What does the Coronavirus mean for Manufacturing in China?

2020 will certainly go down as an historic year when studying global sourcing. Interestingly the COVID19 virus outbreak coincided with the Chinese New Year, which for the past three decades has been a de facto consideration for anyone making buying decisions based on China suppliers. Had this struck in the middle of the year there would have been an exponentially greater interruption and impact to global supply chains although there is certainly a delay Western companies are feeling.

In a “perfect storm” or chain reaction of events beginning with the March 9 Nikkei > HK> Europe > U.S. Dow Jones market adjustments and crude oil future nose dives – people aren’t traveling, taking cruises, going to trade shows, holding corporate meetings, going to Disney World, etc…the economy will suffer a huge blow which means consumer and corporate spending will drop which also means demand for inventories will fall.

What it all means? China factories will not be held to blame for the same inventory and supply chain challenges that could have arisen in, say June. China will be far less traveled by Westerners this year which also means decision makers will pursue diversifying supply chains away from China.  This strategic shift has been built in to strategies which were already taking shape in the past three years

What they will find? Cheap products are no longer attractive for serious and sophisticated Chinese businessmen or factory owners who want to be in more high margin, innovative categories such as AI, VR, medical, autonomous and electric vehicles, and deep learning. Provincial authorities are in the crosshairs of being required to eradicate poverty yet not encourage “smokestack industries.” There are still tens of thousands of potential suppliers in China with the necessary equipment still running and ample labor to operate. If you are a small startup, China-as a whole isn’t as excited about your potential as they were in the early 2000s. And they aren’t as excited about quoting a nickel a piece. This general category will indeed shift to SE Asian suppliers some of which has already been moved there By the Chinese.

Because every manufacturing discipline under the sun can be found in China to make anything in the world; almost three decades of training and tech transfer, up to date ERP software & logistics and cap-ex investments by both the private and public sectors, the things holding back major corporate decisions on China for new product startups is politics, trade wars and the continued complexities of outsourcing in China. These factors will certainly add to a general de-coupling with China. It is not just the Coronavirus causing the issue.

Purchasing managers will be directed to seek out China manufacturing alternatives. Yes they will look at manufacturing in Vietnam, Malaysia, Indonesia, the Philippines, Mexico. Perhaps Eastern Europe will continue to hang out a shingle and let people know they’re in business. It will be a solid 3–5 years before China is not the best option by when the Coronovirus will be news of the past. What remains to be seen at the time of this response is to which levels of demand global economies drop. A major recession may be more detrimental to global vitality than the COVID 19.

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