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Thursday, Oct 22, 2020

Coronavirus: China’s small factories brace for ‘big hit’ as pandemic erodes overseas demand

Coronavirus: China’s small factories brace for ‘big hit’ as pandemic erodes overseas demand

China says 60 per cent of small firms back at work, but many report orders from Europe and US are drying up as virus spreads around the globe. Others fret that the outbreak may prompt multinational companies to reduce their reliance on Chinese-made products

Most Chinese manufacturers are on track to resume normal operations in April after months of crippling coronavirus restrictions, but the rapid spread of the pandemic is sapping international demand and presenting new challenges for under pressure businesses.

Weeks of quarantine and transport limitations that forced the closure of businesses across the country are gradually being lifted as the number of new infections drops, indicating Beijing's unprecedented controls have helped stem the spread of the virus.

While this has allowed Chinese firms to begin ramping up production, some contract manufacturers that rely on overseas customers say orders from the United States and Europe have started to dry up as the virus ripples through the global economy.

Others fret that the outbreak may prompt multinational companies to reduce their reliance on Chinese-made products, accelerating a shift to alternative manufacturing bases.

Meanwhile, an expected decline in consumer and business incomes due to work lost during the outbreak could mean domestic manufacturing and service demand will remain weak for some time to come.

Claudia Luo, an executive with a Guangdong-based manufacturer of automotive parts and industrial moulds, said the situation in Europe was “very worrying”.

“Last month, we were mainly worried about the problems on the production side, thinking that the problems would be solved if Chinese factories resumed production. But now that the epidemic has spread across the world, we are beginning to worry that international demand will take a big hit as a result,” said Luo, who asked that her company not be identified.

“We originally set a sales target of 200 million yuan (US$28.6 million) for the first quarter of this year, and now we are at less than half of that,” she said. “Most of the orders are from Southeast Asia, there are no orders from the US and Europe yet.”

Less than half of her 9,000-strong workforce had returned to their jobs, though production would recover fully by the end of the month, she said.

The central government has prioritised getting factories running at full speed again and will send 29 teams to check on progress across the country this month.

Some 60 per cent of the country’s small and medium-sized enterprises (SMEs) have resumed operations, but 95 per cent of large businesses were back up and running, including in Hubei province, the epicentre of the outbreak, said Xin Guobin, a deputy minister at the Ministry of Industry and Information Technology at a press conference in Beijing on Friday.

However, even among large firms only 80 per cent of the workforce had returned, he added.

In the construction sector, 58 per cent of housing and infrastructure projects had restarted as of March 8, said Ni Hong, vice-minister of housing and urban-rural development earlier this month.

More than 80 per cent of China’s migrant workers had returned to China’s cities to resume work after an extended Lunar New Year holiday as of March 12, according to a survey by Tsinghua University’s Information Technology Research Institute.

The level of employment in commercial and office areas in major cities was 68.8 per cent of the level in December as of March 12, the survey said.

While local governments have claimed that most factories have resumed production, many small businesses said the picture on the ground differed from official announcements.

“Suppliers in Guangdong and Zhejiang [provinces] began to make small shipments in the first week of March. But suppliers in central and northern China, such as in Anhui, Henan, and Hebei provinces, have not yet received approval by local governments to resume work,” said Jason Ding, who runs a trading firm in Guangzhou city purchasing car parts in bulk from factories in Dongguan and then shipping them to Africa.

“I will only be able to export two containers at a value of about 1.2 million yuan (US$171,000) this month, which is far less than this time last year." he said, adding that between January and November in 2019 he exported goods worth a total of 50 million yuan (US$7.1 million).

Ding said the value of this month's exports would be around a quarter of what they were on average each month between January and November last year.

“The international epidemic is likely to have a new impact on our orders in the second and third quarters this year,” he said. “If the global epidemic lasts until June or longer, foreign buyers will become conservative and global demand will shrink.”

Ramping up production has proved more difficult than expected in some regions, said Peng Peng, executive chairman of the Guangdong Society of Reform, a think tank associated with the province’s government.

“So far, even in [the major manufacturing cities of] Guangzhou and Dongguan, local governments at the subdistrict level still have strict rules on migrant workers, requiring a 14-day mandatory quarantine,” he said, referring to the two-week timeout period required before employees could return to work.

“In addition, the cost of treatment for an infected worker can be up to 200,000 yuan (US$2,800), which firms are also required to pay. This cost is just unaffordable for small factory owners and it scares them.”

Tom Zhong, who runs a contract manufacturing businesses in Dongguan that makes parts for bags and suitcases for US and European brands, said he had originally estimated his factory would be back to normal this month, but has had to push his plans back.

“The only thing we need is orders – and our orders have fallen drastically since 2018,” he said. “Now we worry about the spread of the virus around the world and that orders for Olympic-related and tourism-related products will be gone. Orders from domestic brands will also decrease a lot.”

Large European and American firms are likely to postpone their 2020 procurement plans in response to the outbreak, said an independent observer that helped international companies monitor work at Chinese contract manufacturers.

“The epidemic is quickly developing beyond expectations around the world,” said the industry expert, who requested anonymity because the Guangdong government ordered him not to talk to foreign media. “Demand will definitely slow down and orders will definitely decrease.”

To avoid future risks and implement lessons learned from the epidemic, a growing number of overseas buyers will place orders with suppliers in at least two countries, he said. This may lead to a loss of orders among manufacturers in China with short production chains, such as those in clothing, shoes, toys, he added.

“In 2019, China’s exports of these traditional and labour-intensive goods were about US$800 billion,” he said. “If a quarter of them are relocated, it would already be a huge loss for Chinese exporters, especially [smaller firms] that employ a huge number of workers.”

While full production would soon be restored the bigger question for Chinese firms was just how far demand would sink, Peng said.

“In early January, we surveyed 275 SMEs in Guangdong – 176 manufacturing firms and 89 service firms – and found that 60 per cent of them were already on the verge of collapse and deeply in debt,” Peng said. “The epidemic has only made the situation worse.”


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