China struggles to revive manufacturing amid a virus outbreak

In smartphones, an industry that relies on China to assemble almost all of its phones, some component suppliers say production is as low as 10% of normal levels, according to Nicole Peng of Canalys, a research firm.

“The bad news is that there will be more impact, and the impact is worse than many people initially expected,” Peng said.

Travel companies and retailers that need Chinese customers have been the most affected by the partial closure of the second largest economy. But brands like Apple Inc. say it is beginning to interrupt its supplies. Analysts warn that the longer the interruption lasts, the more damage will be extended to larger industries and other economies.

World brands have used low-cost Chinese labor to assemble products for three decades. Now, they increasingly rely on China to supply cars, computers and other components. Interruptions can make this country a bottleneck, drowning its sales.

The most optimistic forecasts require the virus to be under control in March, which will allow manufacturing to recover. The bleak prospects say the outbreak could last until mid-May or later. Or, as the World Health Organization warned this week, authorities may not stop its global spread.

Car manufacturers and other factories are reopening, but analysts say they will not restore normal production until at least mid-March.

“If work at the factory does not increase in the coming weeks, a worldwide shortage of parts is likely,” said Taimur Baig and Samuel Tse of DBS in a report.

There is still no evidence of an impact on consumers abroad, but retailers are beginning to warn that some products may be late or unavailable.

China is also a major supplier of chemicals for the global pharmaceutical industry. The outbreak has caused concern that supplies may be disrupted, but there is no evidence that drug production has been affected.

President Xi Jinping has put his personal authority behind the revival of the industry.

Beijing promises tax cuts, although economists say financial aid will have a limited impact when disease controls are still in force and keep workers away from factories and interrupt the movement of goods.

On Sunday, Xi said “low-risk areas” should change disease control measures to completely restore production, while high-risk areas focus on fighting the epidemic, according to the official Xinhua news agency.

Manufacturers face a shortage of workers after millions of people who visited their Christmas cities for the Lunar New Year holiday were stranded there by the suspension of plane, train and bus services.

Officials must “unlock the transport channels,” Xinhua said, citing Xi.

The Yiwu government, a southeastern city known for its thousands of suppliers of buttons, doorknobs and other components to export to manufacturers, says it organized airplanes and trains to help its employees return to work.

China accounts for approximately a quarter of global manufacturing when measured by the added value in its factories. But it is the final meeting point for more than 80% of the world’s smartphones, more than half of televisions and a large portion of other consumer goods.

Apple, which has most of its iPhones and other products assembled by contractors in China, shook the stock markets when it warned on February 17 that revenues would be affected due to supply disruptions.

“We would certainly expect to see more news like that,” said Simon Weston of AXA Investment Managers in Hong Kong.

According to Kaho Yu of Verisk Maplecroft, a consulting firm, other global companies that need Chinese plastics, chemicals, steel and high-tech components also “face reduced production.” Yu said it is likely to last until the quarter ending in September.

The United States Chamber of Commerce in Shanghai said last week that half of the 109 companies that responded to a survey reported that their global operations are already affected. He said 78% reported that they lacked sufficient staff to operate the production lines.

Some companies, including Ralph Lauren Corp., were already moving from China due to rising costs and increased U.S. tariffs. UU. But many still depend on China for components or some manufacturing stages.

Samsung is “feeling the heat” because it moved the smartphone assembly to Vietnam, but it needs experienced Chinese managers to manage those factories, Peng said. She said they visited China for the Lunar New Year and cannot return to their jobs.

Other companies, including global car manufacturers that are increasingly dependent on the Chinese market, are restarting production, but say the pace depends on whether they can get components.

China accounts for approximately a quarter of global car production and, according to UBS, provides 8% of global exports of car components. Many use manufacturing “just in time”, delivering components when necessary. These factories have limited reserves to overcome interruptions.

Volkswagen, the country’s best-selling car brand, said Monday that its challenges include “a slow national supply chain and logistics acceleration.”

In China, factory production in the export-oriented coastal provinces is again above 70% of normal levels, according to Cong Liang, general secretary of the cabinet planning agency, the National Development and Reform Commission.

“Companies are working overtime,” Cong said at a press conference. He insisted that the impact of the epidemic is “short term and generally controllable.”

Private sector forecasters are less optimistic.

Economic activity is “likely that 45% will return to normal,” said a report by Citigroup.

Coal consumption, a way of measuring industrial activity, is 60% of the average level in the same period during 2017-19, according to UBS. He said real estate sales are 10% of normal.

Haier Group, one of the largest home appliance manufacturers in the world, said its suppliers have returned to about 80% of normal production. The company said its own factories will operate normally at the end of February.

Some smaller companies that lack the resources of global industrial giants but may be the only source of a critical component are struggling to reopen.

In the southern city of Shenzhen, a computer monitor manufacturer is closed because some of its managers are in Hubei and cannot return to work, according to Global Sources, a company that links buyers with Chinese suppliers.

Other manufacturers are looking for alternative suppliers, but they say that foreign sources cannot match Chinese prices or service, according to Global Sources.

Copyright 2020 The Associated Press. All rights reserved. This material may not be published, transmitted, rewritten or redistributed without permission.


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