Coronavirus to test just how reliant the world is on Chinese manufacturers

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Manufacturing and logistics players reliant on China’s giant economy are braced for an incoming shock wave from the spread of the Wuhan coronavirus, which is set to test “just how reliant we have grown on Chinese manufacturers.”

The world’s second largest economy remains on lockdown, with factories in 14 provinces covering 70 percent of China’s gross domestic product and 80 percent of its exports ordered not to open until Monday at the earliest.

The virus has claimed over 420 lives, the vast majority in China, but has infected people throughout the region, with more than 25 countries having confirmed cases as of Tuesday. In an effort to contain the spread, authorities in the likes of the United States, Singapore and Vietnam have restricted air traffic to and from China, while the movement of Chinese people across borders is also being restricted.

“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 are skeptical as to whether manufacturing will resume as normal on Monday, given the virus is still spreading, albeit at a slower rate in recent days. Huge numbers of migrant workers are trapped in parts of China that are under an official lockdown covering more than 60 million people, while many others are in areas unofficially closed off by local officials.

“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 percent, 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.

All this means the optimism that followed the signing of a phase one U.S.-China trade deal barely three weeks ago already feels like a distant memory.

“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 fulfillment 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.”

A survey of businesses in the city released by the American Chamber of Commerce in Hong Kong on Tuesday found that more than 80 percent of companies had been affected to medium or great extent by the coronavirus prevention measures recommended by the Hong Kong government, with 87 percent having to adjust working practices for employees.

Factory operators in Southeast Asia reliant on Chinese-made materials and Chinese staff are unsure if they can obtain new components — a problem that will only get worse the longer the virus outbreak continues.

“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.

Vietnam, meanwhile, has been toasted as the “real winner” of the U.S.-China trade war since it inherited much of the production capacity leaving China so companies could avoid paying U.S. tariffs. But after the Vietnamese government put a ban on Chinese nationals entering the country last weekend, these producers face a new challenge.

“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.”

The US economy was buoyed overnight by positive manufacturing data, after the Institute for Supply Management’s purchasing managers’ index — a survey of American factory owners — rose by 3.1 percent to 50.9 percent. This was in contrast with Asian manufacturing surveys, which performed poorly in January — even though they were conducted before the coronavirus outbreak.

Nonetheless, there is some concern that even the U.S. 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. U.S. 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.”

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