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https://scmp.com/business/companies/article/3049110/nike-walt-disney-international-companies-warn-coronavirus Companies
From Nike to Walt Disney, international companies warn coronavirus outbreak is starting to pinch results
- Carmaker Hyundai has halted production in South Korea because of a shortage of parts from Chinese suppliers
- Disney is preparing for its Hong Kong and Shanghai theme parts to be closed for up to two months
A woman in a protective face mask walks past an Apple store in Beijing that is temporarily closed because of the coronavirus outbreak. Photo: AP
Major corporations from Apple to Hyundai and Walt Disney Company are warning that the coronavirus outbreak is weighing on their businesses.
The health crisis in China has forced the closure of shops and theme parks, severely reduced foot traffic at outlets that remain open and disrupted parts of the global supply chain.
The growing chorus of warnings is a sign of how dependent international companies have become on China not just as a manufacturing hub, but as a source of revenue as they seek to tap consumers in the world’s second largest economy.
It comes as China’s economic growth is widely expected to slow to less than 6 per cent this year. China’s gross domestic product grew at 6.1 per cent in 2019 amid an 18-month trade war with the United States, its slowest growth rate since 1990.
Nike said on Wednesday that half of the stores it owns in China had been temporarily closed and its other shops were operating with reduced hours and seeing fewer customers, which is having a short-term “material impact on our operations in Greater China”. China accounted for 17 per cent of the company’s revenue in its 2019 financial year.
“Despite this difficult situation, Nike’s long-term opportunity to continue to serve customers in Greater China with inspiration and innovation remains exceedingly strong,” said John Donahoe, the Nike president and chief executive. “As the same time, we continue to have extraordinary brand and business momentum in all other geographies.”
The Beaverton, Oregon-based athletic goods maker said it would provide an update on the “operational and financial impacts” on its financial third-quarter conference call in March. Nike manufactured 23 per cent of its Nike-branded footwear at contract factories in China in 2019.
The coronavirus outbreak, which is believed to have originated in Wuhan, a major manufacturing and logistics hub in central China, has infected more than 23,000 people worldwide and killed at least 492.
To try to stem the spread, health officials in China extended the Lunar New Year holiday, locked down at least 15 cities in Hubei province near the epicentre of the outbreak and asked businesses to allow employees to work from home.
“We expect the novel coronavirus to leave a clear mark on China’s economy and Chinese equities in [first-quarter 2020],” Bruce Pang, head of macro and strategy research at China Renaissance Securities, said in a research note. “However, we think the short-term disruption does not change the medium-term market uptrend.”
Pang said it is likely the virus will recede later this month, but there is a risk of wider and prolonged travel bans as countries from Australia to the US try to stem the spread.
On Wednesday, Disney said it was preparing for its theme parks in Hong Kong and in Shanghai to be closed for as long as two months.
“The recent closure of our parks in both Shanghai and Hong Kong due to the ongoing coronavirus situation will negatively impact second quarter and full year results,” Christine McCarthy, the Disney chief financial officer, said on a conference call. “The current closure is taking place during the quarter in which we typically see strong attendance and occupancy levels due to the timing of the Chinese New Year holiday. The precise magnitude of the financial impact is highly dependent on the duration of the closures and how quickly we can resume normal operations.”
The Burbank, California-based media and entertainment giant said the closure of its Shanghai Disney Resort could reduce it operating income by about US$135 million in the second quarter if the park is closed for two months. Hong Kong Disneyland, which was already seeing fewer visitors from the mainland and other parts of Asia following months of street protests in the city, could see a decline in operating income of US$145 million in the quarter, including US$40 million related to the park’s closure.
The health crisis has hit airlines, hospitality and retailers particularly hard as it has kept mainlanders at home during the peak Lunar New Year holiday travel season.
Cathay Pacific, Hong Kong’s flagship carrier, said on Tuesday it would cut 90 per cent of its flights to mainland China for two months as its passenger numbers have dropped in half in recent days.
Macau has ordered its casinos to close for 15 days, causing the shares of resort operators Melco International Development, MGM China and Wynn Macau to drop sharply in Hong Kong on Tuesday. Visitors to Macau fell by 75 per cent in the first four days of the Lunar New Year holiday this year.
Starbucks said last week that it has closed more than half of its stores in China – the Seattle-based coffee chain’s largest market outside the US – and it would “materially affect” its results. Over the weekend, Haidilao International Holding, China’s largest hotpot chain, said on Sunday it would extend the temporary closure of all of its mainland outlets.
The crisis, which has caused many manufacturers to delay reopening their plants until next week, also is starting to hit the global supply chain.
Last week, Apple gave an unusually wide range for its financial second quarter of US$63 billion to US$67 billion to reflect the “uncertainty related to the recently unfolding public health situation in China”. On Saturday, the Cupertino, California-based tech giant said it would close all of its stores in the mainland until February 9.
Tim Cook, the Apple CEO, said on a conference call last week that it was working on “mitigation plans” to make up for lost production as a result of closed factories of suppliers in Wuhan, but the effect on production was “less clear” for its suppliers in other parts of China as plants will not reopen before February 10.
Foxconn Technology Group, a major Apple supplier with operations in Wuhan, has said it had measures in place to “ensure that we can continue to meet all global manufacturing obligations”. Like many manufacturers, it is expected to resume production on February 10.
South Korean car maker Hyundai said on Tuesday it would have to temporarily close its plants in Korea as it is running short of parts from China. Several carmakers, from China’s Dongfeng Motors to France’s Renault, have already extended the closure of plants in the mainland.
The auto industry is particularly vulnerable to shutdowns by suppliers as many factories globally are now built around just-in-time deliveries of parts to avoid holding large inventories.
S&P Global Ratings has estimated vehicle production in China could decline by 2 per cent this year.