As coronavirus idles China's factories, desperation grows

Janey Zhang, the owner of an umbrella factory in China’s east coast city of Shangyu, spends her days watching the news for coronavirus updates and fielding calls from cash-strapped employees asking when they can go back to work.

“I don’t know,” says Zhang, whose Zhejiang Xingbao Umbrella Co. employs about 200 workers. “We await government instructions. If it’s just me, I can tighten my belt for a few months. But if the epidemic lasts a long time, China’s economy will slump. That will be horrible.”

Across China’s vast east-coast manufacturing heartland, the story is the same. Thousands of businesses are in limbo, waiting to hear from local authorities on when they can resume operations. Even when they get the all-clear, it might take days for them to climb back to full staff, as many workers who traveled home for the Lunar New Year holidays are stuck there because of travel restrictions. Completed orders would pile up anyway, because the logistics companies that deliver them aren’t working either.

China’s efforts to contain the coronavirus are rippling far beyond Hubei province, the epicenter of the disease. At 4.6 trillion yuan ($660 billion) in 2019, Hubei’s economy is bigger than Poland’s or Sweden’s and accounts for 4.6% of China’s national gross domestic product.

Disruptions there scale up to nationwide impact, which at peak last week saw provinces accounting for almost 69% of China’s GDP closed for business, according to Bloomberg calculations.

And while Hubei is not itself an export powerhouse, the factories along China’s east coast are tightly embedded in global supply chains, so plant closures there could disrupt assembly lines in South Korea and India.

A pedestrian wearing a face mask walks through an empty shopping plaza, in view of a H&M store, in Hangzhou, China, on Feb. 11, 2020.

Bloomberg Economics estimates that if the outbreak is successfully contained, the impact on China’s economy will be severe but short-lived — with growth slowing to 4.5% in the first quarter, followed by a recovery and then stabilization in the second half. That trajectory would put full-year growth in 2020 at 5.7%, which is 0.2 percentage point below Bloomberg Economics’ forecast prior to the outbreak and down from 6.1% in 2019. If it takes longer to come under control, the hit to growth would be bigger.

The U.S. Federal Reserve Board has warned that “significant distress” could spill over to U.S. and global markets, which isn’t surprising given that China contributes about 17% of world economic output.

Lost Orders

“We are missing our peak sales season,” laments David Ni, the chief executive of Jiangsu Siborui Import and Export Co. headquartered in the Yangtze port city of Nanjing, the company buys aluminum alloy wheels for cars from Chinese producers and exports them to retail outlets in the U.S.

None of its suppliers have gone back to work yet, and it’s unclear when they will, says Ni, who’s based in Los Angeles. “There’s little factory owners can do except wait. On and off, the epidemic could delay production for at least two months. Most factories this year wouldn’t be able to make any money.”

In India, Vinod Sharma, managing director of Deki Electronics, calls it a “panic situation.” To compensate for the factory closures in China, the New Delhi-based maker of capacitors is leaning more heavily on South Korean suppliers. But their inventories may be quickly exhausted, because they too rely on plants in China for parts. “My problem is how available they will be, because the whole world will be talking to them,” he says. “I don’t know if they can scale up so quickly.”

For factories in China that make lower-end goods such as furniture and cheap phones, the coronavirus is the latest in a series of existential threats. Already operating on paper-thin margins because of rising labor and materials costs, these businesses sustained another blow from the tariffs the Trump administration levied on $360 billion worth of Chinese exports to the U.S.

For others, the coronavirus outbreak is a more severe threat. “The impact of the epidemic is even worse than the trade war,” says Zhou Xinqi, owner of Cixi Jinshengda Bearing Co. in Cixi city. The company gets 60% of its 100 million yuan annual sales from abroad.

“The trade war just decreased our margin, but at least we were still making money,” said Zhou. “Now we are not making money. We are losing more than a million yuan.”

About 90% of the 300 employees at Cixi Jinshengda come from other provinces. Zhou has told them not to come back to the city until the government announces a restart date, and he doesn’t expect to resume production until February 25 at the earliest. Anyone who does return early would have to pay hotel fees to quarantine themselves, he says.

In a survey of 995 small- and medium-size companies by Tsinghua and Peking university professors, 85% said they would be unable to sustain operations for more than three months under current conditions, and 30% expect revenue to plunge by more than half this year because of the virus.

Running Dry

“We’re spending money every day but making none,” says Sun Qiuliang, says Sun Qiuliang, sales manager at his family’s Chaozhou-based Guangdong Chaoan Liyuan Flashlight Works.

He said the local government ordered him not to resume operations before Feb. 21. “Those who start working will be arrested,” he says. “I’m not kidding. We just have to listen to the government.”

Foshan Andun Sanitary Ware Co. near Guangzhou had planned to resume work on Feb. 10. Now it doesn’t expect to reopen before Feb. 20, says sales vice director Yi Chuanfa. That 10-day delay will cost it about 300,000 yuan in salaries, rent, and utility fees.

Some places are getting back to business faster though. In Shanghai, which extended the Lunar New Year holiday until Feb. 9., about 70% of manufacturers have returned to work, the city government said Feb 10., citing a survey. More than 80% of Shanghai’s software and information service providers have resumed operations, and 70% of their employees are working from home, the survey found.

Local governments also are doing what they can to ease the pain. Authorities in Yiwu are offering merchants rent exemptions for one or two months, depending on the severity of the situation, says Yu Guoying, owner of garden gnomes maker Bolus Resin Craft.

She says clients have been very understanding, and some agreed to postpone their deliveries to March or April. “The only thing we can do is stay at home,” Yu says. “What’s the point rushing to make money if we can’t stay safe?”