Supply runs dry

As China catches pneumonia, the world coughs


iPhone production in limbo

Much has been said about ‘Made in China’ goods in recent years but the world is now finding out what happens when the world’s biggest factories go into deep-freeze, thanks to the Covid-19 virus.

Workers were supposed to be returning to work in China as of Monday after the government extended the public holiday for the Year of the Rat by an extra seven days, as well as commanding companies across 17 cities and provinces to stop operations until February 9.

Yet for millions of migrant workers trying to get back from their hometowns hasn’t been an easy task. Even if they can get tickets for trains and buses, they must navigate a series of medical protocols and quarantine cordons on their journeys. “It’s like Europe in medieval times, where each city has its checks and crosschecks,” Jörg Wuttke, the president of the European Chamber of Commerce in China, told the New York Times this week.

That has helped to create situations like the one at Foxconn’s massive assembly plant in Zhengzhou, where only 10% of the workforce was reported to be available for duty as the week began. Analysts were soon predicting a supply shortage for Apple, Foxconn’s biggest client.

Companies have been struggling to get formal approvals to restart work because local officials fear for their jobs if they aren’t being seen to stop the virus from spreading. Firms are being made to sterilize their workplaces and show that they have epidemic controls in place. That’s sensible but there doesn’t seem to be a standardised approach to how this should be implemented, leading to confusion in Shenzhen last weekend when officials were said to have told Foxconn that another of its assembly plants had to stay shut because of the risks of infection.

Foxconn put out a partial denial the following day, although the statement noted that employee safety was its top priority and that it would only restart production once inspections were completed.

Commentators generally agree that the impact on international trade is going to be greater than during the SARS outbreak in 2003 because supply chains are much more globalised and China now has a more central role as an engine of global growth. That means that it’s not just consumers that won’t be getting some of their goods in the typical way. Companies around the world face a more immediate crisis because they aren’t getting the parts and components they normally receive from China.

Firms that run the leanest operations from ‘just in time’ inventory are more at risk, points out Herald van der Linde, Asian head of equity strategy for HSBC, who published a research piece on the impact of the virus outbreak on Asia’s supply chains earlier this week.

The car industry is particularly exposed because Hubei accounts for about 9% of China’s automotive sector, including many components that are exported overseas. That was apparent last Friday when South Korea’s Hyundai Motor and Kia Motors suspended production at all their plants due to a lack of auto parts from China-based suppliers. A few days later there was a partial resumption but only because of plans to import substitute parts from companies in Southeast Asia.

How straightforward is it to source alternative suppliers? Obviously it’s easier to sign a new contract with a textile factory than to set up a supply chain in semiconductor parts. Looking at the data on US imports from 238 countries, van der Linde also points to industries where the Chinese are the dominant producers, making it more of a challenge to find alternative partners. Buyers of goods like toys, cutlery, tools and mobile phones are going to have more of a problem but other industries should find it a little easier to find substitute producers (tyres from Korea and Thailand, for example, or food oils and rubber from Indonesia).

A final question is whether the disruption might have a longer-term impact on China’s position in the global supply chain. Van der Linde says it’s too early to tell, although industries where China’s share of global exports was already showing signs of decline are more at risk. In that context, some of China’s market share of items such as plywood, camping gear, furniture, footwear and apparel could be lost more permanently, he thinks.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.