Nevertheless, a couple of weeks into the main full-year reporting season, and it is nailed on that Covid-19 will have a genuine material impact on numerous companies, with certain sectors – most notably travel and tourism/aviation – bearing the initial brunt of the disruption.
Most companies have delivered a caveat linked to the outbreak in their full-year updates, but it is difficult, perhaps nigh on impossible, for many companies to gauge the financial implications at this early stage.
Details have been thin on the ground, but there was an interesting update at the end of last week from engineering group IMI (IMI). The Birmingham-based group is in the middle of a restructuring programme, but it was able to provide a broad appraisal of its potential exposure: “China accounts for 8 per cent of sales, with another 8 per cent of business exposed through the supply chain or [IMI’s] customers exporting into China”. That last point is salient given the extent of trade flows in and out of China, with the fall-away in customer business driving what might be termed as an inverted multiplier effect.
The spread of the virus, and the ensuing media panic, have served to remind us of the mesh of supply agreements that underpin the globalised economy. The expansion of global trade in the last quarter of the 20th century was made possible by two unrelated factors: the rise of intermodal freight transport (ie, containerisation) and the widespread abandonment of capital controls in the early 1980s.
Increased logistical efficiencies and an enhanced mechanism for allocating capital across the globe resulted in an explosion of global trade. In 1980, global export volumes were worth $2.05 trillion; by the end of 2018, that figure had grown to $19.5 trillion. To put it another way, when Britain was the chief global exporting nation in 1870, the value of worldwide exports accounted for less than 10 per cent of global output; that proportion has subsequently risen to around a quarter, as the law of comparative advantage increasingly holds sway.
There are obvious advantages to the expansion of world trade, but there is a chance that policy makers may give second thoughts to the vulnerability of global supply chains if the outbreak takes hold in western economies. We have already witnessed an increase in what might be termed economic nationalism under the Trump administration. But what would happen if supplies of critical pharmaceutical products to the US and other western markets were to suddenly dry up? A nominal trade disruption would rapidly morph into a national security issue.
Last year, the US Food and Drug Administration revealed that nearly three-quarters of the active pharmaceutical ingredients (API) used to create medicines are now produced outside the US. So, although Uncle Sam remains at the forefront of clinical developments, an estimated 40 per cent of manufacturing responsibilities have been hived-off to mainland China, chiefly because the country offers cheaper production costs and watered-down patent regulations.
Unfortunately, exposure in this area isn’t confined to the US. AstraZeneca (AZN) relies on the Chinese pharmaceutical market for more than a fifth of its sales and is basing current guidance on “an unfavourable impact from China lasting up to a few months”. But globalisation, the search for comparative advantage, is a two-way street. Up to 90 per cent of generic medications used in the NHS are now imported, with India and China two of the main suppliers outside of the European Union (EU).
Our exit from the trading bloc has raised concerns over potential supply issues. But it isn’t simply vulnerability to production disruption; there are growing anxieties over quality issues.
The World Health Organization has moved to step up inspections of API production in China and other emerging economies, which offer cut-price production channels, but if the supply of antibiotics is disrupted to Occidental markets, there will be pressure on governments and domestic pharmaceutical companies to repatriate production of critical medicines.
And who is to say it will end there? UK companies are already under pressure to rethink their supply-chain strategies as a large proportion of the UK’s trade with the EU is in the form of intermediary products, but if a global pandemic does ensue it could result in a realignment of supply-chains across multiple sectors.
