Economy & Economic Development  March 2, 2020

Colorado manufacturing grapples with a potential coronavirus supply shock

Editor’s note: this story was published in the print edition and online edition using COVID-19 information available as of Feb. 27, 2020. As a public service, BizWest is making all of its coverage of the COVID-19 virus free to read. Please consider subscribing to BizWest to support our efforts to keep you informed on Northern Colorado and the Boulder Valley’s top business news.

If China coughs, will Colorado get sick?

In a literal sense, probably not. While the U.S. Centers for Disease Control has warned American life may face severe disruption from an outbreak of the virus, Colorado health officials believe there’s a low chance of a COVID-2019 pandemic in the state.

As of Feb. 27, no one in the state has been diagnosed with the virus after CDC tests came back negative for 12 suspected cases. State officials are coordinating pre-pandemic responses.

While it’s less than likely that the coronavirus or another foreign outbreak will directly make Coloradans sick, the disease has already produced downstream effects to local manufacturers as a result of grinding the world’s largest manufacturing economy to a near-standstill.

Local companies brace for tight supply

China’s government has undertaken the largest quarantine program in human history to try to stop the deadly respiratory disease, locking down an estimated 50 million people from the rest of the country and ordering businesses to close.

For manufacturers in Colorado and across the world, that means a much longer disruption in shipments than usual for this time of year.

Dean Herl, CEO of agricultural equipment maker Noffsinger Manufacturing Co. in Greeley, said his company had ordered a large quantity of equipment from China ahead of the traditional dip in production during the Chinese New Year.

However, a portion of that is stuck due to the logjam of freight movements throughout the country to port cities.

Tim Heaton, president of the Colorado Advanced Manufacturing Association, said while at least two contract manufacturing companies in the state said they are seeing a boost in demand as other businesses try to find domestic suppliers, it wouldn’t come close to replacing the mammoth production capabilities of the Chinese economy.

One of CAMA’s member companies recently told Heaton that the three months of the virus being a major factor in China has created a production backlog of more than eight months.

“If three months translates into an eight-month backlog and if this goes on for months, this is going to have lasting ramifications in the manufacturing world,” he said.

Noffsinger procures 85 to 90 percent of its raw materials and equipment from American suppliers, and Herl is confident the company can fill orders from customers looking to buy new equipment before the start of planting season by shifting more of the production to its four plants in Greeley, Idaho, Minnesota and Canada.

But shifting more of that supply chain to the Americas is expensive, especially when certain niche parts such as bearings or snap rings are made almost exclusively at scale in China.

“At our current pricing, we would be looking at basically breaking even on some of those products we’re building in-house and some of them, we may even be looking at a little bit of a loss,” he said.

Overbuying from Italy

Italy is among the hardest-hit countries outside of China, with a reported 322 cases and three deaths so far. Most of the infections are centered around Milan, the country’s industrial and financial powerhouse.

The worries of northern Italy are particularly acute for Louisville-based Rupes USA Inc., a distributor and assembler of automotive cleaning tools. It gets almost all of its inventory from its namesake company RUPES SpA, which is based in Milan.

CEO Rob Volkert said Rupes USA usually buys $7 million to $9 million worth of inventory over the course of a year, but he recently bought $4 million worth of supplies to build up stock in the event of a Milanese worker getting infected.

“If one person ends up being diagnosed, then that’s going to shut down the entire facility there and everyone will go into quarantine,” he said. “That shuts them down, and that shuts us down.”

Volkert is worried customers may refuse to buy Rupes products because they came from a hot zone. The World Health Organization has no evidence to suggest that this specific strain of coronavirus spreads by surface contact. But even with science on his side, Volkert said he’s not sure people will trust that his cleaning products are free of disease.

That cash flow hit is forcing Rupes to slow hiring and cut other expenses after years of rapid growth. The company of 30 employees grew from about $2.5 million in revenue in 2015 to $12.5 million last year and expected to reach $14.5 million or so by the end of 2020. Now, Volkert has to readjust for previously unseen scenarios, including the outside chance that an extended quarantine in Milan could force him out of business.

“Who puts this in their SWOT analysis for their company?” he said. “We don’t normally say a pandemic is one of our concerns, but here we are.”

Region’s public companies and supply chain exposure

The economy in Colorado isn’t too deeply exposed to a supply downturn from China. Colorado imported $1.755 billion worth of goods from China and exported $525.27 million to the country in 2019, according to U.S. Census Bureau data. That combined is just a sliver of Colorado’s overall gross domestic product, last estimated at $392 billion.

But several major companies along the Front Range have significant operations in China or are part of larger supply chains.

Take Broadcom Inc. (Nasdaq: AVGO), a semiconductor maker that signed a pair of deals with Apple Inc. (Nasdaq: AAPL) in January to provide up to $15 billion in wireless parts. Broadcom specifically produces wireless radio frequency parts in its Fort Collins factory, where it employs an estimated 1,500 people.

But in mid-February, Apple revised its revenue estimates for the second quarter of 2020 partly because its assembly plants in China weren’t returning to production as quickly as expected after shuttering to prevent the spread of the virus. That hammered the stock prices of chipmakers and Apple suppliers.

According to annual reports submitted to the U.S. Securities and Exchange Commission, about 7 percent of fiscal year 2019 sales for Fort Collins-based Woodward Inc. (Nasdaq: WWD) came from products made in China, and Woodward’s merger partner Hexcel Corp. (NYSE: HXL) mentions the coronavirus as a general risk to its operations, particularly at its Tianjin facility in northeast China.

Additionally, Wuhan’s central position within the Chinese mainland presents a logistical problem for moving raw materials and products through a company’s supply chain and eventually toward the ports.

Preparing for more pandemics

Public health experts don’t expect this outbreak to be a one-off event because of the scale of global trade, along with the downstream effects of climate change, said Glen Mays, a Colorado School of Public Health professor and program director for the National Health Security Preparedness Index.

As the world’s population moves more inland and encroaches on previously untouched animal habitats, Mays said there are more opportunities for a previously animal-only disease to mingle and mutate to humans.

“The ranges of certain pathogens and animals carrying those pathogens are changing because of changes in the environment, and that creates more and more degrees of freedom, more mixing between these animals, animal hosts and human hosts,” he said.

Lisa Miller, a professor at the Colorado School of Public Health and a former Colorado chief epidemiologist, told BizWest that businesses also need to make sure their sick-leave plans are flexible enough to keep workers who are sick from coming into the office and exposing others. This includes making sure workers can work from home if needed and having time off to care for a sick loved one.

“Nobody knows what’s going to happen and in a specific event, you’ll often have to change those plans, because it’s not going to happen exactly as you planned,” she said. “But at least there would have been some thoughts on how to address a general case where there’s some infectious agent that changes the way you do business.”

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