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Virus Scare: China Goes Into Pause Mode, Suppliers Remain Stoic

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by Sakthi Prasad , Director - Content
23 February 2020

In collaboration with Shobana J and Jason Zhong

In the past decade, global corporations have thrice suffered shocks to their Asian supply chains. In 2011, they were hit in succession by the Japan Tsunami and Thailand flood, which disrupted the production of global firms. This year, the supply chains have been shaken by the mysterious Coronavirus, officially known as Covid-19.

Public health officials around the world have been scrambling to understand, track, and contain Covid-19 since its onset in Wuhan, China, in December 2019. It has caused the deaths of more than 2,000 people, mainly in the Hubei province.

The situation in China is grim and unpredictable. Even renowned epidemiologists have expressed uncertainty about when the infection rate will be brought under control. However, the silver lining is the rate of infection is slowing down over the past few days or so.

The big question revolves around determining the ground situation in the middle kingdom -- the manufacturing powerhouse of the world. The ground reports show that China has gone into a pause mode to contain the outbreak.

“Many companies are yet to resume work. Some cities are under lockdown, barring the entry and exit of citizens. As a result, many factories had to stop operations. In addition, the World Health Organization (WHO) designated the outbreak a public health emergency of international concern (PHEIC), making people suspicious of Chinese products.

However, China is making vigorous efforts to turn the situation. It is believed that the outbreak will end in a month or two and the situation will soon recover. The supply levels will also return to normal. Although this outbreak had some impact, I believe that it is only temporary,” Beroe’s China representative, Jason Zhong, said.

Chinese companies are struggling to resume operations, with many workers unable to reach factories or offices. Thus far, as per the numbers tracked by Beroe, the China Council for the Promotion of International Trade (CCPIT) has issued nearly 1,600 force majeure certificates to companies spread over 30 sectors, covering a total contract value of 109.9 billion yuan ($15.7 billion). The CCPIT's force majeure certificates are recognized by governments, customs, trade associations, and enterprises across more than 200 countries.

According to a special briefing issued by the business research firm Dun & Bradstreet (D&B), at least 51,000 companies worldwide—which includes 163 Fortune 1000 companies—have one or more direct or “tier 1” suppliers in the impacted region, and at least 5 million—which includes 938 Fortune 1000 companies—have one or more “tier 2″ suppliers.

The fear of the contagion is so high that China’s central bank has mandated that yuan bills coming into the banking system from hard-hit provinces should first be disinfected by ultra-violet light or high temperature. The disinfected bills would then need to be stored for more than 14 days before being allowed to re-enter the market. 

“We aim to ensure the safety and hygiene of cash for people’s use,” the China’s central bank said.

Chinese Suppliers: Ground Report

Small and medium-sized manufacturers (SMEs) in China, especially labor-intensive firms, have expressed concerns over the economic impact of the coronavirus outbreak. Among them, many are worried about closure in the case of a failure to bring the situation under control expeditiously.

Also, with production coming to a grinding halt, salary payments in subsequent months can become a challenge for many SMEs.

Only about 18 percent of roughly 1,000 small and medium-sized companies surveyed by academics from Tsinghua University and Peking University said they could survive for three months with the cash they have. And a third of them said they could survive only for a month on current cash flow, according to Reuters News.

Over the past week, Beroe had contacted over 100 Chinese suppliers, including nearly 30 in the hard-hit Hubei province. Many were not willing to comment on the ground reality but several of them provided us a snapshot of the prevailing business situation.

A Shanghai-based supplier told Beroe about the apparent impact of the Covid-19 epidemic on the economy, especially on several SMEs, which cannot be ignored.

In China, micro, small and medium enterprises (MSMEs) represent a fundamental part of the economy, accounting for 80 percent of the urban employment, 60 percent of the GDP, and 50 percent of the tax income, according to an estimate by the Organisation for Economic Co-operation and Development (OECD).

Hence, SMEs cannot be considered as isolated and independent units responsible to produce the whole product. They also manage one or several production links in the value chain. If they fail, then the domino effect will ricochet across global supply chains, given the country’s importance to the world economy.

Given below is a compilation of responses from Chinese suppliers. Beroe has not named any supplier considering the sensitivity of the situation prevailing in China.

  • When questioned about the production and logistics disruption, a manufacturer of SF and C4F8 gases and liquid ammonia, based in the hard-hit city of Wuhan, said that things are under control and that people trust the government to defeat the virus. The spokesperson ended our exchange by saying, “Sorry, that is the only answer I can provide.”

  • An apparel manufacturer in Wuhan told that the company is not in a position to maintain its deadline for product delivery in February.

    “We are based in the Hubei province, the center of the outbreak. We will resume business later than other provinces—after Feb. 20, 2020. Most of our workers are local, and they can return to work as and when we resume production,” a representative said.

  • A pellet supplier based in the Shandong province confirmed that it received a “guideline” from the government to work quickly toward resuming business operations.

    The company representative said that, owing to the virus outbreak, the company had delayed resuming operations by a week post the extended Lunar New Year break. However, 95 percent workers reported to work. The remaining 5 percent were absent because of “different reasons”; the company did not elaborate on the reasons behind absenteeism.

    The representative said that they have been assuring customers of supply continuity via emails. The representative added, “If they have any request, they can ask us any time as we are online round the clock.”

  • Another pellet supplier in the Shandong province confirmed that the situation is not as bad as the Hubei province, whose capital city Wuhan is the epicenter of the virus outbreak.

    “The situation in Wuhan is a little serious. We have enough material in our warehouse,” the company representative told Beroe. The representative also said that worker attendance was not impacted post the extended Lunar New Year break. “All workers resumed work on Feb. 10, and the production has been continuous.”

  • An exporter of charcoal making machines, such as wood crusher, dryer machine, briquettes machine, and carbonization furnace, said that the situation in the Henan province is thus far ok and not facing serious issues.

  • A manufacturer of stainless-steel paddle mixer based in the eastern-central coastal province of Jiangsu said that their province is not facing a lockdown-type situation and they have been open for business.

  • A Shanghai-based supplier of calcium carbonate told that the company has not yet resumed production, and is making preparations to resume operations.

    The supplier also said that they “attach great importance to epidemic prevention.” The company is conducting health checks and is in the middle of registering and isolating workers who are returning from other provinces.

    For now, the company has barred group dining in canteen, temporarily cancelled or reduced the number of people participating in group activities, and reduced business travel as much as possible.

  • A maker of health and beauty care products based in the Guangdong province told that its operations were affected due to a lack of components and shortage of workers on account of the Coronavirus outbreak. Most of the out-of-town employees are yet to return to work. The spokesperson said that the company has explained the reason behind delivery delays to their customers.

Waiting for the Spring to Bloom

Despite the gloominess, many suppliers interviewed by Beroe expressed hope that the war against the virus will be won eventually.

“For the past few weeks, most tourist sites, restaurants, and shopping centers have remained closed. Surely, the services industry has been hit hard. However, we are confident that after normalcy is restored, the services sector along with other industries will also revive,” a representative of a Wuhan-based apparel manufacturer told Beroe.

As per a representative of a supplier based in the Guangdong province, “The economy will certainly suffer a lot in the first half of the year, but we believe that it will recover quickly in the second half. We believe that the epidemic will be controlled and eradicated eventually.”

“This sudden epidemic situation has resulted in unprecedented difficulties. But no matter how difficult it is, we have to clench our teeth and get through it even if we suffer a lot. I believe this difficulty is only temporary. What we need to do is: believe in the country, protect ourselves, and wait for the spring to bloom,” a representative for Shanghai-based maker of calcium carbonate told Beroe.

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