The whole of China, except Hubei, is now pushing to get back to work. Overall, the restoration of the Chinese manufacturing industry is asymmetrical when looking at the rapidly growing number of companies that have resumed work compared to the slow recovery of their manufacturing capacity.
Over the past two weeks, since the end of the extended Chinese New Year Holiday due to the coronavirus outbreak, China has been pushing towards the resumption of work. By February 23rd, the rate of resumption of work for companies above the designated size[1] in the top-three manufacturing hub provinces are as follows: Jiangsu 95%, Guangdong 82.2% and Zhejiang 98.6%. These three provinces are also the hubs for export-oriented manufacturing.
In terms of industry, for (electronic) machinery goods, China’s largest exports, the resumption rate of factories are 90% in Zhejiang (as of February 20), over 60% for Jiangsu (as of February 16) and Guangdong is at around 50% (as of February 19).
While the data seems rather optimistic, it reflects more on the number of factories that obtained the authorization to restart work, rather than the actual restored manufacturing capacity. While 97% of the Fortune 500 companies in China have resumed work, their manufacturing capacity has only been restored to around 60%. The asymmetry is more significant in labor-intensive and small-medium companies.
This is also the situation elsewhere than in the manufacturing industry, according to a survey conducted[2] by the Chinese Federation of Logistics and Purchasing on over 2,000 logistics firms, 70% of firms have restored less than 50% of their capacity and half of the logistics firms have restored less than 30% of their capacity.
Fractioning of traffic restrictions
While China is now gradually releasing the restrictions on traffic, the fractioning of these restrictions at different levels continues to disrupt the supply chain. Horizontally, restrictions can differ from province to province. Vertically, the restrictions at a local level, such as county-level borders, which most migrant workers travel through, can decouple from the province level, due to the implementation process.
> Work force shortage
The traffic restrictions pose major difficulties to migrant workers who need to return to work. By February 15th, around 80 million workers, less than one-third of the nearly 300 million-strong migrant work force, have traveled back to work. And even if they are able to return, they may be subjected to a 14-day quarantine upon arrival.
To increase the rate of return of migrant workers, dedicated passenger transport has been established between labor-import provinces, such as Zhejiang, Jiangsu, and Guangdong and labor-export provinces, such as Sichuan, Henan or Yunnan. By February 21st, around 159 thousand migrant workers had moved back to work via the dedicated passenger transport. By February 23rd, 27 provinces had restored dedicated passenger road transport.
However, since regular interprovincial passenger road transport has been restored in only 9 provinces, the lack of workers will continue to be the main obstacle for the restoration of manufacturing capacity. This will be particularly significant for labor-intensive manufacturing industries in China, such as the textile and electronic machinery manufacturing sectors.
The situation could improve in March, as two thirds of the migrant workers should be gradually moving back by the end of February and the beginning of March, according to the estimation by the Chinese Ministry of Transport.
> Disrupted Interprovincial Road Transport
The traffic restrictions on passengers and freight have also disrupted the supply chain in the following ways.
- Firstly, the restrictions on passenger traffic not only prevented migrant workers from moving back to factories but also truck drivers. As of February 18th, the full-truck-load shipping had only recovered to 25% of the previous year’s level for the same period and the less-than-truck-load shipping was at less than 4%.
- Secondly, export shipping is also affected, since there is a lack of road transport capacity to ship goods to ports. The situation in major Chinese ports is improving. Taking the port of Ningbo-Zhoushan, one of world’s busiest ports, as an example, the number of truck drivers returning to work has tripled over the past two weeks. However, the full recovery will take more time, since a significant number of truck drivers for these ports are not local. In the case of Ningbo for instance, the figure is around 95%.
- Thirdly, inter-provincial road shipping may be restored at a slower pace than intra-provincial shipping. Truck drivers could be less motivated to conduct inter-provincial shipping, due to uncertainties caused by differing traffic restrictions. Their shipment could find itself blocked midcourse. Also, drivers could be exposed to the risk of infection or be subjected to a 14-day quarantine once they come back from shipping, which would make transport costly. Under these circumstances, the capacity of downstream labor-intensive manufacturers relying on interprovincial suppliers may be restored at a slower pace.
Heavy dependence on local government
The extent to which a factory can resume its manufacturing capacity is also heavily associated with the degree of support that can be obtained from local government. Not only the resumption of work needs local government authorization, securing the return of migrant workers and smoothing interprovincial shipping will also require interprovincial government coordination.
Two points in particular need to be taken into consideration:
- Firstly, local authorities prioritize their support to companies depending on their industry sector and size. Priority is normally given to high-tech companies, export-oriented companies and enterprises above-designated size. However, it can be particularly challenging for companies, mainly small enterprises, that do not belong to these categories. By February 24th, the rate of mid-small manufacturers resuming work was only around 30%, in sharp contrast to the high rate of work resumption for enterprises of above-designated size.
- Secondly, there is a rapidly changing regulatory environment. At the moment, policy tendency is aligning towards simplifying and accelerating the evaluation process. However, regulations can change sharply, depending on the coronavirus control situation.
Notes
[1] This is a statistic term used by the Chinese National Bureau of Statistics, referring to companies with annual revenue over 20 million RMB (roughly around 2.8 million U.S dollar).
[2] The survey was conducted from February 12th to February 21st.
