Smaller companies are particularly vulnerable after coronavirus lockdown that has choked supplies
By Chuin-Wei Yap, February 10, 2020
As China shuts down swaths of the country to contain a fast-spreading virus, Fabien Gaussorgues is struggling to keep running a business that makes consumer electronics for small-business customers in North America.
The chief executive of Agilian Technology Co. isn’t sure if he can get enough of his 80-person staff back to restart his factory after the extended Lunar New Year holidays. Even if he does, he can’t get hold of quality controllers to certify his factories, and he can’t get shipments flown to customers because so many flights from China have been canceled.
“We have warned our customers that air shipments might be impossible in the next three months,” Mr. Gaussorgues said. “Suppliers can’t commit to anything at this time. This is the No. 1 danger. It might force us to stop production.”
Mr. Gaussorgues’s woes are emblematic of the problems facing companies as they try to restart operations following the lockdown caused by a coronavirus that emerged from Wuhan, which has infected more than 30,000 people and killed more than 600 in China. The country’s restrictions—which are beginning to be lifted—have choked supplies, restricted travel and limited the ability of employees to report to work.
The virus is the latest blow to businesses in the world’s largest manufacturing economy, which also has been hurt by a bruising trade war with the U.S. And while production disruptions are expected to affect companies of all sizes—including giants like Apple Inc. and Qualcomm
“Suddenly, an existential threat has come up, and many organizations are re-evaluating their supply chains,” said Renaud Anjoran, chief executive of Sofeast Ltd., a China-focused quality assurance and engineering firm. He said thousands of small and midsize Chinese factories may shut as a result of the production shocks.
“This will, unfortunately, have an impact on our production and delivery,” said Janice Wang, chief executive of New York-based Alvanon Inc., an adviser to retail and apparel makers including Under Armour Inc., with operations in Shanghai. “We anticipate a four-week delay on any physical goods that have already been paid.”
China extended its new-year holidays three days to Feb. 2, and kept most businesses shut thereafter to combat the outbreak. Many factories are scheduled to reopen Monday, although it is unclear how many can. Many workers can’t leave their hometowns, and employers still have to pay them. Factories that do open might have to operate with lower productivity because of labor shortage, new screening requirements and lack of parts.
German auto maker Volkswagen AG said Saturday that it is pushing back the date to resume production at some plants to Feb. 17, citing challenges in its supply chain and in securing factory workers as they face limited travel options.
“If several key suppliers suddenly close down, or are several months late in their shipments, it is a deadly threat to a business,” Mr. Anjoran said. “It is much worse than, for example, a 10% tariff, since they can survive that extra cost for some time.”
Inland deliveries face an additional four to five hours on each journey as 18-wheelers clog temperature checkpoints screening drivers and passengers on highways, according to DHL’s risk-analysis platform Resilience360.
Also affected have been shipments via air and water. Since the virus outbreak, more than a dozen countries have stopped flights to and from China, and ships have been held back from calling. Shippers including CMA CGM SA say they have canceled shipments to Chinese ports.
“We don’t know if trucks will be running, if couriers will be operating, if ships will be sailing, or what other transport disruptions there are likely to be,” said Terry Newman, general manager of a wood-flooring company in the eastern city of Huzhou.
Mr. Newman hasn’t been able to set a reopening date since closing shop just before the Lunar New Year. He is struggling to find enough face masks, now mandatory when in public in some Chinese cities and provinces, to cover two days’ use for his 25-person staff.
He also is trying to make sure his employees can get to work. One of his employees had to return from Huzhou to the employee’s hometown of Guizhou, after being forced to do so by local law enforcement eager to ensure everyone was accounted for because of epidemic management efforts, he said.
The coronavirus first hit businesses clustered in and around Wuhan, as car makers including Hyundai Motor Co. and industrial conglomerates such as Hitachi Ltd. suspended production. Then it amplified in the supply networks that crisscross the country.
Avnet Inc., a Phoenix-based provider of electronics components and services, has an office handling supplies in Wuhan, the epicenter of the outbreak. The company told employees in Wuhan to work from home. A spokeswoman said it “will source alternative products as needed. … The situation is fluid.”
Even before the coronavirus hit, China’s factories had been reeling from a prolonged trade war with the U.S. China’s economic expansion in 2019 was the slowest in nearly three decades, officials said last month. Trade, investment, consumer spending and business confidence are all down year-over-year.
China’s relentless integration with the global economy over the past two decades drove an 11-fold rise in its exports to $2.7 trillion in 2018 from 2000, compared with the world economy’s 2.6-fold expansion in the same period. As a result, the world is now more dependent than ever on China for key goods and services, increasing the virus’s impact on the global economy.
Agilian, based in Dongguan, in southern China, told its customers that production would be hit for at least February and very likely March too. Out of his staff of 80, Mr. Gaussorgues expects only 15 will be working next week, if the factory is allowed to reopen, and possibly 30 thereafter. The rest will be homebound by infection worries and policies.
“Our business continuity plan addressed risks such as fire, but not the lockdown of the entire country,” Mr. Gaussorgues said.
Mr. Gaussorgues said the combination of rising costs and increased risks of producing in China might cause him to consider leaving China.
“We could already feel pressure last year to relocate to another country,” he said. “We will certainly feel stronger pressure to do that in 2020.”