Coronavirus: impact on the world's factory

Few or no businessmen in the world had witnessed a crisis as sudden and global as that generated by the new coronavirus. A public health crisis that directly attacks the base of companies, the people, and that alters the functioning of each of the chains that move the world economy. There, in the essentially human character of this situation lies the great opportunity, since it imposes on society the obligation to rebuild its economic model, and on industry leaders to rethink new ways of doing business, producing and generating profits.

The epicenter of this earthquake could not be other than China, the world's main production center and supplier of a large part of the raw materials and intermediate components that factories require to operate in each country. In this way, the consequences of the outbreak were felt at the macroeconomic level, affecting production, supply chains and financial markets globally.

Coronavirus impact on the world's factory

Beyond exporting final consumer products, in the last two decades China has become the main supplier of supplies and raw materials for industries in the rest of the world. According to figures from the United Nations Conference on Trade and Development (UNCTAD, for its acronym in English), currently about 20 percent of the global market for intermediate products come from China, therefore, the abrupt drop in their Production levels affect the supply chains of other countries.

In February, the Manufacturing Purchasing Managers Index (PMI) in China was 35.7 percent, which represented the largest drop in its history since it was officially registered (2005), with a decrease of 14.3 points in relation to month of January. Taking into account that a mark below 50 points separates the growth from the contraction, this figure took specialists by surprise, who, according to a survey by Reuters, pointed to a reduction of no more than five points. Such a fall in the PMI implies a 2 percent reduction in exports on an annual basis.

The most affected sectors by covid-19 in their production during the first months of the year, according to figures from the global consultancy KPMG, were:

1. Automotive: -32%.
2. Transport equipment: -28%.
3. Textile: -27%.
4. Metals: -27%.
5. Electrical machinery: -25%.

It should be noted that, although each of the indicators had significant drops, at the time of writing this article, the measures implemented by China to control the epidemic already reflected much more encouraging results. For example, the companies' recovery rate had accelerated again and production and operating activities were reactivating at a good pace

Covid-19 impact on global value chains

China's production is integrated into the main value chains in the manufacturing sector globally, especially those related to precision instruments, machinery, auto parts and communication equipment. Therefore, the interruption in the supply of intermediate products from this country had a domino effect on the manufacturing companies that depend on these inputs to manufacture their products in Latin America and the rest of the world.

In this sense, the level of affectation in each of the industries was proportional to the degree of dependence on Chinese suppliers. For example, in the automotive sector, large manufacturers in Europe such as Audi, and in Japan such as Honda, are experiencing difficulties in sourcing critical components for their production lines. In the case of Audi, the company stopped operations at two plants in Germany, as well as those in Belgium and Hungary. The Audi automaker in Mexico announced that it would halt production at the Puebla headquarters due to the lack of supplies for the construction of the Audi Q5, as well as difficulties in moving finished products to destination countries. However, according to the company, it would resume operations during April.

The UNCTAD report "Impact of COVID-19 on the global market", published in mid-March, details the implications of the Chinese slowdown on the most affected economies in each of its sectors. The figures presented in the graphs below show how many million dollars the different industries would stop exporting in the countries indicated, compared to a 2 percent reduction in China's exports of intermediate products, which the report predicts according to current indicators:

**B2BIMGEMB**1**

Great challenges for Latin America

The impact on the economies of Latin America can be significant considering that China is one of the main trading partners of the region: the first trading partner of Brazil, Chile and Uruguay, the second of Mexico and the third of Argentina. According to United Nations figures, three years ago trade between China and the region already represented 9 percent of exports and 18.4 percent of total imports in Latin American countries.

The most vulnerable economies in Latin America are these with great trade integration with China. In the case of Mexico, although China is not as significant as a destination for its exports, it is the main supplier of raw materials and supplies to its most robust industries - according to statistics from the Ministry of Economy, in 2018 Mexico imported USD 83.5 billion from China while exporting USD 7.4 billion to that country. Therefore, Mexico is in a scenario where it must quickly seek to supply its supply chains in order to continue keeping plants running.

Brazil also faces a challenging landscape, as much of its economy is based on its trade relations with China. The Asian country is the main destination for Brazilian products, which represents 22 percent of its total exports (Chile and Peru are also net exporters to that destination). Brazil is the main recipient of Chinese direct investments in Latin America, aimed especially at the energy and infrastructure sectors. In addition, China ranks second on its list of suppliers, after the European Union, with a participation percentage that reaches 19 percent.

The global economy faces a challenging landscape, with specific focuses that require the agile implementation of policies by governments to safeguard human lives, markets and companies. Such measures should include tools such as loans to make up for the companies' lack of liquidity, strategies to ensure it in financial institutions, cuts in interest rates and asset purchases.

Countries that have already traveled a path that the rest of the nations have yet to overcome can serve as an example: China temporarily renounced social security contributions for companies and South Korea expanded loans for commercial operations and granted loan guarantees. for the small and medium-sized companies affected. Although it is a challenging scenario, in Latin America the economies have a history of volatility so ingrained that it makes them resilient in the face of crises, because surely the Latin American industry will be victorious and will remember this moment as what it is, one more crisis, a focus of new challenges and opportunities.