For China’s Factories, Virus Brings ‘Survival Of Fittest’ Test

By many measures, China’s factories appear to be recovering after the weeks-long closures during the coronavirus outbreak. The country’s Ministry of Industry and Information Technology said Monday the average operating rate of industrial enterprises had reached 98.6%, and employees had returned to work in proportion of 89.9%.

More promising news came on Tuesday. The manufacturing purchasing managers’ index (PMI), a gauge for manufacturing activity, came in at a surprisingly high value of 52.0 in March after crashing to a record low of 35.7 in February. A figure above 50 signals expansion.

But despite the reopening of factories and China’s apparent containment of the virus, challenges remain for the country’s manufacturing sector. While production is getting back into gear, demand from consumer markets in Europe and the U.S. is threatening to collapse as the coronavirus outbreak is flaring up in these regions. Observers expect the effects of the global pandemic to ripple back to China and its factories.

“What is the most worrying now is not the epidemic in China and the slow resumption of work but that the global epidemic will cause some companies to temporarily suspend production”, says Shanghai-based economic analyst Ye Tan. 

Since the coronavirus started spreading from the central Chinese city of Wuhan in December, every link in the supply chain has been disrupted, Ye says. After a “cliff-like” economic decline in the first two months of the year, Ye says she expects China’s economy to rebound, in the most optimistic scenario, after the first quarter of the year.

“The real challenge and problem is that the demand side, in Europe and the U.S., is quickly shutting down by the day,” says Patrik Berglund, CEO of Xeneta, an Oslo-based firm that analyzes freight data. “In order to restore anything remotely looking like ‘normal,’ we would need to see supply (China/Far East) and demand normalize – which we’re not at the moment.”

The Chinese government is expected to issue a large stimulus package to shore up the economy after economic indicators plunged across the board in the first two months of the year. China has already injected billions of yuan into the financial system and cut taxes and social insurance payments for smaller businesses, which have been the most affected by the crisis.

Despite the government’s support, there will nevertheless be many cases of smaller factories and enterprises closing or operating on losses, says He Xiaoyu, chief economist at Guotouxinda Investment Fund Group in Beijing. “This is actually a process of survival of the fittest,” he says. He predicts that stronger companies will replace the failing ones and that China’s supply chain will not be affected in the long term.

As a manufacturing powerhouse, China still has attractive attributes such as skilled workers, a complete industrial chain and a sizable consumer market, Ye says. But change is underway. 

The coronavirus crisis is set to speed up trends that were already in place, fueled by issues such as action against climate change and the U.S.-China trade war. Industry leaders expect trade to become increasingly regional and lower-value-added manufacturing to shift from China to places such as Southeast Asia, South America and India. China is set to move toward manufacturing more technologically complex items such assemiconductors, planes and cars.

“Whether [external conditions] are changing, China must change,” Ye says.