Latest posts by Jan Zhang (see all)
- COVID-19 Will Force Manufacturers to Improve Resilience Via Increased Automation & Digitalization - March 13, 2020
- Coronavirus Gives Chinese Manufacturing Market a Chill - February 12, 2020
- The Industrial Robot Market – 2019 - January 27, 2020
The COVID-19 outbreak is becoming a global stress test. As the number of people infected with the virus continues to rise around the world, uncertainties about global economic growth increase. China hosted the first outbreak and, after more than 1 month of unprecedentedly strict prevention and control measures, the epidemic has been essentially brought under control. Now the whole nation’s focus is shifting to the recovery of normal ways of production and normal lifestyles. In our last insight on this topic, we analysed the impact of the epidemic on China’s manufacturing industry. In this article, we will review the current status of China, and share our observations about some of the key impacts coronavirus is having on the Chinese and global manufacturing industry.
· For many of the infected regions, the economy will fall sharply in the short term, and then rebound after the epidemic is over, but COVID-19 is unlikely to have a major long-term impact. The effect of local government’s prevention and control of the epidemic is key
· COVID-19 may have a far-reaching impact on the capacity layout and supply chain network of many enterprises. Multinational enterprises in particular will further improve their disaster emergency mechanisms and supply chain management processes
· For manufacturing enterprises, the epidemic has exposed some of the problems and risks that already existed in industry, and might force them to reform, including radical improvements to automation, digitalisation and logistics processes
For many of the infected regions, the economy will fall sharply in the short term, and then rebound after the epidemic is over, but COVID-19 is unlikely to have a huge long-term impact. Epidemic prevention and control measures from local governments will be a key factor.
China was the first region hit by COVID-19. The biggest challenge lay in the fact that the outbreak of the epidemic took place during “Spring Festival”, when billions of people were travelling all round the country for family reunions. And, in its early stages, the so-called coronavirus was an unknown quantity, with very limited knowledge of its characteristics, fatality rate and impacts. So, the nation has adopted an extreme control method, sacrificing the economy in the short-term to ensure lives are saved. Domestic Chinese production and consumption dropped sharply for over a month.
According to the NBS (the National Bureau of Statistics of China), in February 2020, China’s manufacturing PMI (Purchasing Manager Index) was 35.7 percent, down 14.3 percentage points from the previous month. Meanwhile, the Production Index was 27.8 percent, down by 23.5 percentage points from the previous month, indicating that manufacturing production activity had slowed down radically. As outbreaks continue to unfold around the world, external demand will falter, further hampering recovery.
Related Indicators from China’s Manufacturing PMI (Seasonally Adjusted)
|New Export Orders Index||Import Index||Purchase Quantity Index||Main Raw Material Purchase Price Index||Producer Price Index||Finished Goods Inventory Index||Open Orders Index||Production and Business Activities Expectation Index|
According to analysis of data segments such as power generation, population migration, and transportation; the work resumption rate in China is about 65% (except for students). Although the overall recovery of enterprises is better, it is more difficult for small and medium-sized enterprises and lifestyle-service industries to return to work. It is expected that production and operation will get back to normal completely by May.
Based on the experience of the SARS epidemic in 2003, combined with data from the COVID-19 outbreak, the development of the disease will roughly track the following trend: from the time the government takes strict control measures to avoid crowd gathering and large-scale movement (at about T+15 days), the high growth momentum of confirmed cases begins to slow down (at about T+30 days), new cases then drop to a low level. And then from this time, manufacturing production begins to gradually resume. About one month after the epidemic has been effectively controlled, production is expected to return to 80-90% of normal levels.
The effect of local government’s prevention and control of the epidemic is the key variable and the most decisive factor. On the premise of effective prevention and control, the whole epidemic will be over in 2-3 months, and societies will return to normal.
The negative impact of the new coronavirus epidemic on most economies should be short-term – effecting just one quarter. Measures to deal with the virus (especially quarantine) will lead to a sharp decline in the economy in the short term, and then a rebound, probably without a major long-term impact.
COVID-19 may have a far-reaching impact on the capacity layout and supply chain network of many enterprises. Multinational enterprises in particular will further improve their disaster emergency mechanisms and supply chain management.
In fact, global supply chains were already feeling a ‘butterfly-effect’ even during the earliest stages of the outbreak in China.
Take the electronics industry and the automobile industry as examples. Apple has more than 700 manufacturing suppliers around the world, nearly half of which are in China. The company announced on February 18 that production would drop 10% due to the impact of the epidemic. While, for the automotive industry, the effect was even greater. According to data from UBS Group, China’s automotive parts accounted for about 27% of global automotive industry production in 2019. As early as February this year, the interruption of China’s factories caused some automobile companies in Japan and South Korea to cut or even stop production of some models. Some American and European car companies even airlifted Chinese parts at cost.
Hubei Province is the centre of the epidemic. And, although its manufacturing industry accounts for only 4% of China’s as a whole, it is one of only four major automobile production bases in China. Hubei supplies automobile companies around the world, and so the impact has been and will continue to be profound. Due to the extended quarantine for this region, the recovery of production is likely to be one month later than for other regions in China. Automobile-related enterprises are therefore facing not only the problem of 2-3 months’ loss of production capacity, but also a problem of a supply shortage of components, as well as the delivery of orders to both domestic and overseas customers. This has further triggered many companies to examine supply chain management.
Is industry relocation or transfer needed for the future?
Many enterprises will now be thinking about relocating manufacturing. During the 2011 earthquake in Japan, even companies who were hardly hit by supply chain issues decided to relocate. However, cross-border relocation of production capacity is not an easy decision to make, and many factors need to be taken into account, such as local market capacity, time and investment required, local government policies, infrastructure and logistics, labour costs, skill levels and so on. Relatively speaking, the completeness of China’s supply chain in automobile, electronics and other industries makes the Chinese industrial chain very efficient and flexible. This, coupled with China’s huge domestic market, stable government policies, strong infrastructure, good labour skills and engineering resources, means that many global companies will surely want to maintain key production centres in China.
The establishment of disaster emergency mechanisms?
The establishment of robust disaster management mechanisms may well be a better alternative than moving production, for many companies. And, in harsh times, measures such as reallocation of production capacity and inventory to different regions, backed-up with a policy of using similar products as substitutes in the short-run, and the development of multi-point suppliers, are all possible solutions. Although the above will undoubtedly increase costs, it will better protect supply chain stability – potentially delivering great savings in the next crisis.
In the long run, the establishment of information chains will further enhance the resilience of supply networks. Key information about materials, logistics, inventory, production and capital in the supply chain can easily be grasped, analysed and shared to improve overall supply chain management. At the same time, market demand can be tracked and predicted more dynamically, and production rhythms can be adjusted accordingly. All this needs to be part of a wider digitalization push from the manufacturing industry to deal with the next crisis.
For manufacturing enterprises, the epidemic has simply exposed problems and risks that already existed. As such, it might force industry to undertake much needed reforms to automation, digitalisation and logistics processes and systems.
For manufacturing enterprises, the short-term impact of the epidemic is a decline in revenue and profits. For example, under China’s stringent prevention and control measures, a large number of manufacturing enterprises were completely suspended, and the loss of production capacity is expected to be 1-3 months in total. In addition, production recovery cannot be achieved overnight, and the resumption of work may also face difficulties in the form of recruitment problems, an insufficient supply of raw materials, and other issues such as logistics and cash flow. Operating costs will also clearly remain high during this period, further eroding profit.
Small and medium-sized enterprises, and those with insufficient cash flow, will feel the pressure most. For enterprises with good operation and high capacity utilization, the focus must be to restore production as soon as possible, but for some enterprises that were on the edge of the market, the epidemic will push them over that edge.
In recent interviews with domestic Chinese enterprises, many mentioned that the epidemic may drive further enhancement of automation and intelligence, in order to reduce dependence on people – improving resilience to future pandemics. An obvious existing example is during the early stage of the outbreak, where some semiconductor and flat panel factories in Wuhan, the epicentre of the epidemic, were able to maintain relatively normal production thanks to high levels of automation; while labour-intensive industries such as 3C manufacturing almost completely shut down, and the restriction of personnel mobility has made resumption of normal operations difficult.
It has been apparent for some time that, as Southeast Asia continues to take an increasingly large amount of the world’s low-value-added production, China’s manufacturing enterprises need to upgrade to higher-value activities. If the pandemic causes a general move to higher levels of automation, this will further that long-term goal.
At a recent meeting held by the Chinese government in early March, decision-makers put forward a concept of “new infrastructure construction”, which refers to seven technological infrastructure areas: 5G, ultra-high voltage, inter-city high-speed railway and rail transit, new energy vehicle charging, big data centres, artificial intelligence, and the industrial Internet. Essentially, it can be understood as the infrastructure of information and digitalization. Although compared with the traditional infrastructure investment, the proportion of these new investments only accounts for about 24%, they will directly promote the development of the pandemic-resistant industries of the future.
The epidemic has brought unexpected difficulties and challenges to governments, industries and enterprises around the world. But it is a short-term effect and it will eventually pass. In the long-run, COVID-19 is a chance for industries to make much-needed operational improvements.