Chinese factories run over Lunar New Year, but supply chains still strained

Every year since China took the title as the world’s factory, the Lunar New Year holiday period meant a once-a-year lull in global trade and quiet on the seas, as China’s manufacturing workers began an exodus from economic powerhouses in the eastern provinces to visit family in central and western parts of the country.

But for many this year, family reunions will have to wait. The Lunar New Year, which begins on 12 February, is taking place amid recent new COVID-19 clusters in provinces in the north and northeast. China’s national and local government the past few weeks increased requirements for inter-province travel, including proof of a negative COVID-19 test and a 14-day self-quarantine upon arrival, to discourage workers from making the trip home.

Chinese officials expect 1.15 billion trips during the holiday period, a 60% drop from 2019.

Instead of new year festivities, workers who stay put may work throughout the holiday, which typically lasts two to four weeks. For instance, Apple suppliers Foxconn and Pegatron are offering bonuses and overtime pay to maintain production during the period. This means factories will be able to reduce order backlogs for the export boom China is seeing due to COVID-19.

Rex Gu, FCMA, CGMA, the CFO for China, South Korea, Japan, Russian Far East, and Taiwan operations of Maersk, the world largest ocean shipping company by capacity, said that since the start of 2021, the shipping volume out of China has remained at extraordinary levels. It’s a trend he hasn’t seen during the Lunar New Year period the past 20 years.

“Usually, about right now, we see a peak [in shipping volume] in the run-up to Chinese New Year and a V-shape recovery after that. But this year, we don’t see that. The reason for this flattened curve is because business is carrying on as usual,” he said.

Toward the end of last year, COVID-19-related demand for pharmaceutical products and office devices pushed China’s exports to the US and Europe to a historic high. Disrupted production in other countries due to the pandemic meant that orders for consumer and industrial goods headed to China. Ocean carriers and air freight operators are still playing catch-up to meet the heavy backlog in shipments.

Gu said he doesn’t see workers at Maersk’s terminals taking extra leave this year for the holiday. But he sees a short supply of container truckers in the market, as many truckers had left much earlier ahead of the peak travel period.

Less travel over the Lunar New Year holiday will impact consumer confidence and spending, impeding China’s first-quarter GDP growth this year, according to a note by Oxford Economics last month. But China is expected to return to stronger growth in its second quarter this year if there are no significant increases in coronavirus cases, said Tommy Wu, lead economist with Oxford Economics in Hong Kong, in an email. China was the only major economy that reported positive GDP growth for last year.

While China’s factories continue to churn out goods to meet the world’s demand, a bigger problem is delaying the time it takes for the goods to land in consumers’ hands — a global shortage of shipping containers.

Containers shipped out of China have been delayed in ports across Europe and the US, waiting to be unloaded as COVID-19 cases and labour shortages cause disruption at the ports. The Los Angeles-Long Beach port, the main gateway port into the US for ocean carriers from North Asia, is suffering from severe congestion due to virus cases amongst port workers and a shortage of other equipment to unload shipments.

At Maersk, Gu said that the company has deployed all its available capacity to support exports out of China.

“In solving the problem of service reliability, we separate shipments into categories. … We know our different types of customers and the impact of delays to their businesses,” Gu said. “We prioritise shipments using digital planning tools.”

A note by S&P Global Market Intelligence last month predicted that global retailers such as Costco, Walmart, and Amazon will continue to see supply chain disruptions this year due to the shortage of shipping containers.

Consumers may continue to see longer delivery times and price increases for items in high demand. Retailers, uncertain about when COVID-19 will be brought under control, may continue to stockpile their inventories to prevent a shortage like last year when the virus outbreak began in Wuhan. This will further fuel backlogs in global supply chains, according to the note.

— Alexis See Tho (Alexis.SeeTho@aicpa-cima.com) is an FM magazine associate editor.