Investment & Finance

China's factories restart just as coronavirus hits global demand

Nikkei
Domestic operations resume but foreign clients are in hot water

The worst of the coronavirus seems to have passed in China, but it is now wreaking havoc in key overseas markets.   © AP

The worst of the coronavirus seems to have passed in China, but it is now wreaking havoc in key overseas markets. © AP

Just a month ago, Danny Lau was concerned that he might miss the deadline for deliveries to a U.S. client, as he was unable to reopen his aluminum facade panel factory in the southern Chinese city of Dongguan due to the coronavirus outbreak then ravaging the country.

Now that 80% of his employees have returned to work, Lau's concern is that he might not receive enough orders to sustain the payroll.

It is a dilemma facing many businesses in China: Just as the worst of the coronavirus passed at home, and Beijing pressed companies to resume operations, the virus is wreaking havoc in key overseas markets.

In Lau's case, his company exports 40% of its products to the U.S., where infections jumped 10-fold from a week ago to more than 32,000 as of Sunday and business is increasingly coming to a halt.

"The world economy will be affected in the long run, and that will affect orders for construction materials," Lau said, adding that he expects a slowdown in government projects and property developments around the world in the coming months.

Lau said he has not secured any new orders since reopening his factory in late February.

The official narrative is that Asia's biggest economy is getting back to business as usual. But with companies like Lau's struggling to find customers, the outlook may not be as rosy as Beijing would like to believe.

"We are making a large downward revision to our forecast for real GDP growth in China in 2020 to 2.1%, from 5.4% previously, after factoring in a longer period of economic disruption and weaker global demand due to the international spread of the virus," said Wang Dan, a Beijing-based analyst with the Economist Intelligence Unit.

China exported 17.23 trillion yuan of goods and services in 2019, accounting for 17.4% of nation's gross domestic product. But all of its four top markets - the European Union, the U.S., Southeast Asian and Japan -- are now struggling to contain the spread of coronavirus themselves, with some areas placed under complete lock-down.

And while Wang believes that generous government subsidies can give China's domestic consumption and related companies a boost, such policies will offer little relief for export-oriented enterprises.

"It's a demand side problem. Tax cuts and subsidies do not help if companies are not getting orders," Wong said, adding that their situation will only truly improve once the virus outbreak is contained outside China. "Even June would be a very optimistic estimate," she said.

Some of her clients making electric devices are now asking workers not to come back to work, she said.

Richard Chan, who owns a factory making Christmas decorations in the eastern city of Dongguan, said he will have to let go 20-30% of his workers this year due to a drop in demand. "Almost everyone is cutting the size of orders," the Hong Kong businessman said.

His regular clients, including British supermarket chain Tesco and retailer Marks & Spencer, ordered fewer holiday decorations to make room for more daily medical supplies. Retailers and supermarkets in Italy, which has the highest coronavirus death toll worldwide, did not place any orders with him this year, he said.

Chan has secured a permit from the local government that allows 30 of his 200 or so workers to work in the factory, but said he is hesitating to request more permits given the weak demand. "I'll play it by ear," he said.

There are also logistics issues as the worst of the coronavirus outbreak moves beyond China.

"We were relieved after being allowed to restart operations on Feb. 13," said Chen Zhijian of Yige Trading in Guangzhou, referring to production of baby products and other goods. "But the first shipment has gotten stuck in a Malaysian port," he said.

And hanging over factory owners is the fear that the coronavirus could flare up again.

"I don't even dare to think about the consequence [of a relapse]," said Ye Zhenqing, founder and CEO of Zhen Qing Eyewear in Wenzhou, one of the worst hit Chinese cities during the outbreak. Ye, who has been in the export business for 20 years, said all his orders from European clients have either been delayed or cancelled.

While business owners wrestle with these and other headaches, Beijing insists things are going smoothly. It claims a nationwide work resumption rate of more than 90% as of mid-March for companies with annual revenue of over 20 million yuan, excluding those in Hubei Province, the epicenter of the coronavirus outbreak. central and local governments have also rolled out a series of incentives, including offering low-interest loans and deferring social insurance fees, to help companies restart production.

In a late February conference in Beijing, Chinese President Xi Jinping urged all levels of the government to make "unremitting efforts" to resume work and production in an orderly manner, while also controlling the disease.

The government's desire to present a narrative of triumph over the coronavirus has even led some local companies and officials to falsify data to meet targets.

According to a Caixin report early this month, factories in a district in the eastern Chinese city of Hangzhou were instructed to leave equipment running idle for the entire day, while offices were told to keep lights, computers and air conditionings on. The move was an attempt to boost electricity consumption, which is regularly used as a metric for evaluating the back-to-business rate.

Rushing to restart operations, moreover, can bring risks.

Tesla, the U.S. electric vehicle makers, was held up as an "exemplary company" by State Council officials for continuing to operate its Shanghai Gigafactory while implementing effective disease control measures. The $2 billion factory restarted work on Feb. 10, one of the earliest in the nation. 

Tesla was one of the earliest companies to resume production in China, but the U.S. car maker stumbled over supply chain disruption.    © Reuters

Early this month, however, Tesla faced a huge backlash after Chinese buyers discovered their newly delivered Model 3 cars were equipped with a lower version auto-pilot control chip instead of the newest one promised by the company. The EV maker blamed supply chain disruptions caused by the coronavirus outbreak for the inconsistency, but angry customers are threatening to take Tesla to court.

As the situation in overseas markets grows more grim, China's business owners are having to adapt to survive.

For Ye, the sunglass maker, this means reorienting exports to domestic sales. Half of his roughly 100 workers had returned to the plant as of late March, and he is under pressure to replace his lost European orders.

"I am now learning how to use Tik Tok to sell our sunglasses," Ye said, referring to the ByteDance-operated video platform. He admitted that this is a "completely different business" for him. First, he must change the design of his sunglasses to suit Asian faces, and then he needs to bring down production costs, as Chinese consumers as a whole have less buying power than Western costumers.

But what worries him the most is the uncertainties.

"I don't know if the sunglasses will sell in China," he said. As an exporter, Ye said, he knew the demand before he started production. Now he can only produce first and hope the customers will buy later.

He is not the only one wrestling with uncertainty.

An executive from a key supplier to Apple and Google told the Nikkei Asia Review that they are ramping up production to meet the spike in demand for online learning and work-from-home devices, but he does not expect it to last.

"The situation is very fluid. It's uncertain how the demand will look like for the future," the executive said.

"All we can do is think about now, not do anything about the future."

Nikkei

Các tin, bài viết khác