Posted: 1 year ago

Hopes and Fears

We are in the middle of the world pandemic, with the cities and the entire countries shutting down.

Experts present apocalyptic visions predicting dramatic ruptures in international order. Media headlines, adding fuel to the fire, are intensifying the general anxiety, talking about the inevitable global economic cataclysms ahead. 

There are many speculations about the future of the post Corona economy, dependent on how the governments and society will respond to the economic aftermath. General consent being – world is heading to unprecedented economic downfall.

Since the mid-1990s, many companies have outsourced most of their manufacturing operations to China. One essential enabling factor was reducing manufacturing costs through outsourcing and reducing capital investment. Low-cost production played a huge role in making China the second largest economy in the world. However, the first quarter into 2020 the equation has changed. 

“This is an economic tsunami,” Mark Zandi, chief economist at Moody’s Analytics, told Vox’s Ezra Klein. “We’re about to see dizzying decline in economic activity,” he said. “There’s no analogue to it in the modern era.” 

” The coronavirus pandemic is going to cause immense pain and suffering. But it will force us to reconsider who we are and what we value, and, in the long run, it could help us rediscover the better version of ourselves” says Eric Klinenberg, the professor of sociology and director of the Institute for Public Knowledge at New York University.

Today, apart from the pandemic, there are three economic themes dominating the discussion on the world economy – global recession, the relocation of manufacturing from China to other countries and the collapse of global supply chains.

Japan has already allocated some US$2.2 billion of its economic stimulus package to help its manufacturers shift production out of China, as the coronavirus disrupts the supply chains.

“There will be something of a shift,” said Shinichi Seki, an economist at the Japan Research Institute, adding that some Japanese companies manufacturing goods in China for export were already considering moving out. “Having this in the budget will definitely provide an impetus.” Companies, such as car makers, that are manufacturing for the Chinese domestic market, will likely stay put, he said according to Bloomberg.

The South Korean tech giant’s Samsung ceased phone production in China at the end of 2019, expanding its smartphone production in lower-cost countries, such as India and Vietnam. Samsung employed 6,000 workers and produced 63 million units in 2017 in China.

Sony also said it was closing its Beijing smartphone plant and would only make smartphones in Thailand.

The departure of the world’s largest smartphone producers is the serious blow to China’s long dominance in the exclusive manufacturing.

The economics of collapse are pretty straightforward, the businesses exist to make profit, if they can’t produce, they cannot sell, they cannot sell, they won’t make profit and employ people, which in longer turn spirals into economic depression.

 “The global smartphone market will ship -25% fewer smartphones than expected in 2020, due to the fear and “paralysis” caused by coronavirus” – says David Kerr in Strategy Analytics. “China smartphone shipments will be -16% less than expected in 2020. All regions will see a double digit annual decline rate this year. All industry stakeholders need to plan for a very soft and tough 2020.”

No matter how much longer the economic disruption will last the impact on industries will be two-fold, affecting both annual profitability and short-term liquidity. As for the businesses, they will have to mitigate the risks and diversify their manufacturing bases in the post Corona economy. 

By Nona Mamulashvili, founder of Caucasus Economic Institute and President of Swiss Chamber of Commerce