Coronavirus disruptions - a problem for all enterprises big and small
COVID-2019, the coronavirus that emerged late 2019, has been affecting the world in many ways. Tens of thousands are falling ill, with over 75,000 cases and more than 2,100 deaths to date. There are massive quarantines in place, some estimates put the figure as high as 10% of the world’s population.
Small and large businesses have been affected from both manufacturing and supply chain aspects. Factories are closing down and there has been limited production since the Chinese New Year break has ended. All of this leads to a hindered global economy.
The garment industry has taken a large hit. China is the world’s largest cotton producer. Companies outside of China rely on these suppliers and manufacturers to conduct their business. Some companies send over raw materials for Chinese factories to work with, returning a finished product. Other companies need just one part from China (like a zipper) and are halted on completing their goods. These factory limitations and shutdowns are beginning to affect economies, including the Canadian economy. The companies that need small components manufactured by China are unable to make it to the shelves; all of this is starting to disrupt the global supply chains.
Major corporations are experiencing losses - big players like Apple have decreased revenue. They are restrained in production capabilities and combining that with a drop in Chinese spending due to the coronavirus means considerable setbacks for companies. Jaguar/Land Rover is missing car parts made in China, which affects their British manufacturing facilities. General Motors and Nissan are unable to get enough parts to keep up with vehicle production lines. Nintendo cannot make enough Nintendo Switches.
Small companies are taking some of the hardest hits. What seems to be a minor setback a larger corporation is something that can cease a smaller one’s operations. Take for example, Roger Gingerich's fashion brokerage, Maholi Inc:
...While the garments are sewn in Toronto, the small metal logo for their down jackets is manufactured in China. Without that final piece, they have finished jackets that are unable to make it to the shelves for purchase.
Coronavirus just beginning to hurt Canadian economy, experts say
For some companies, not having their eggs all in one basket proved to be beneficial in this unexpected crisis. CEO Anne Harper of OMG Accessories stated in an interview with CNBC:
I am in a better situation than many Amazon third-party sellers in that I source products from many places besides China, including the U.S., U.K., Germany, India, Israel and more. If I had only products from China, I would be in a much more precarious situation.
The coronavirus means tense times ahead
Harper’s diversification of manufacturers allows her to continue operations despite the factory setbacks in China.
Knowing if and when to diversify your vendors and manufacturers is valuable to your business’s viability.
At a level localized to the Chinese mainland, quarantines and altered paths on shipping routes have reduced the rate of shipping drastically. This is in turn causing shipping rates to increase. Generally, Chinese factories are also operating below capacity. Even though some factories have opened back up, there are not enough workers to bring production back up to speed.
One survey of U.S. companies, 75% of their Chinese factories were short on workers
Many believe that we have yet to scratch the surface on the economic impact. Losses could double those of the 2003 SARS outbreak. (For a more in-depth comparison between the COVID-2019 epidemic and how it differs from SARS-2003, please visit our previous opinion piece: SARS-2003 vs COVID-2019: Why it's different this time and the effects on the world economy).
Currently, the majority of these losses are estimated from the highly impacted service industry including hotels, restaurants, entertainment, and travel services. However, the true losses are yet to be seen - people on the mainland are not going out to buy things and there are and will continue to be fewer and fewer items available to purchase as the quarantine drags on. Many small Chinese businesses are expected to shut down as the virus spreads. Shopping centres are becoming ghost towns, and online shopping is increasing to fill the gaps. There are banks lending financial support, but it will not be enough for everyone:
A survey of small- and medium-sized Chinese companies conducted this month showed that a third of respondents only had enough cash to cover fixed expenses for a month, with another third running out within two months. Only 30% of such firms have managed to resume operations due to a complicated local government approval procedure as well as a lack of employees and financing, a government official said at a press conference on Monday.
A 92 per cent drop in car sales in China in the first half of February demonstrates the growing severity of the epidemic. China’s automobile sector will see about a 10% drop in sales for the first two quarters with 5% estimated for the whole year.
Early on Monday morning, President Xi Jinping issued a statement regarding the supply chain disruptions. Xi acknowledges that this outbreak will affect the Chinese economy, but it will try to be quick to bounce back, and the government reforms on development and poverty will continue as planned. At the same time, he believes that the global peak of the outbreak is yet to be seen which is scary in and of itself.
If things do not turn around quickly, a lot of companies will go out of business or at the very least, be left having to resource parts from other locations.
Is resourcing even a possibility in all cases?
Statistics Canada’s imports data for 2019 provides some insight into which countries you might think about extending your manufacturing reach towards. For example, analyzing the value of electronics being imported to Canada puts China far ahead in the number one spot with $2, 278 M and the U.S. and Mexico almost tied with $873 M and $854 M, respectively. It is likely that the automotive industry drives most of this demand, but based on these figures, it would seem there's a significant population of electronics contract manufacturers based in Mexico making this a worthy option to explore.
All of this may seem overwhelming, but it is important to keep the situation in context and always be planning for the future. Envest can help evaluate your company and its supply chain and logistics needs. We assess everyone on a case-by-base basis. Is it most cost-effective for you to stay in China? Or are you able to branch out to other countries? We can determine which path is right for you and your business.
We’d love to help you review, troubleshoot, and operationalize a plan to improve your supply chain and manufacturing needs. Contact us today to find out more.