Almost No Company Is Safe from Coronavirus Impact

Companies have endured financial meltdowns, civil wars and natural disasters. But nothing in modern memory has dented both demand and supply so quickly for so many industries as the novel coronavirus.

Source: WSJ | Published on March 2, 2020

The phrase Corona virus on a banner with blurred Chinese flag on the background.

The virus, which has infected more than 85,000 people, has swept through Asia and Europe, disrupted global travel and hobbled supply chains that churn out everything from smartphones to pharmaceuticals. In days, it went from pockets of woe to the top concern of chief executives world-wide.

Conferences are getting canceled, from the CERAWeek energy conference in Houston to Facebook Inc.’s F8 developer gathering in California. Disneyland Tokyo is closed. Auto suppliers are warning of parts shortages. Generic drug manufacturers are paying 50% more for some raw materials.

The organizers of CERAWeek, one of the world’s top annual energy events, announced their decision Sunday citing, among other things, “growing concern about large conferences with people coming from different parts of the world.”

The epidemic’s widespread nature and related uncertainty will put a hold on large corporate investments, mergers and hiring, said Stanford University economist Nicholas Bloom, who has researched the impact of uncertainty on business cycles.

“A lot of the damage is already being inflicted, purely from major decisions being delayed,” Mr. Bloom said. “I can’t see many firms green-lighting any projects until they can figure out what is going on.”

Larry Kudlow, director of the White House’s National Economic Council, said Friday the threat from the virus for Americans is low and the “coronavirus is not going to sink the U.S. economy.” Some in the Trump administration have accused the news media of exaggerating the situation and causing hysteria, even as the White House tightened travel restrictions over the weekend after health officials in Washington state reported the first U.S. death from the illness.

The virus surfaced as U.S. companies were riding atop America’s longest economic expansion on record, matched by soaring stock-market returns. But profit growth for S&P 500 companies started to cool last year, squeezed by rising labor costs and trade disruptions.

Chinese government gauges of activity in the manufacturing and services sectors plunged to record lows in February, the country said Saturday, dropping into territory that indicates a contraction.

U.S. business activity in February fell to its lowest level in more than six years on fears of the epidemic.

In February, 129 companies in the S&P 500 discussed the coronavirus in their quarterly earnings calls, up from 60 in January, according to a Wall Street Journal analysis of transcripts. There were nearly 600 mentions of the virus in companies’ security filings in the past week alone, according to Kaleidoscope, a research firm.

Executives have talked about how the virus will curb consumer spending on products from Crocs sandals to Gucci handbags. It has slowed production at nickel mines in Indonesia and halted the filming of “Mission Impossible 7” in Venice.

At the same time, many companies have cautioned it is too early to tell how much the virus might damage business. Economists have struggled to project the extent of the economic fallout, which they say depends on whether the epidemic continues to spread—and on public reaction if it does. While some forecasters have said the virus’s spread in China and elsewhere would slow the U.S. economy in the first quarter, economists expect a swift U.S. recovery from any downturn as companies work to meet pent-up consumer demand after the health threat subsides.

“Every CEO that I know has got to manage an employee dimension, supply-chain dimension, in many cases a revenue dimension,” as well as Wall Street’s needs, said Mike White, who ran PepsiCo Inc.’s international division in 2003 when SARS hit. He now sits on the boards of Whirlpool Corp., Kimberly-Clark Corp. and Bank of America Corp. “We’re still in the middle of the river here,” he said.

Whirlpool cited its sales and supply chain in China and elsewhere in Asia in trimming its first-quarter profit guidance Friday. The appliance maker said the outbreak in northern Italy, where the company has manufacturing operations, would hurt sales there too.

Some companies that have tried to gauge the impact of the virus have had to revise initial estimates. Emerson Electric Co., which makes factory automation equipment, warned on Feb. 13 that the virus would reduce quarterly sales by $75 million to $100 million. On Friday, it put the damage as high as $150 million.

On Friday, United Airlines Holdings Inc. postponed until September an investor meeting that was scheduled for March 5, saying it couldn’t have a productive conversation on its long-term strategy until the epidemic abates. United is offering certain pilots the option of taking April off with reduced pay, according to a letter from the pilot union chairman to members.

Airlines have taken one of the hardest, earliest hits from the crisis. Asian and European carriers have implemented cost-cutting measures to accommodate canceled flights to China and curtailed services to other affected areas such as Italy.

As the spread of the virus in China has slowed, some Chinese factories are reopening, though many are short-staffed and transportation is still difficult. For example, smartphone makers are expected to ship 64 million fewer devices in the first half of 2020, market researcher International Data Corp. said, hampered by component shortages and quarantine mandates.

Zuru Ltd.’s factories have reopened in phases over the past few weeks, after the toy maker installed dividers between workspaces and added sanitation stations. But the Shenzhen-based company is thinly staffed due to restrictions on China travel and was operating at 20% capacity last week, said co-founder Anna Mowbray. “There’s definitely going to be holes on shelves,” she said.

The disease is still spreading in other countries. Hyundai Motor Co. on Friday stopped building its popular Palisade SUV and other U.S.-sold SUVs after a factory worker in Korea tested positive for coronavirus. Google said Friday one of its employees in Zurich had been diagnosed, but the office remains open.

Some companies are getting hit in multiple ways. Milwaukee-based water-heater maker A.O. Smith Corp. detailed its situation in a securities filing: It has resumed operations in China but at below-normal levels. The stores where its products are sold are mostly closed or operating on reduced hours with significant decline in customer visits. Its products require professional installation, which is limited because of disease containment efforts in China, the company said.

China is a key supplier of chemical and raw materials used by many pharmaceutical manufacturers, a potential problem for popular blood-pressure medicines and several older antibiotics that are no longer manufactured in the U.S. Experts believe China is also the only maker of key ingredients in a class of decades-old antibiotics known as cephalosporins, which treat a range of bacterial infections including pneumonia.

Automotive suppliers are warning car companies they could run out of certain parts used in North American factories in coming weeks, particularly electronic components. Hoping to stave off factory stoppages, some manufacturers have taken the unusual and costly step of flying in critical parts by cargo planes.

Vehicle sales in China plummeted 92% in the first 16 days of February, according to the China Passenger Car Association. Several suppliers have cut profit forecasts in recent days because of the fallout, including electronics suppliers Aptiv PLC and Visteon Corp., and seat maker Adient PLC.

Some companies have benefited from the outbreak, which has spurred buying of respiratory face masks and disinfecting wipes, propping up shares of some makers of such items. Clorox Co. ’s stock briefly hit record highs last week while the broader market plunged.

“The good news is that the shock from the virus is hitting at a time when households appear to be in good shape,” wrote Bob Schwartz, a senior economist with Oxford Economics.

Mr. White, the former PepsiCo executive, said the long-term economic outlook is solid even as companies face short-term pressures. “Almost every company is going to have an issue with their first-quarter numbers,” he said.