Roadblocks to the Recovery of China's Supply Chain

When Liu Wei, a woolen textile sales manager, started receiving a wave of overseas calls and emails asking him to halt orders, he was prepared. “We experienced the market disruption first [due to the COVID-19 outbreak]. We were worried that our clients might shift their production to places like South East Asia because of the restrictions here. What’s unexpected is that they ended up having to cancel on us,” Liu said. His employer, a woolen supplier called Shenzhou, located in China's Jiangsu Province, produces textiles for brands like Brooks Brothers, J.Crew, and Reiss. As the COVID-19 pandemic rips the world apart, global fashion supply chains have been beaten into the ground. And Chinese suppliers that processes natural fabric like cotton, wool, and manmade fabrics like polyester, have been hard hit twice: They were forced to close their workshops by the central government amid a lockdown, and now, by their overseas clients, which came as a surprise because Beijing has been easing restrictions on the path to recovery. As a result, the export volume of such goods dropped almost 20% in the first two month of this year, according to the General Administration of Customs. In China, the biggest textile producer and exporter in the world, geographical advantages to transportation and access to raw materials have given rise to provinces like Jiangsu, Zhejiang, and Shandong, where textile production and exports serve as a pillar of the local economy. Many conglomerates from these regions, such as Shandong Ruyi, the LVMH aspirant of China that owns Swiss luxury brand Bally, also began as a humble textile factory. As a port city, Zhangjiagang has some of the biggest textile suppliers and exporters in China; it’s a microcosm of China’s textile supply chain. Jing Daily spoke with several employees to learn the challenges and uncertainties the industry face on the road to a full recovery. Facing Travel Restrictions and Discrimination, Non-Local Workers Delay Return China is in recovery mode. By March 28, 89.9% of industrial workers at large factories had returned to their jobs and 76% of mid to small-sized factories had returned to work, according to the Ministry of Industry and Information Technology. But the textile industry’s recovery is far below the national average. When the lockdown was initially lifted, factories needed to apply for certificates from local governments to reopen. However, as the situation has evolved, the bigger issue around travel regulations of workers has continued, with a rising concern resulting from China’s new measures to control the virus spread by asymptomatic cases, which has brought discrimination against non-local workers and put another strain on staffing. The travel restrictions go both ways for Shenzhou’s workers. Before the pandemic, its local factory had about 800 workers, while a second factory had around 200; however, only one third of them returned to work as of last week. “Our local factory is missing a lot of workers because a large part of our workforce is from the Anhui Province. On one hand, there are travel restrictions from their local provincial governments. On the other hand, our city is restricting anyone coming from outside," Qian Yongliang said, another sales manager at Shenzhou. For non-local workers, returning to work means an added cost and uncertainty of their living situation. Although Jiangsu Province has lowered the level of alarm, it still asks all inbound people to quarantine themselves for 14 days at appointed locations, with fees covered by themselves. Many workers, however, don’t want to waste that money, said a former managerial employee at another local textile supplier Huafang. Last Wednesday, recognizing the potential danger of asymptomatic COVID-19 cases, China announced a focus on observing the positive cases without symptoms. This shift of focus against the fight of COVID-19 has unexpectedly brought discrimination toward workers from outside the province. As a result, local landlords in Zhangjiagang feel hesitant about renting their properties to the outside population, especially people from Hubei, the former manager at Huafang Group’s cotton spinning workshops said. Suppliers Are Suffering Different Extents of Impact While all of China’s textile suppliers with overseas clients are being affected, the ones that are focused on supplying for the Spring/Summer season are experiencing an even bleaker outlook compared to other woolen suppliers, which were mainly used in Fall/Winter collections. “Given the nature of our materials we supply to those brands’ for the Fall/Winter season, we are doing slightly better than the cotton suppliers,” Liu, the sales manager, said. The initial halt took place at the end of February, as the COVID-19 outbreak rippled across the US and Europe. But after two weeks, most of his clients, including Brooks Brothers, resumed their orders. He said the clients were optimistic and expected that the pandemic could end by the end of summer and planned the order to be in place for the winter collections. It would take Shenzhou two to three months to finish before shipping the textile to clothing manufacturers in Southern China, according to Liu. Brooks Brothers did not immediately respond to requests to confirm its production plan. About a 15-minute drive north from Shenzhou lies the headquarters of two of the largest cotton yarn and cloth suppliers and exporters in China — Huafang Group and Guotai Group. The two groups both have core businesses in textiles but have also ventured into investment and hospitality. Moreover, both were heavily hit by the crisis, according to former employees in the know. Huafang’s current number of staff and production is one third of what it used to be before the crisis, the former manager said. As of Guotai, “Their orders are mostly from Europe and the US. For some of Guotai’s subsidiaries, as much as 80% of the orders have been cancelled,” a former employee in Guotai’s export business said. The Price of Products Are Being Disrupted Due to the sudden drop of demand, some clients and intermediaries are asking the suppliers to discount their goods, which can be a tough decision to make. “Some clients said they could keep their orders on the basis of a discount, but I’m not sure if our company is willing to do that,” a current business assistant at Guotai said. If the discount is within a reasonable range, both sides could mitigate their losses, but submitting to discounts might also cause disruption of the market order, which is why Shandong Textile Association sent an open letter to the industry players. “We will firmly strike down irrational bargaining...especially those from intermediate traders.” The association encourages members to their service center to directly contact and supply to the end clients. The price of textiles have already witnessed different levels of decline in the first two months. The sales ratio of cotton yarns and cloth came to their lowest point in the last three years, while the time for stocking duration became the longest, according to the China National Cotton Information Center (CNCIC), which just published a weekly report with information from 1,895 surveillance centers across the country. The pricing might affect the further outlook of raw materials like cotton as well. As Spring should be the sowing season for the Northern hemisphere, the disrupted price might trickle down to cotton farmers, who are financially unmotivated to plant cotton, the report pointed out. China’s supply chain recovery depends on the demand from the rest of the world. Although many global brands are bootstrapped at this turbulent time, there are things they can do to mitigate the adverse relationships between themselves and their Chinese suppliers. The most important thing is to keep an open and transparent communication, so that once the COVID-19 virus situation changes, they all can bounce back quickly. Many suppliers, like Liu, have been understanding and allowed clients to pay for their orders a few months later. “We are trying to be sympathetic, and if we switch situations, we can imagine how difficult it might be for us,” Liu said. “Our strategy is to survive this together with our clients.”

Roadblocks to the Recovery of China's Supply Chain

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Published April 07, 2020

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Roadblocks to the Recovery of China's Supply Chain