.

Standard operating procedure enables the sustainability of the manufacturing process. In 2019, an original-equipment manufacturer suspended production of an end-of-life product, only to see the need to recover it based on end-customer’s request. This brief disruption and the loss of key operators resulted in a lower than 50% product yield due to an overly simplified standard operating procedure and poor maintenance records of the equipment. Significant calibration and fine tuning of the manufacturing process was needed before recovering the yield to a reasonable level.

Another form of disruption comes from factories losing essential operators because of turnover and dismissal due to business needs. In 2018, a team of essential process implementation engineers, quality inspectors, and reliability testers, which holds key information and protocols, was transferred out of the original line due to budget cuts. This resulted in significant delay to deliver the end product; the business interruption ultimately outweighed the cost-saving benefit of the personnel reorganization. In the case of the coronavirus, these effects will be felt simultaneously throughout the Asian economy as firms resume operations.   

While resuming operations, manufacturers should conduct extensive tests to ensure their new processes and fill-in staff are able to fulfill orders in a safe and manageable way. Within the manufacturing industry, these tests are known as a reliability assurance, or ongoing reliability testing.

Changes in the standard operating procedure and key users will also create new risks that will need to be quickly discovered and corrected by factories that are reopening. If not properly addressed, even small deviations or mistakes will prolong the effects of the coronavirus on the global economy.

While the stock market plummets over coronavirus fears, smart investors should prepare for a prolonged draw-down, not a blip, in the Asian manufacturing sector. When it comes to the global supply chain, having to restart one manufacturing line is difficult enough. Having to restart hundreds will take months.

Huang, who has a doctorate in electrical engineering from the California Institute of Technology, is the head of Asia offices and principal engineer at Exponent, a global engineering and scientific consulting firm.