The Coronavirus Is Wreaking Havoc on Supply Chains: What You Can Do About It

Yet again yesterday, the number of coronavirus cases and deaths reached a record number. In other words, the virus continues to spread ever faster and until it begins to slow down there is literally no end in sight. And yet, yesterday was also the day some Chinese factories were to open again for business.

In light of these two things, our China manufacturing lawyers are getting bombarded with the following questions regarding the interaction between the coronavirus and Chinese factory production, each of which we seek to answer below:

  1. My factory said it would open on February 10 but now they are saying that it will more likely be February 17. Can we rely on that? Unfortunately, no. We are hearing rumors that factories will not open in some cities until March. It seems China is picking dates based more on propping up its stock market than on when it believes it will be safe for people to return to work. Also, in many cities, factories cannot reopen unless and until they are given a specific okay to do so by the local government. You have probably read how at least one of Foxconn’s plants has not yet been authorized to reopen. If Foxconn is having trouble getting this approval, just imagine how difficult it will be for your factory. I hate to say this, but your factory will be open when it opens, but see question #2 for what that might mean.
  2. My factory insists it will be open on February 17, but when I ask them whether this means they will be back to their normal production schedule, they say they hope so but they do not know. Why are they saying this?  They are saying this because a huge portion of China’s factory workers are migrant workers and until your factory actually opens back up for production, it has no idea how many of their workers will show up. The media is saying that only around 10% of Foxconn employees have returned to its reopened factories (see here) and if with all its money and power that is all Foxconn can get, just imagine for a minute what sorts of worker numbers you can expect to see at your factory. It is not easy to travel within China right now and even if it were easy, what percent of factory workers will want to risk their health (their lives?) to travel to a low paying job where they live in dorm-like rooms with 4-25 other people and work in factories with thousands of other people? If you were that worker would you choose these risks over staying relatively safe in your hometown? Your factory is undoubtedly aware of these issues and that is why it is unwilling to commit to anything.
  3. But if my China factory’s workers come back does that mean all will be good? Absolutely not. Virtually all factories in China depend on more than just their own workers to function smoothly. They also depend on other company’s workers. We have a client whose factory in Dongguan depends heavily on a very expensive, very complicated piece of equipment made by a company in Wuhan. That piece of equipment often goes down and when it does no product can be made until someone from the equipment manufacturing company comes out and fixes it. This client is worried that the equipment manufacturing company’s repair people will not be able to go back to Dongguan and production (if it ever starts up) will quickly cease when this piece of equipment goes down. We have another client whose products demand a grinder made of a special material and the Chinese company that makes that grinder is saying it will not be open again until March 1 “at the earliest” and our client’s factory in China does not have enough of these grinders to last until then. We have another client whose product has 44 component parts, made by 30+ factories, most in China. If its main China factory opens and operates, what are the odds the 30+ Chinese factories that make the product components will open and operate as well? Not very high.
  4. But if my factory opens and most of my factory’s workers make it to work, and the Chinese factories that make my product’s component parts open as well, and most of those factories’ workers make it in to work as well and there are no issues with the equipment, I’m golden right? Not necessarily. There is also the issue of getting foreign component parts into China and to your factory and that will be difficult, maybe impossible. You’ve been reading the news so you know that most airlines have stopped flying to China. Well, many shipping lines have stopped going there as well. And why would you think that China’s ports and interior transportation system is operating at 100% anyway? We are hearing that even with the greatly decreased incoming traffic, China’s ports are falling behind due to lack of manpower and so they will probably be delayed. But even if your parts get into a port and are unloaded there, they will still need to be loaded onto a truck and/or a train and/or an airplane and taken to your factory, and with so few people back to work and so much of China’s transportation network just not operating, that will probably severely delay things as well.
  5. Well, at least I can count on my products from Vietnam getting to me on time, right. I’m glad I listened to you urging us to diversify? I wish that were true but nearly half of the component parts to your products made in Vietnam come from China. That means all of what I list out above will apply to those products  as well — or at least to all of the Chinese-made components of those products. But on top of that, there is the likelihood that the Chinese component parts will never make it to Vietnam because Vietnam — like so many other countries in Asia and around the world — is doing just about whatever it can to try to block off anything from China so as to try to block off the coronavirus.
  6. But if I get jump over all of the hurdles above, at least you have to admit then that all will be good for me, right? Not exactly. Even if you and your factory jump over all of the above hurdles for your product, there is a good chance your chance your China factory will be in horrible economic straits due to first from the US-China trade war and then from being closed for the last few weeks while stil having to pay its workers. Economically weakened Chinese factories are dangerous. I know this from every past economic downturn and you need to know this as well and act accordingly. Even before the coronavirus our firm had been seeing a massive uptick in China factory problems largely resulting from the pessimism rampant in China’s manufacturing sector caused by so many foreign companies moving their manufacturing out of China  or looking to do so. Even before the coronavirus hit, we were seeing countless Chinese factories acting in ways that indicated they no longer viewed their foreign buyers as long term customers. Practically every week for the last year one of our China lawyers has gotten an email or a phone call from someone who bought product from China and received nothing in return or nothing even approaching what they actually ordered. This sending of “junk” instead of real product has spread to just about every industry in China and ordering your products from allegedly reputable online sites provides little to no protection.
  7. So what then should I do now to increase the odds that my payments for product from my Chinese factory will go to a company that actually plans to make and deliver my products and has the capability to actually do so? On behalf of our clients, our people in China regularly visit factories, conduct inspections, and maintain relationships with the most important people of all — Chinese factory managers. This is more than just basic due diligence. It’s about satisfying the important cultural expectation that foreigners befriend their factory manager. Few foreigners get this right. When we send one of our Chinese-speaking consultants into the field, the Chinese factory managers are virtually always happy to see them and with all that has gone on lately that will be truer than ever. Their visits are prestigious events during which the manager is shown “face” and given an opportunity to show hospitality. It’s a big deal when a Chinese-speaking foreigner bothers to come to one of the small towns where a factory is usually located. When handled correctly, these visits motivate Chinese factory managers to prioritize their new friend’s supply chain and send the “junk” elsewhere. This strategy works well in normal times — it saves our clients time and money. But as Chinese factories slowly re-open and need to allocate limited resources among a bunch of outstanding orders and demanding, worried customers, just by showing up, this can show that you care and are not frightened to work in and with China. This kind of support is not easily forgotten by factory managers on the front line and their payback is a greatly increasing your chance of timely getting the product you ordered and paid for. At worst, these visits can reveal that you need to find another manufacturer and fast. And if even this is impossible, you can always video in.

What are you seeing out there?

UPDATE: We are hearing of tensions in China between local governments that do not want factories to open for fear of spreading the virus and the CCP that is choosing to priotize profits by ordering these local governments to stand down. Not clear who will prevail.

2-14-2020 UPDATE:  This CNBC article says China’s textile factories are operating at less than 10 percent capacity right now.