Week in Review
‘It’s going to get worse’: Virus impact on NZ firms
This week’s plummeting international stock markets are a sign the ‘best case scenario’ economic outcomes of the coronavirus are looking increasingly unlikely, and that’s a worry for New Zealand’s manufacturers
This should be the week China’s factories started getting back to normal after the coronavirus-induced shutdown. Back to producing the goods that both China and much of the rest of the world - including New Zealand - need to keep their economies running smoothly.
But it’s not as simple as that.
China’s need, and the need of its customers, to get Chinese production started again comes up against its efforts to contain the virus; which has so far killed more than 2,700 people and infected 80,000.
And that’s affecting both on how quickly factories can restart, and how much they can produce when they do.
Fears of a global slowdown caused by the Covid-19 virus saw the S&P500 stock market index lose US$1.74 trillion in a two-day plunge. The Dow Jones index fell 6.59 percent, the NZX50 was down 5 percent between Monday and Wednesday, before recovering a bit today.
Fiona Acheson is New Zealand Trade and Enterprise’s regional director for Greater China. She’s in Wellington now, but in daily contact with her team in Shanghai, Guangzhou, Chengdu and Beijing. She says approximately 150 million people have returned to work in China over the last week, but capacity at factories, particularly in the big cities where most of New Zealand’s suppliers are, is restricted.
This is partly because of the health measures imposed on workplaces, including inspections, regular disinfections, the rule everyone must wear masks (which are in limited supply), and restrictions on how close workers can be to each other.
“It will be a few more weeks before they are up to normal shift numbers and have enough staffing for production lines,” Acheson says.
But the main constraint on Chinese production is not enough workers. Restrictions around the coronavirus outbreak coincided with the Chinese New Year holiday at the end of January, when vast numbers of Chinese people go from the cities back to their home towns and villages to be with their families.
When trains and buses stopped running because of the risk of contagion, they just couldn’t get back. Even if they did return, many had to self-isolate for 14 days.
Global supply chains
The coronavirus is a stark reminder of just how connected the world’s production lines are - and how important China is. Vast international companies like Apple and BMW have closed plants or reduced production because they can’t get the parts they need.
And New Zealand companies aren’t immune. Iconic brands like Fisher & Paykel Appliances and Icebreaker manufacture in China, and even companies which make stuff here get components from China. Our high tech sector is very reliant on China, as is our fashion industry, and our construction companies.
Less well known, our books are often printed in China and huge amounts of our packaging comes from there. Domestic food companies aren’t just being hit by the loss of an important market for their products, but by a lack of packaging materials to put their food in.
Then there are problems moving products around, Acheson says.
“Ports are either congested through the backlog that built up over the Chinese New Year, or constrained due to lack of labour.
“Air freight options have reduced with the reduction in flights and the cost of air cargo has increased.”
Acheson says of the conversations NZTE has had, "about 13 percent [of companies] have expressed concerns. They are planning contingency for the possibility that components, packaging, or other items for their products may not be available”.
"It's going to get worse"
Thirteen percent doesn’t seem like a huge problem, but indications are that things are likely to get worse, possibly a lot worse, says Dieter Adam, chief executive of the New Zealand Manufacturers and Exporters Association and executive director of The Manufacturers' Network.
Preliminary results from a survey to members suggests most Kiwi companies relying on products from China stocked up in advance of the Chinese New Year holiday, Adam says.
“It can be normal for supplies to go slow for several weeks.”
It’s once these stocks run out that things might get tight.
“Give it another four weeks and I wouldn’t be surprised if it was more serious,”
Adam tells the story of a manufacturing company which has had to put a $400,000 order on hold until further notice because it’s missing a “relatively small component”.
“In manufacturing, supply chains are international, particularly around electronics. It could be a small plastic part that people are having made in China that’s not being delivered.”
Retail NZ chief executive Greg Harford has a similar story.
“A jeweller which has new equipment sitting in a factory in China but can’t get it out because the factory is closed and logistics are difficult. It’s all very uncertain,” he says.
Harford says most of the problems his members are reporting are around lead times in the medium and long term - not immediately. Like manufacturers, retailers built up stock levels ahead of the Chinese New Year holiday.
Alternative supply chains
It’s not easy to find alternative suppliers, Adam says. Up-and-coming manufacturing countries like Vietnam don’t yet have the high-tech capability that Chinese factories do, and European or American manufacturers are using any spare capacity to fill local China-affected orders.
Anyway, often European suppliers are having their own problems because they are waiting for sub-components from China.
A number of retailers are starting to look for alternative suppliers, particularly for clothing. India, Bangladesh and Indonesia are options, Harford says, “but it’s not easy just to change your procurement overnight. There is a lead time and there are likely to be delays.”
And as companies - The Warehouse, for example - increasingly try to make sure their suppliers meet ethical and sustainable benchmarks, switching is even more difficult, he says.
“A number of larger retailers have sophisticated manufacturing in China. Trying to pull those arrangements isn’t easy.”
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