Coronavirus: The deadly virus has stalled manufacturing in China, affecting global supply chains

But the good news is that factories are opening and local governments are attempting to restart shipping and logistics operations.

This article was first published on Sourcing Allies Blog

It’s been nearly a month since China placed Wuhan — a city of 11 million people in Hubei province — under quarantine on January 23 because of the deadly coronavirus outbreak, which has killed 2,249 people in the country as on February 21 and at least 11 people outside mainland China so far.

The lockdown was subsequently extended to other provinces such as coastal Zhejiang — the worst-hit area after Hubei province — which is home to Ningbo-Zhoushan, China’s busiest port in terms of cargo tonnage, and Wenzhou city, an important commercial and industrial hub.

The quarantine and movement restrictions have also hit our China sourcing team at our Ningbo office, most of whom have spent the last three weeks working from home — minimizing movement outside, painstakingly disinfecting hands and paws (of pets) in case they do venture outdoors, and being supplied with food and groceries by a number of online delivery services that were still operating.

Life in Ningbo does seem to be getting back to normal. Chris Schell, project coordinator at the Sourcing Allies office in Ningbo, said he was able to make it to the office on February 19 after nearly a month at home. He said restrictions hadn’t been completely eased; he had to fill in a special health application form online that he showed at the office building to be permitted entry. Other team members such as project manager Bruce Zheng are still working from home, while another colleague is in the mandatory 14-day quarantine after returning from another province.

Elsewhere, such as Shenzhen in Guangdong province, home to the world’s largest electronics market, news reports said that traders were making attempts to restart business, some even setting up temporary stalls with bags full of electronics on sale.

China is indeed slowly returning to work. But with several factories unable to start production because of worker availability and quarantine issues, and with a logjam at ports, the big question is: How soon will it be business again as usual? How soon will the cogs of the massive engine that is the Chinese economy start moving as fast as they used to before the outbreak. Customers who are sourcing from China may also be wondering: “How soon am I going to get delivery of my order?”

It is difficult to give a conclusive answer to these questions but the good news is that things are improving. Developments in the past five days have certainly been positive with everything indicating that we are most likely to be up and running soon.

Having said that, we’d warn our customers to expect delays in deliveries because we are at a standstill till factories are completely back online. Additionally, as production starts and ports resume work, everyone will be rushing to fulfill pending orders so production and even shipping delays are likely. If you are our customer, it’s best to contact us at usoffice@sourcingallies.com for more up-to-date information.

In this blog, we talk about the impact of the deadly coronavirus outbreak on workers, factories, sea and air shipping over the past month, as well as what global economists have to say about the impact of the outbreak on the Chinese and global economy at large.

Worker travel limitations

China first informed the World Health Organisation that it was treating a number of unusual pneumonia cases in Wuhan on December 31. The first death was reported by state-run media on January 11.

The Chinese government subsequently imposed extensive restrictions on the movement of people, quarantining the epicenter Wuhan on January 23 followed by several other cities and provinces. The objective was to minimize the spread of the virus.

The New York Times estimated that half of China’s population — or at least 760 million people — have been subjected to movement restrictions with an army of volunteers and Communist Party representatives helping enforce them by shutting factories, blocking roads and quarantining entire apartment complexes.

These restrictions came around Chinese New Year (January 25 this year), a major holiday in China, where millions of people working in industrial hubs travel to their hometowns to celebrate with family. This is a traditionally slow time for manufacturing in China, because factories close for up to a week because of the festival. But the massive movement of people posed a risk of spreading the virus far and wide. To prevent the spread of the virus by travelling workers, several Chinese provinces, municipalities and regions extended the Lunar New Year holiday until February 10.

Though workers are now returning to work, and manufacturing is said to have started in some areas such as Shanghai, some cities such as Beijing have imposed rules that require returning workers to quarantine themselves at home for 14 days before they can start work or risk punishment.

On its part, the Chinese government has been encouraging local governments to kickstart economic activities, with President Xi Jingping saying in remarks released on February 15 that local authorities must work towards fulfilling the government’s social and development goals, indicating that they must do this even as they work to bring the epidemic under control.

Factory downtime and ramp up

The extended factory closures imposed by local authorities and the inability of several workers to get back to work because of movement restrictions have hit vital global supply chains that are heavily dependent on Chinese manufacturers.

China — called the factory of the world — manufactures a wide variety of products for export including industrial equipment, farm implements, phones, designer clothing, automobile parts and die casting and plastic injection molding products (for which we are China sourcing agents).

Apple Inc, for instance, has warned that the outbreak is going to hit supply of iPhones as well as its revenue this year while analysts have warned that retailers such as Walmart and Target might start seeing resupply issues by April.

The auto industry is especially vulnerable, with the lack of China-made parts poised to stall automotive production. A large number of the world’s major automakers — such as Ford, Fiat Chrysler, General Motors, Hyundai, Nissan, Renault and Volkswagen — source parts from China, while some also have automotive assembly plants in the country to cater to the domestic market.

Hyundai announced earlier this month that it was suspending production at its factories in South Korea because of a shortage of China-made parts. Even parts that are already produced and ready for shipping are likely to be held up because travel restrictions have crippled logistics and shipping too.

Shipping challenges

China is not only the manufacturing hub of the world, it also hosts seven of the world’s 10 busiest ports.

Roughly 80% of global trade by volume and 70% by value is transported by sea, according to the United Nations Conference on Trade and Development, a large part of which goes through Chinese ports. The fast-spreading deadly virus has therefore severely disrupted global shipping because of travel restrictions imposed by the government, which led to a shortage of people to drive trucks and a shortfall of labour in ports and warehouses.

The outbreak has led to the world’s top container lines reducing calls (known as blank sailings) to Chinese ports. This has reflected in the Capesize Index — the bellwether for the shipping market — which slumped to an all-time low on February 5 due to reduced demand for ships.

The disruptions are likely to delay shipment deliveries for months after the outbreak is brought under control, industry sources told Reuters. Container ship operators are also gearing up for a financial hit with sources telling the Wall Street Journal that they are preparing profit warnings for shareholders for the first half or the full year, said reports.

Air cargo has also been affected. German logistics group DHL suspended deliveries in the worst-hit Hubei province in February but continues deliveries elsewhere. It, however, warned of “severe disruptions to inbound and outbound air cargo shipments, trucking and rail cargo services as well as heavy port congestion for vessels along the Yangtze River near Wuhan…”

DHL has warned of extended disruptions to supply chains in its Resilience 360 report on the impact of the Coronavirus on supply chain operations. The report says: “…It could have a major impact on supply chain operations and industrial production throughout China across industries such automotive, pharmaceutical and medical supplies, and high-tech manufacturing for optoelectronics and semiconductors.”

There are indications, however, that movement in ports may restart.

The government was planning to remove the compulsory 14-day quarantine period for non-local drivers from regions deemed to have low virus risks in order to clear the logjam at ports, said a February 18 report (subscription required). It added that the government in Zhejiang province “aims to bring 3,000 container truck drivers back on the roads by February 23, and to double that tally by the end of the month”.

Long term impact on China as the centre of manufacturing

The coronavirus outbreak comes at a time China’s economic growth hit its lowest level in nearly 30 years — 6.1 per cent in 2019. The outbreak also comes at the back of the US-China trade war that started when US President Donald Trump’s announced his decision to impose tariffs on Chinese goods in July 2018. This has hurt manufacturing in China.

Some analysts say the outbreak is accelerating the “decoupling” between the US and China as a growing number of businesses realise that an overreliance on one major supplier or market was risky, news reports said. “You have the trade war and then on top of it the coronavirus outbreak,” the Financial Times quoted a researcher with a ship brokerage, consulting and business intelligence company as saying. “You’ll have people say ‘wait a minute…we need a plan B’.”

Impact on economy: What economists say

With no clarity on when the epidemic is likely to be brought under control, economists are divided over the extent of the impact on the Chinese and global economy.

Nomura analyst Richard Koo cautioned against optimism that China would bounce back from the Coronavirus outbreak just as easily it did with the SARS (Severe Acute Respiratory Syndrome) outbreak in 2003 that killed 774 people before it died out. “I think it is quite possible that the economy’s growth rate for the full year will be substantially lower,” Koo was quoted as saying in a report.

But about 40 economists polled by Reuters were more optimistic. They forecast that the Chinese economy will grow at its slowest rate since the financial crisis in the current quarter but said the downturn will be short-lived if the outbreak is contained.

The poll of 40 economists based in mainland China, Hong Kong, Singapore, Europe and the United States was conducted between February 7–13. It predicted China’s annual economic growth in the first quarter of 2020 to slump to 4.5% but would bounce back in the second quarter to a median 5.7%.