As Coronavirus Slows in China, Factories Are Coming Back Online

Too early to gauge extent of disruption to manufacturing

factory floor
Chinese factories are beginning to come back online this week after being shuttered since about the middle of January. Getty Images
Headshot of Richard Collings

Major financial indices suffered significant declines on Monday, with the Dow Jones Industrial Average tumbling more than 1,000 points by the close of trading due to reports of new coronavirus outbreaks outside China in Italy, Iran and South Korea.

“We remain concerned about the increasing signs of transmission outside China, and we are calling on all countries to invest urgently in preparedness for the arrival of cases, and to prioritize the protection of health workers [and] individuals at risk, and to communicate better the risks of transmission to their people,” a spokesperson for the World Health Organization (WHO) said.

“The window of opportunity is narrowing,” the spokesperson added, explaining that it is impossible to predict the spread of coronavirus as it a new pathogen with many unknown properties.

In China, however, the spread of the disease is slowing, according to the WHO, even though the virus may not be contained globally. After a joint mission between the WHO and China concluded earlier on Monday, the investigators issued a report that stated the epidemic in the country had peaked, then plateaued, between Jan. 23 and Feb. 2, and has since steadily declined. The team found no significant change in the DNA of the virus, the WHO said in a statement.

As of Monday morning, China reported 77,362 cases of coronavirus and 2,628 deaths, the WHO also said. During the prior 24-hour period China said it had 416 new confirmed cases and 150 deaths. Thus far the fatality rate in Wuhan, which is the capital of the Hubei province in China and the epicenter of the outbreak, is between 2% and 4%, while outside the city the rate is 0.7%.

Meanwhile, factories are beginning to come back online this week (at least those north of Shanghai) after being shuttered since the middle of January for the Chinese New Year, according to a source who directly works with Chinese manufacturers and requested anonymity, In prior years, factories, on average, would typically have been in operation for about two weeks by this point, the source said.

Even so, manufacturing facilities take about three to four weeks to become fully operational after being closed, according to Suketu Gandhi, a partner and digital supply chain expert at management consulting firm Kearney. And there may also be difficulty convincing employees to return to work because they are fearful of exposure to coronavirus, according to Andrea Weiss, CEO of retail consulting network The O Alliance, which would add a new snag in getting factories up and running.

Many companies have implemented solutions to a slowdown in production and deliveries, Weiss said. But if workers don’t return to the factories for another one to two months, that would present a challenge that was previously unanticipated, and more difficult to solve.

In addition, there are further slowdowns in both shipping and production at this stage because of extensive inspections and regulatory compliance aimed at stopping the spread of the disease, the manufacturing source noted. There are also delays in ground transportation across China, from roads to railways, which are halting the flow of goods and services, said Gandhi. The Chinese government, for example, has set up multiple checkpoints at which armed guards check travelers’ temperatures, looking for signs of possible infection. In some cases these checkpoints more than double the amount of time it takes to get from one point to another, the manufacturing source said.

But at this point it’s too early to say to what extent the production of goods will be crimped, the source said, as the government is willing to pay workers overtime to make up for the loss in manufacturing in prior weeks. In addition, U.S. businesses were also proactive in terms of orders due to the trade war and the possibility of tariffs, which in combination with the run-up to the Chinese New Year mitigated the potential impact of a slowdown in manufacturing, Gandhi explained.

Among the goods affected are footwear and accessories, and even more importantly raw materials and components, both Gandhi and the manufacturing source said. Apparel manufacturers in places such as Vietnam, Cambodia, the Philippines and Indonesia rely on materials from China ranging from denim, silk and rubber to buttons, thread and lace, the source explained.

Other categories affected include toys and perhaps even automotive parts, Weiss said, though she was less concerned about components because there are larger amounts of the materials held in storage outside of China.

Retailers may also have the option of receiving a discount or penalty fee on the goods, even if delivered a day or two late, the manufacturing source said. While such fees are negotiable, they can still be enforced, the source added. Ultimately, Chinese manufacturers hope that retailers choose not to put their suppliers out of business.

However, there is a clause that in most situations allows for extraordinary circumstances, Gandhi said, which would apply in this case. Weiss concurred that such clauses exist, and added that some companies are also insured against potential losses in these kinds of situations. Retailers and suppliers have a collaborative relationship, she said, so they are incentivized to work together—however, all contacts are different.

Regardless, as retailers manage inventory in the face of potential shortages, they are unlikely to raise prices. They will also be more cautious as to where they place merchandise so as not to alienate customers, Gandhi said.

The one thing most industry experts agree on at this stage is there are no green flags, and the coronavirus’ impact is still very much day-to-day, added Gandhi.

@RichCollings Richard Collings is a retail reporter at Adweek.