News How the virus infects the global economy

How the virus infects the global economy

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Benjamin Scheidel has to stop on the highway on his way to work. Men in protective suits, with respiratory masks and goggles hold a small, elongated plastic device to his forehead and measure his temperature. He is asked how he feels. And whether he knows someone who is infected with the corona virus. Only when the thermometer shows below 37.3 degrees and he has answered all questions can he continue driving.

The next stop is at the parking lot entrance. A security guard set up a table in front of the Lufthansa building. The temperature is measured again and the name checked. Scheidel is the head of Lufthansa Technik Shenzhen, and his almost 700 employees repair important aircraft parts in the southern Chinese city.

Only those who are on a list drawn up by the local government come to the company premises. If someone has a coronavirus in the same apartment building or with friends, they have to stay at home.

Things are ghostly in the offices of Lufthansa. Through the loudspeakers there are clues to wash your hands. The conference rooms are sealed, a precaution by Scheidel. “To keep the epidemic situation under control, this meeting room is closed,” it says on large stickers in English and Chinese. Meetings take place virtually. Colleagues whose offices are next to each other are talking on the phone.

Disinfection of a station in Changsha

With all means against the virus.

(Photo: Top Photo / Sipa USA)

The in-house kitchen is closed. The employees bring their food with them, they eat in the canteen – in shifts so that a minimum distance can be maintained. Cardboard displays also ensure that there is no contact. When one group is out, the room is disinfected before the next one is allowed in. “The measures are very strict,” says the 40-year-old German.

Working in times of epidemic. As in the Steve Soderbergh film “Contagion”, a new virus has broken out, spreading at a frantic pace, attacking the respiratory tract – and has already killed more than 2,000 people. As if Soderbergh had suspected it in the movie hit of nine years ago, the Sars-CoV-2 virus known as “Coronavirus” comes from China, from the city of Wuhan in the province of Hubei.

The good news: unlike the 2003 Sars virus, the corona virus is statistically less lethal. Most sufferers show only mild symptoms. The bad news: Even with the lower death rate, millions of people worldwide are still under threat.

The expansion outside of China is almost unstoppable. “An impending pandemic appeals to primal fears in humans,” warns Christian Drosten, Director of the Institute for Virology at the Berlin Charité.

The uncertainty caused by the corona virus will continue. Markus Steilemann (CEO Covestro)

Fear paralyzes the economy. China is taking draconian measures to curb the spread of the virus. Streets are swept empty, cinemas or shops are closed. Fighting the epidemic is literally causing the Chinese car market to collapse, production is sluggish in all industries due to a lack of workers.

Small companies and the self-employed especially suffer. The consequences are already “very, very serious,” said Ding Yuan, Vice President of the Shanghai-based China Europe International Business School (Ceibs), in an interview with the Handelsblatt.

The threat faces a global economy that has already been weakened by the trade dispute between China and the United States and Britain’s exit from the EU. “The epidemic is currently the greatest threat to the global economy,” says Gabriel Felbermayr, President of the Institute for the World Economy.

The topic is at the top of the agenda everywhere. At the weekend, the G20 finance ministers and central bank heads in Riyadh in Saudi Arabia will discuss the issue. Hardly any country outside of Asia is affected as much as Germany.

For one thing, many German companies produce in China, supply chains are under threat; for example, drugs like certain antibiotics could become scarce in a few months. On the other hand, China is a large sales market for car manufacturers like Volkswagen or plastic manufacturers like Covestro. In total, around 200 billion euros in sales are at stake for listed German companies alone.

Covestro runs out of barrels with which the company transports its plastics. The Dax Group will lose an estimated EUR 60 million in profit in the first quarter of the year due to the delivery problems in China alone. The worst part is that there is no end in sight. “The uncertainty caused by the corona virus will continue,” said Covestro CEO Markus Steilemann.

A few days ago, President Xi Jinping reported optimism on state television that China will achieve its goals in 2020 despite the virus. But he didn’t say what they look like in numbers. Analysts are less optimistic. Deutsche Bank expects 5.8 percent growth, while economist Felbermayr speaks of five percent in the optimistic scenario.

The consequence for Germany: In the first quarter, the corona virus will push the German economy into the red and shrink by 0.2 percent. Overall, according to Deutsche Bank, Germany will lose 0.3 percentage points of economic growth in 2020.

In their “baseline scenario”, the economists at Oxford Economics assume that the virus spreads massively, but remains limited to China – and that the epidemic can be contained quickly. In this optimistic case, Oxford Economics already expects the global economy to shrink seasonally adjusted in the first quarter of 2020 – for the first time since the outbreak of the financial crisis.

Overall, the institute expects the global economy to grow by 2.3 percent in 2020. That would also be the weakest value since 2009. Should Corona expand into a global pandemic, the euro zone and the US would plunge into recession in the first half of 2020, but according to Oxford Economics, followed by a rapid economic recovery in the second half of the year.

“The corona virus hits us hard”

The idea came from having a beer together: An acquaintance of Patrick Schmieder is a carpenter and needed a workshop. Why not take a sea container for this? Mein Lagerraum3 in Dresden emerged from the idea four years ago. The company today rebuilds hundreds of sea containers annually for major customers such as Siemens, ZTF and many start-ups – for industrial applications such as combined heat and power plants or data centers for Bitcoin production. The house specialty is “tiny houses”, habitable small houses with bathrooms. Cost point: up to 70,000 euros.

The demand is great, the business has been going “steeply upwards” since it was founded in 2016, says Managing Director Schmieder. Today 30 locksmiths, carpenters or employees work for Mein Lagerraum3. However, there are currently problems: Since the outbreak of the corona virus, the prices for Chinese sea containers have risen by 20 percent – and the trend is rising. According to the managing director, other suppliers from Eastern Europe, for example, are out of the question, the quality of the steel there is worse and the prices twice as high.

The small company is a big problem. The fine-tuned mechanism of global supply chains is stalling, the “workbench China” does not work as usual. There were already problems with car manufacturers in Korea and Japan. Production in a Fiat factory in Serbia has also been suspended since last weekend.

“The corona virus hits us hard,” says the program manager of a German car supplier. “In two weeks at the latest, we will no longer be able to keep one or two milestones at the German manufacturer.”

The auto companies are alarmed by the supply bottlenecks. “We in Wolfsburg now have a crisis team that meets every day,” reports one VW manager. There are still no problems, the stock levels would last up to eight weeks. But nobody knows exactly what the situation really looks like. “We cannot look at every subcontractor,” says the VW manager.

The automaker’s supply chains are structured in several stages. At the end of this long chain, there could be smaller suppliers that hardly anyone knows, but which may have produced a single, very important component. “And if things go very badly, all of the supplies in one of our factories will be used up in a few weeks.” Most other car manufacturers now also have comparable crisis management units for parts supply.

Companies like Volkswagen are looking for alternative sources of supply. But nowhere in the world are there suppliers with enough free production capacity to close the gaps in China in the short term. “Of course, the problem is compounded by the fact that every car manufacturer is now looking for new suppliers,” says Wolfsburg.

graphic

Chinese suppliers have established themselves in the global automotive industry primarily as producers of electronic components. This includes circuit boards that are used in many control devices in a car. Suppliers also play an important role in the screens that are used in every navigation device today.

Digitization has significantly increased the proportion of electronic components in cars. China has also developed into a central hub for the production of electronic components due to low wages. According to a new study by the management consultancy Boston Consulting Group (BCG), China exports brakes, bodies and wheels to European automakers particularly strongly.

Not only the German producers have problems. “Our factory in China is standing,” said Jaguar Land Rover boss Ralf Speth at an industry meeting in Bochum last week. In China, the sale of new cars has almost stopped. “Who is interested in a new car now?” He asked. The supply of parts from China for Europe is also an issue at Jaguar Land Rover. No one can say today how long the supply chain will last, Speth continues.

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