Chinese factories are getting back to work amid COVID-19 – what now?

In our last article, we discussed in detail how COVID-19 was impacting the supply chain in early February. We’re now in March and the coronavirus has presented new challenges to the supply chain.

Data released last week by the country’s top economic planner showed industrial hubs like Shandong and Guangdong have more than 70% of companies back at work, while in Zhejiang the rate is over 90%. 

The vast majority of factories in China are back to work, but that doesn’t mean things are back to normal. 

With a sudden re-opening of hundreds of thousands of factories, new complications are arising. We’ll break down what to anticipate and how to work around these new issues.

Businesses Reopening 

Through a recent outreach to the factories in the Noviland network, it’s estimated that about 60-70% of all factories are re-opened, but not all are necessarily achieving their full production capacity. There’s a process that factories go through when they return from a 3-4 week-long Chinese New Year.

Many of those steps are prolonged and more complicated after being closed for 2+ months and with the COVID-19 (coronavirus) continuing to loom globally.

The official purchasing managers’ indices (PMI) in China was released in February 2020 for both services and manufacturing. The all-time low of 38.8 was set in November 2008; this report shows that it’s currently dropped to 35.7, with anything below 50 indicating a contraction in activity.

Upstream Supply Chain

The “upstream” supply chain refers to any and all businesses involved in the production of your end product – your supplier’s supplier, their suppliers, and even raw materials suppliers. Factories often rely on a number of separate suppliers to procure different components, as having a single factory making all parts/pieces in a final product is not only highly inefficient, but entirely unrealistic.

This often gets overlooked in the immediate supply chain because it’s not something your suppliers often talk about. The vast majority of products require multiple materials, parts, and pieces that come from various upstream suppliers. The factory that’s quoting you the final product has to obtain quotes from their raw materials suppliers.

Here’s a very high-level overview of a Barn Door Hardware Set and the components that go into it that are obtained by various upstream suppliers.

Every color you see comes from a different parts supplier. All parts are critical to the final barn door hardware set.

Why are we talking about this? 

Well, before a factory can provide you with a quote on the final product, they, in turn, need to receive quotes from their parts suppliers. COVID-19 is not only impacting the speed at which these quotes can be retrieved, but in a few other ways that we will cover next.

Demand

There is currently a massive demand from these raw materials/parts/pieces suppliers which can affect you in 2 ways: 

  1. High demand spike = higher prices
  2. High demand spike = longer lead times

It’s simple economics and these upstream suppliers are not in the business of charity. Most factories have been closed for over two months now. They will capitalize on this opportunity and prioritize whatever is easiest and brings them the most money in order to make up for lost revenue.

These costs may be minor, but will surely be passed onto the end-buyer as the majority of factories already run on very low margins. With limited supply, factories may also prioritize requests by what they know they have available in terms of supply. 

Prioritization

Suppliers you reach out to will see what’s not only most profitable to them, but what will make their raw materials suppliers happy as well. 

Approaching them with larger orders will be a sure-fire way to move to the top of their pile of requests. Their raw materials suppliers will likely be having higher MOQs while the market takes its time to stabilize, meaning you will likely be seeing higher MOQs along with higher prices.

If you plan to have a product that has many customizations, you may be experiencing a road-block during this time due to the shortage of raw materials. Remember that these raw materials suppliers don’t just supply Chinese factories, but factories worldwide. 

If your factory does not have an established relationship with a materials supplier needed to facilitate your customizations, there’s a high likelihood that the materials supplier will pass on the request when your factory reaches out to them. That is, unless they have a large potential order.

Freight – Domestic & International

This is particularly critical in a country that just a few months ago had a trucking workforce of over 30 million strong. Over half of them are limited or completely prevented from re-entering the trucking industry due to regulations put in place by local governments.

Domestic

Some drivers are quarantined after delivering goods/materials to areas affected heavily by the coronavirus. Others simply can’t leave their homes due to lockdowns and curfews in their cities. Additionally, many routes are impossible to traverse due to local governments disallowing vehicles to enter their jurisdiction.

This is causing massive disruption in the transport of materials, parts, and pieces from upstream suppliers and causing spikes in domestic transportation costs. 

Although there are attempts to shift cargo onto railroads and river barges, trucks are still needed for the last-mile transport.

The trickle-down effects are vast: Upstream suppliers are overloaded with demand; Truckers are fighting to get back to work, but limited by local regulations; Factories can’t obtain parts & pieces to complete finished goods; As demand continues to rise for truckers & parts, prices start to go up; Finished goods can’t be shipped out so there’s a low demand for ocean freight; Capacity remains limited on the Trans-Pacific routes. 

The Wall Street Journal reports that shipping a container 1,000 miles by road would normally cost $1,500; now, if you can find a truck, it will cost you $3,000.

The supply chain is only as strong as its weakest link – and right now, the trucking industry is one of the weakest.

Ocean & Sea

Both ocean and sea freight bookings have increased dramatically, but there continues to be a container pile-up at the ports. 

Availability for ocean freight has continued to increase, but the demand for shipping continues to outweigh the supply. Wait times at ports have been going increasingly longer. There are fewer blank sailings than there were even 2 weeks ago, but they’re still certainly something to factor into your orders as a possibility. Expect to see this through the month of March and possibly into April.

Rates are experiencing more day-by-day fluctuations than normal based on availability. One more thing to consider; Preferred rates and loading priority are often given to long-time customers and business partners.

Noviland suggests scheduling bookings at least 2-3 weeks in advance to ensure there will be space for your cargo on a specific ship.

Factory Limited Capacity

Although factories are opening back up at a steady rate, that doesn’t mean they’re running at full capacity. 

Between domestic freight and lack of parts & materials, factories are experiencing narrow bottlenecks. A Bloomberg Report shows that ⅓ of the labor force is still out of commission. About 200 million workers would have returned by the end of February with another 100 million planning to return from March onwards per a transport ministry official, Liu Xiaoming on Feb. 15.

Quoting Capacity

Production, although major, is just one component of their limited capacity. Factories are also being bombarded with requests – both from existing clients, and new buyers looking for alternative suppliers.

This may seem like a phenomenal problem to have, but it is a problem nonetheless. 

“We’ve been getting more requests than we can handle in a day.” Some high-quality, some ill-prepared. We have to answer them on a first-come-first-serve basis, but always look for the fully prepared ones first.” Chaoyang Wang, factory manager at a large door hardware factory in Zhejiang told Noviland COO, Jie Xiang, in a recent interview.

Many other Factories in Noviland’s network have informed us they’ve also had to establish similar queues. Prioritizing in order of:

  1. Existing clients & partners
  2. New leads with well-prepared requests
  3. Warm leads with products that line up with those listed above
  4. Leads that don’t have complete specifications & requirements

Poorly prepared requests seem to be put on the back-burner of many factories simply due to the demand.

To set Noviland users up for success, we provide a checklist of items that factories look for in Request for Quotes (RFQs). 

 

 

It is clear that those factories in regions relatively unaffected by COVID-19 (particularly in southern provinces) are quick to respond. The further north you go, the slower the responses seem to be.

Approaching New Suppliers

Noviland suggests that, if you’re researching multiple products, be selective about which ones you begin to contact factories with. If you’re fully prepared to launch one product, but are only in preliminary stages with the other, start with the more prepared option.

Reaching out to various factories that you’re not ready to move forward with will ultimately lead to burning bridges. Letting them know your honest plans for purchasing will also lead to more honest conversations with potential suppliers. Suppliers will be much more open about their actual capacity knowing you have a plan to move forward.

Being as prepared as possible with your quote request will also lead to far higher quality quotes. Limiting the amount of back and forth the factory needs to invest resources into will allow for them to be more effective and thus be a great start to a lasting business relationship.

 

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Francois Jaffres is the Director of Business Development of Noviland.com, a rapidly growing sourcing & purchasing solution making sourcing from overseas factories simpler. He has worked with over 500 businesses to source from China, has a background in Industrial Engineering, and is very active in the Amazon Community. He’s currently based out of Noviland’s Atlanta office and travels often.

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