Anyone paying reasonable attention to economic and cultural events around the globe would certainly recognize that China has been occupying a very visible and impactful role. And during this period of worldwide pandemic recovery, China has been on center stage. There are a multitude of events occurring within China, many of which are having long term repercussions, the impact of which are difficult to foresee. A very brief overview of events having global implications, both short and long term:
Covid-19: China’s response to the pandemic was swift and by measures of other countries extreme. As discussed in previous updates, China effectively closed down the country, refusing to allow businesses to reopen early in the spring of 2020 unless Covid mitigation plans were in place, and in certain cities forced the population to quarantine for weeks (a practice that still continues as small outbreaks are identified). China’s border continues to effectively be closed, as 14 day quarantine requirements for travelers in both directions remains in place. Lately, some key shipping ports experienced temporary closures due to isolated outbreaks, furthering the current freight forwarding delays getting goods shipped out.
Hong Kong: On a long term basis, China’s interventions in Hong Kong’s political autonomy and in everyday personal freedoms is of concern not just to those who live there but throughout the world. Hong Kong has long been considered a cornerstone in the global economy, and international business leaders are watching China’s moves here very carefully.
In the short term, it’s all about the current vaccination rate and when Hong Kong will reach the point where world travel starts to return to normal. Currently, approx. 24% of Hong Kong’s population is fully vaccinated. There has been a great deal of hesitancy to get vaccinated due to a substantial amount of negative press. However, the number of vaccinations occurring daily is gradually improving. Also, the number of active Covid cases (in the population of 7.5 million people) is extremely low. Until just this week, Hong Kong reported no new Covid cases over a 33 day stretch.
The quarantine requirement for certain countries (the United States included) is now down to 7 days for anyone who is fully vaccinated and has a positive anti-body test upon arrival. The Hong Kong government has stated that the territory can effectively open to the rest of the world when herd immunity of 70% vaccinated is reached. However, this percentage may not ever be (or actually need to be) reached.
Material costs and availability: This year has been difficult as it relates to material costs. Seemingly all driven by surging demand, material costs spiked in early 2021 for paper products (of all types), as well as plastic resins. Availability of some materials has been impacted as well, as certain raw materials providers throttled back their manufacturing capacity in 2020 due to lower demand and have been slow this year to ramp up production. However, material availability problems now appear to have abated. It is also estimated that these cost increases will stabilize during Q3 and Q4 this year.
Electrical Grid: In the May and June timeframe, several cities in the Guangdong province (a major manufacturing region) experienced capacity issues with China’s electrical grid. Soaring temperatures and increased demand for electricity put pressure on capacity to the extent that manufacturers were forced to cut their electrical usage by shutting down operations for certain hours or days per week. It’s worth noting that other non-electrical factory operations were able to continue, but nevertheless productions schedules were negatively impacted when key machines (molding, printing, etc.) were not able to operate for 20 – 25% of the workweek. These forced shutdowns seem to have abated currently.
Labor: For several years now, availability of unskilled workers for factory jobs has been a great challenge. Labor costs have consequently risen and manufacturing businesses must compete as never before for workers. In addition, China has implemented new labor laws in recent years that impact a number of workplace conditions, thereby impacting factory overheard. All this impacts production lead times, putting more focus on longer range inventory planning. GPI’s factories have also placed more emphasis on upgrades to automation, effectively shifting factory workforces to certain (manual) manufacturing processes and final assembly.
China has been undergoing a major cultural shift in recent decades. Changing demographics, adaptation to fast-paced cultural changes, surging consumer demand, higher education rates and more entrepreneurial opportunities have all resulted in a lack of interest in lower paying factory jobs for unskilled workers.
A recent Harvard Business Review Spotlight Series “Understanding China” writes “…To understand what’s powering the global rise of Chinese companies, we need to recognize that China now has at its disposal a resource that no other country has: a vast population that has lived through unprecedented amounts of change and, consequently, has developed an astonishing propensity for adopting and adapting to innovations, at a speed and scale that is unmatched elsewhere on earth.
It’s that aspect of China’s innovation ecosystem—its hundreds of millions of hyper-adoptive and hyper-adaptive consumers—that makes China so globally competitive today…”
China’s Growth Rate: China’s GDP (Gross Domestic Product) growth rate in 2019 was 6.1%. In 2020, that slowed to 2.3%, which is actually quite impressive given the effect that the Covid-19 pandemic has had on the world economy. The IMF forecasts that China’s growth rate in 2021 will come in at 8.4%, another huge surge in growth. Currently, China’s exports are at $280 billion, up 32% from 1 year ago. Imports are at $239 billion, an increase of 32%. This figure, however, is attributed to increases in global commodity prices.
Freight Issues: GPI’s freight forwarding guru, Erin Gagne, has been regularly reporting on the multitude of issues affecting international freight forwarding. She is a veritable font of information. Bottom line, empty containers and vessel space are both in short supply. This results in delays in getting goods to China ports. Also, delays are occurring elsewhere. Ships are waiting to offload, the U.S. is currently experiencing a substantial shortage in long-haul truck drivers. Delivery of containers by rail is experiencing delays as well. Overall, the normal 35 day lead time for door to door delivery is now running at approximately 60 days. All this is putting great pressure on schedules. And national retailers are well aware of these issues, as the situation is impacting our entire industry.
The key takeaway? Plan your inventory needs very carefully, allowing for the extended time required for delivery to your final destination. Also, take advantage of Erin’s capabilities with GPI’s freight forwarding services. At the very least she has an excellent ability to manage the challenges and keep you closely updated on the status of schedules.
Conclusion: Clearly, there are numerous issues going on in China that impact the rest of the world. Change happens very rapidly there, and adaptations to challenges occur as a regular course of action. And stay tuned to our newsletter- more topics to follow!