- The COVID-19 outbreak and resulting quarantine could result in an estimated 2.1% drop in sales and a 3.6% drop in 2020 operating profits for technology and other manufacturing companies in China and the surrounding region, according to an analysis of 105 companies by Goldman Sachs last month.
- The estimate was based on an average production utilization rate of 50% for the month of February and a 30% reduction in Chinese demand over the next six months.
- "[W]e think the pace of recovery in capacity utilization and monthly shipments over the next 1-2 months will determine the direction of share prices," the note reads.
The sales of smartwatches, computer monitors and televisions manufactured by companies in China are expected to fall by millions of units in the first quarter of the year, according to research released last month by TrendForce.
Goldman Sachs' analysis highlights how the decrease can translate into a multi-billion dollar hit for some of the larger companies affected by the outbreak. Especially since some companies might not be able to cut costs as much as others, the report notes.
"We assume that labor-intensive fabrication-type and downstream companies are likely to be particularly susceptible to fixed-cost burdens due to their low profit margins as a percentage of production value and low utilization rates," the note reads.
The analysis expects Apple manufacturer Hon Hai, also known as Foxconn, to see a more than 4% reduction in sales with about 70% of its production in China. Foxconn Industrial Internet, a subsidiary of Foxconn, is expected to see a drop of roughly 4% in sales as a result of lower production levels and decreased demand.
Companies with more production in China will see more of an impact. iFlytek, which has 100% of its production in China, could see a 10% reduction in sales as a result of the outbreak and resulting disruption, according to Goldman Sachs.
As production fell, so did trade. The top eight ports in China reported a 20% year-over-year drop in overall volume for February, according to numbers from the China Ports and Harbours Association cited by the South China Morning Post. The volume decrease has already begun to show up at U.S. ports.
But Goldman's analysis is just looking at China, so as the coronavirus spreads into and within other countries the impact will too.
Forrester suggests companies should identify key suppliers and manage those relationships carefully. "Identify and keep inventories of critical parts and prioritize your most important business partner relationships so those partners get first claim on help from your staff," Forrester wrote in a report.