Coronavirus to test just how reliant the world is on Chinese manufacturers, with Asia braced for shock wave
- With regions of China accounting for 80 per cent of exports on lockdown, factories around Asia are being forced into looking for alternative supplies
- Workers trapped in China amid travel bans, while trade watchers as far afield as California wait for boats from China to stop arriving
Manufacturing and logistics players reliant on China's giant economy are braced for an incoming shock wave from the spread of the novel coronavirus, which is set to test “just how reliant we have grown on Chinese manufacturers”.
“Anything that limits the free movement of goods or people is bad for shipping,” said Tim Huxley, founder of the Hong Kong container freight shipper, Mandarin Shipping. “The expected demand decline in China is already being factored into prices of commodities and shipping rates. It’s very difficult to make any decisions while we’re still unclear about how long this is going to go on for.”
“Some entire factories may not reopen at all because their entire management and a good part of their operators are still blocked in Hubei province – and that is true of many factories,” said Renaud Anjoram, partner and CEO of manufacturing consultancy firm Sofeast.
Within mainland China, oil demand has dried up by 20 per cent, Bloomberg reported, amid a freeze in travel, while metal prices have plunged on consecutive days since markets reopened on Monday, a sign of expected weak demand in key industrial sectors.
“While production remained largely normal over the Lunar New Year period, logistical disruptions could mean that metal stocks are building at producers,” wrote Wenyu Yao, senior commodities specialist at ING in a note to clients. “We’ve heard that some alumina smelters are facing the risk of fuel gas shortages.”
Nick Bartlett, director at CBIP Logistics in Hong Kong, said that the company’s fulfilment services have ground to a virtual halt since Chinese trade has dried up so severely.
“Some services remain operating at partial and controlled levels, and in some cases, specific logistic providers have come to a halt until February 9 when another review of things will be taken,” Bartlett said. “This leaves most Chinese-based logistics companies working around limited operations ensuring the safety of its people.”
“Our components factories are all closed for another week – we do not know what’s going to happen, we have absolutely no idea,” said Larry Sloven, CEO of Capstone International, a lighting manufacturer that recently moved its production from China to Thailand, but which still imports many components from the mainland.
“We export raw materials from China to Vietnam,” said Steven Yang, a Chinese furniture maker who relocated his factory from Foshan in Guangdong province in to Vietnam last year to avoid the escalating tariffs and who spent the Lunar New Year in his hometown. “The logistics have barely been affected [yet] but the biggest problem for me now is that I am banned from re-entering Vietnam.”
Ernie Koh is faced with a similar conundrum. His company, Koda, makes furniture in Vietnam and Malaysia for export around the world.
However, many of the parts come from China, as do many of his management staff. Furthermore, he operates a retail franchise in China – meaning his business and supply chain is heavily exposed to the fallout from the coronavirus. Having decided to wait until after the Lunar New Year holiday to replenish stock from China, Koh is now running low on some inventory lines.
“We need to look for another source and diversify our supply chain,” he said, adding that he had been forced to write a note to Vietnamese staff members assuring them that Chinese workers that returned to the country before the border was closed would be quarantined, over fears that the coronavirus could be spread through factories.
“Some of our staff and middle-management in Vietnam are Chinese and they have not been able to come back after Lunar New Year. We have had to urgently reposition some of our management from Malaysia to make up for it.”
Aemulus, a Malaysia-based maker of semiconductor testing equipment, said that it too was looking at contingency plans for its China suppliers, including companies in South Korea and Taiwan, amid fears that the Chinese lockdown will continue.
“We, as well as our vendors definitely have concerns over the cases,” said Sang Beng Ng, Aemulus CEO. “The starting date that vendors were due to come back to work has been delayed and there could be further delays which it's hard to tell at this point.”
Nonetheless, there is some concern that even the US could be hit with collateral damage.
“Here, we're waiting for the boats from China to stop showing up once Chinese [dock workers] no longer have anything to load. US importers, who normally plan for factories in China to go dark during the annual New Year celebrations, certainly would not have expected those factories not to reopen promptly after the last [cheers] of the holiday,” said Jock O’Connell, Beacon Economics' international trade adviser and a veteran watcher of Californian trade.
“Those importers with taut supply chains should soon be seeing inventory shortages. If this situation persists, we will all eventually see just how reliant we have grown on Chinese manufacturers.”
Additional reporting by Harry Pearl and Cissy Zhou