By Tom Fairless and William Boston
FRANKFURT -- Companies in Europe's largest economy are rushing to limit the impact of the spreading coronavirus epidemic, which is hitting an already weakened German economy in a particularly painful spot: the supply chains of its export-oriented manufacturers.
With this week's outbreak in Italy, the infection has struck some of Germany's top trade and economic partners just as the economy, long Europe's main engine of growth, is reeling from a 7% drop in industrial production last year amid trade conflicts, a long-term slowdown in China, and global political uncertainties.
In recent weeks, the nation's trade-reliant businesses have been trying to unclog bottlenecks in complex global supply chains built up over decades. They frequently thread through China and Italy, two of the countries most affected by the virus.
Now there is concern that second-stage effects from the infection could hit the parts of the German economy that have so far resisted the downturn, from household consumption to tourism and services.
In a blow to local hotels and restaurants, the cities of Frankfurt and Cologne on Tuesday called off two large trade fairs, citing the outbreak. And Deutsche Lufthansa AG said it was initiating cost-cutting and freezing some new hiring in response to the epidemic.
Germany's DAX 30 stock-market index fell more than 4% on Monday and was off another 1.9% on Tuesday, bringing it back to its level of late October. In a note, Dirk Schumacher, head of European economics at Natixis, wrote that growth in Germany's gross domestic produce, flat in the last quarter of 2019, would likely rebound only once the epidemic is under control.
More than 5,000 German companies in China are currently facing severe restrictions on procurement, production and sales, according to the Federation of German Industries, the business lobby.
One concern is that manufacturers that have so far used parts in stock or already in transit when China put itself on lockdown will suffer shortages of key components in the coming weeks, even as China's manufacturers are slowly coming back online.
"When the last ships reach our harbors in a week or 10 days, that will be it from China," said Joerg Wuttke, president of the European Union Chamber of Commerce in China and chief local representative for German chemicals company BASF. "Then you will see shortages on the shelves of Europe. The impact has not really been felt yet."
The spread of the virus to Italy, meanwhile, could create new supply chain interruptions because the economies of Germany and northern Italy are highly integrated, Clemens Fuest, president of the Ifo economic think tank in Munich, said on Tuesday.
Industrial group Thyssenkrupp AG said it had only been able to gradually restart production in its Chinese plants since Feb. 10 but couldn't yet gauge the impact of the closure on its business, partly because its customers, not just its production, were also feeling the impact.
February has been "very bad," said a senior executive at a family-owned mechanical-engineering company based in northern Germany with more than EUR500 million ($542 million) in annual sales. "We've had a significant reduction in production for two months, and we had to organize new suppliers."
German businesses in China are seeking out alternative factories or suppliers to replace those shut down by the virus, said Oliver Wack, a trade expert at the Mechanical Engineering Industry Association, a lobby group representing mostly small and midsize firms. Many are trying to ship goods more rapidly by air or train to overcome bottlenecks.
Mr. Wack estimates that only between 25% and 60% of his member companies' Chinese workforce have returned to work. "A lot is on hold in China," he said. "Customers are leaving orders in place, and businesses are optimistically planning to work 24/7 to catch up."
Karl Haeusgen, chairman of HAWE Hydraulik SE, a Munich-based manufacturer of hydraulic pumps, said "like many others, we had to close production for three weeks...Many customers cannot be reached and deliveries are slow. It will take months to recover."
Germany's flagship auto industry, which saw profits melt last year under the combined impact of slowing global demand, tightening emissions rules, and the rocketing costs of moving into electric vehicles, is likely to take a big hit from lost sales due to the epidemic.
China's association of car dealers said new car sales had dropped 92% in the first two weeks of February, with sales for the month expected to fall as much as 80%.
Volkswagen AG, which makes 41% of its sales in China, said more than two-thirds of its 2,100 dealers there are still closed. In January, VW said China sales had plunged 11% -- before the impact of the virus.
Daimler AG, which generates about a third of its sales in China, warned on Friday that "risks for the Daimler Group may not only affect the development of unit sales, but may also lead to significant adverse effects on production, the procurement market and the supply chain."
With supply-chain disruptions extending far beyond China, the virus exposed a fragility in Chinese-centric business models and some executives said they saw it as a call to diversify.
"People have now woken up to the fact that you must have a backup plan," Mr. Wuttke said. "All eggs in one basket, as wonderful and competitive as it might be, is possibly not acceptable for companies with vulnerable supply chains in the future."
With industry and exports sagging, private consumption has been a key crutch for the German economy in recent months, bolstered by rising wages and low unemployment. But the virus has begun to trigger uncertainty among consumers, according to market research group GfK SE.
Messe Frankfurt GmbH, one of the world's largest trade fair organizers, said on Monday it would postpone a major weeklong event, Light + Building, as a result of coronavirus. The event planned for early March attracted more than 220,000 visitors when it was last held two years ago. It will now take place in September, the company said.
Organizers and city authorities were concerned that visitors from China, Italy and possibly other nations would need extensive health checks involving considerable work, said Markus Quint, a spokesman for Messe Frankfurt. The decision followed a sharp drop in attendance at a major trade fair two weeks ago.
The announcement shocked local hoteliers, who rely heavily on the millions of annual visitors to the city's trade fairs, during which room rates traditionally spike.
"The loss is difficult to estimate," said Bernhard Haller, general manager of the Mövenpick Hotel Frankfurt City, and vice president of the Frankfurt Hotel Alliance, a lobby group. "Hotels could be almost empty that week. It's an incredibly popular trade fair."
Mr. Haller said the loss would be difficult to recoup, and that hoteliers feared more cancellations and postponements. "How far will it go?" he said.
Germany's national tourist board said last week it would postpone planned marketing campaigns in China as a result of the coronavirus. Chinese tourists are the second most important overseas spenders in Germany, accounting for EUR6 billion in revenue in 2018, according to the group.
Lufthansa has suspended all flights to mainland China from late January through the end of March. The airline normally offers 54 connections a week from Germany, Switzerland and Austria to five cities on the Chinese mainland, including Beijing and Shanghai. The airline is also reducing flights to Hong Kong due to a lack of demand. Flights to Italy continue but the airline is following the spread of the virus closely, according to a spokesman.
"These are not easy decisions but they are necessary," board member Harry Hohmeister told German daily Handelsblatt on Tuesday in announcing the airline's cost cuts.
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