China is the manufacturing home base for some of the largest companies in the world and had for years been a low-risk manufacturing hub. But the ongoing coronavirus outbreak that began in Wuhan city in the central province of Hubei and has put Chinese cities on lockdown and prompted transportation bans, is causing labour shortages and logistical challenges.
In the short term, factories operating in China, from component manufacturers to assemblers of finished products, are working to reduce supply chain disruptions. Crucial to the resumption of manufacturing activity is getting people back to work. But it’s easier said than done.
“Some interstate transport has been blocked temporarily, and Wuhan is in the centre of China where people have to go around Hubei province. It’s extra miles [to travel],” said William Chen, FCMA, CGMA, the CFO of a company with manufacturing facilities in China. “You could imagine the challenges.”
For manufacturers of labour-intensive products, the flow of production is critical because production planning is done based on the availability of staff in each product line, Chen said.
The research firm Gartner noted last week that organisations may start seeing supply chain impacts including shortage of materials or finished goods, white and blue-collar labour shortages, restricted sourcing activity to find new business, limited logistics capacity, and consumers buying more online to avoid being exposed to the virus in public spaces.
At this time, manufacturers should prioritise resource planning for raw materials, factory workers, and cash; production planning; and maintaining proactive communication with customers, Chen said.
“It is important to maintain a healthy level of safety stock for both raw materials and finished goods so that production and shipment can resume once that’s possible,” he said.
The epidemic’s death toll is now higher than in the severe acute respiratory syndrome (SARS) outbreak in 2002–2003. In the past few weeks, the spread of the virus has impacted tourism and retail industries in China and its neighbouring countries. However, its economic cost on China and the world is still too early to tell as the death toll and infection cases continue to increase.
In a report by the South China Morning Post last week, a China Railway Corporation official was quoted saying that the number of workers travelling back to work over the weekend is estimated to be about a quarter of the usual peak number following the Lunar New Year break.
The report added that the railway company is taking precautionary measures to assure travellers by introducing a ticket sales cap at less than half of total seats available. This allows passengers to be farther apart to reduce the risk of transmission. But these arrangements may not be enough to convince the millions of manufacturing workers to return to their factory jobs.
“Some of them can come back, but, obviously, they’re not very keen on taking the bus, the train for hours and hours in close proximity with other people they don’t know who might come from Hubei,” said Renaud Anjoran, the CEO of manufacturing consulting firm Sofeast, based in Hong Kong. “There’s a lot of worries (and) fears.”
Anjoran said he has “very serious concerns” as manufacturers face labour shortages and possibly a 10% to 20% hike in labour costs on the horizon.
“If people are worried, they will not go back to work,” he said.
Even if workers decide to return to their factory jobs, many worry they would catch the virus while working in confined spaces on assembly lines or while sleeping in workers’ dorms.
Besides a labour shortage, manufacturers have to work around lower air cargo capacity as more than 30 airlines have either suspended all flights or reduced the number of flights. The government’s extension of the Lunar New Year break where 10 February is the first official day workers go back to work also means that there is already a backlog in many factories across the country. China’s ports remain open, but for US and Europe-bound sea shipments, they usually take four weeks longer than air shipments, Anjoran said.
Solving the labour shortage deadlock is crucial for the survival of small and medium-size manufacturers. Unlike large manufacturers, Anjoran’s company — which also owns a small contract manufacturer for consumer electronics in a southern city in mainland China — do not have production alternatives in neighbouring countries like Vietnam, Thailand, or Indonesia. And offshoring production to a new country within a month or two is simply not possible, Anjoran said.
He added that the human resources manager for his factory has managed to get half of the 60 workers needed to come back this week.
For big companies that may already be relocating production outside of China, their plans may be accelerated by the current situation, Anjoran said. “They might already have equipment there, [they] just have to train some people there … they may be able to pick it up,” he said.
He expects this supply chain disruption to continue for the next four to six months if the epidemic doesn’t subside soon.
“We’re going to have to live with shortages [in the short term],” he said.
A business continuity plan with a focus on the IT system, disaster recovery, and the supply chain should already be in place, Chen said. These are the fundamental infrastructure that will enable the management team and office staff to set up committees and task forces to monitor plans, meet virtually from various cities in and outside of China, and allow access to the company’s information and data from home, he added.
“Team agility is key to handling this sort of challenge,” he said.
— Alexis See Tho (Alexis.SeeTho@aicpa-cima.com) is an FM magazine associate editor.