Just as the trade war gloom that weighed on Japan’s machinery makers was lifting, the coronavirus struck. Now what? Any answer must account for the new reality: Supply chains in China are increasingly unstable.

A real recovery had been afoot. A closely watched indicator of the capital expenditure cycle, machine tool orders rose 10% in December from November, when they’d hit a multi-year low. Machinery that helps make 5G equipment and electric car parts has been top of investors’ minds, with the stock prices of companies supplying these components rising over the last year, despite lower earnings.

Industrial robot orders, an indicator for automation companies, are expected to rise 6% this year, Japan’s Robot Association said last month, before fears about the coronavirus grew pervasive. Fanuc Corp. outdid performance expectations in its latest results. 

That enthusiasm has come to an abrupt halt. The spreading virus has crippled factories in China and disrupted the supply chains that the machinery companies depend on for servo motors, screw balls, gears and other components that go into making industrial robots, machine tools and factory automation equipment.

There are risks to both supply and demand.

Global companies that feed off production lines in China aren’t sure how a disruption in the flow of goods and parts will affect them yet. No one can say when it will be safe for workers to return and when plants can come back online. That’s cast a pall over machinery makers again. How long will this last? One quarter? Two? It’s no longer  the trade-war uncertainties about how expensive tariffs will make supplies or parts. It’s whether there will be supply at all.  Some sectors will face more acute shortages based on how dependent they are on China. Japan’s electrical equipment manufacturing industry imports  $96.6 billion worth of parts and components, or intermediate goods, that go into final products. Of that, 5.6% comes from China. It’s a similar picture for machinery manufacturers. A recent analysis by Nomura Holdings Inc. shows that these industries will face larger production bottlenecks, hampering their ability to supply and sell machinery. That will have an impact on the hundreds of factories that rely on their equipment.

Then there is demand. China’s thirst for high-tech machinery and robots buoyed Japan’s industrial machinery giants. Foreign brands’ market share is almost double that of domestic rivals. In its drive to get ahead on the technology curve, Beijing has handed out subsidies to local manufacturers for intelligent technology and factory automation. 

But here’s the thing. Demand in China had already been weakening, affected by sentiment around trade, Beijing’s fiscal balancing issues and a deleveraging campaign. A crisis of confidence had local manufacturers on edge. Chinese industrial companies were among the first hit. Their balance sheets were strained and working capital was harder to manage. Capital expenditure and investment in factory automation dipped because of a shortage of cash and a wait-and-see approach.

In theory, foreign companies should by now have reassessed how much they can lean on China for demand and supply. Building capacity in other parts of the world eager to move up the value chain, even if they have to swallow the costs, is one way. Fanuc, for instance, reduced orders from China and found growth elsewhere. 

China has proven painful to companies dependent on operating there or that have little choice, like construction machinery maker Komatsu Ltd. or Hitachi Construction Machinery Co. Beijing has pushed its own domestic manufacturers at the expense of foreign competitors as construction activity picked up before the virus hit.

Part of their challenge is that machinery and factory automation-related companies aren’t adding capacity in a big way but are upgrading instead. That means volumes elsewhere can’t offset the big numbers lost in China. Meanwhile, demand for machines from the auto and smartphone industries has been volatile because of an evolution toward electric cars and better processing units.

Companies will likely say (for quarters to come) that the virus – like the trade war – is a one-off issue. But it’s worth wondering whether they want to wean off China. With all that past upside of a vast market, demand and government support, there’s much to lose now. Learning to contend with a not-so-reliable China is a smart bet. When exceptional things occur on a regular basis, there’s a new normal.