China coronavirus outbreak hits supply chains.

China’s out-of-action labor force is causing concern. With the coronavirus trapping around 50 million people in Hubei, a number equal to twice the population of Australia, and exponentially more workers required by authorities to submit to self-quarantine measures after returning from their hometowns to their urban places of work, China’s behemoth manufacturing base is sputtering.

The country nominally returned to work on Feb. 10 but remains on high alert for the coronavirus, which as of Monday had claimed 1,770 lives. While the U.S.-China trade war and overall rising wages in China have diversified some manufacturing away from the country in recent times, it still plays an outsized role in global manufacturing, contributing more than 40 percent of global textile exports.

Last week, Alibaba revealed that its logistics business Cainiao had less than 20 percent of their usual courier numbers back to work. Multiple trade shows — Intertextile Shanghai, Yarn Expo, Chic Shanghai, Kingpins Hong Kong — and fashion weeks in Shanghai and Beijing have been postponed indefinitely.

“Businesses have not truly gone back to work as some firms have extended return-to-work times into March,” said Jason Ong, director at AlixPartners. “The major tech companies generally have pushed start times into late February. Even for those who have started, many are on split work arrangements, or keeping most employees at home. This will reduce efficiency as most industries and employees are not used to working from home. For manufacturing, we have spoken to numerous factories that supply consumer products and most are not fully operational.”

While Ong believes that the disruption to the global supply chain has so far been blunted — the coronavirus crisis unfolded over the Chinese New Year period so global businesses would have made accommodations for the shut down of factories there — the pressure is increasing fast.

“This week and going forward will be critical as factories would now have typically resumed work,” he said. “The real impact will depend on how long this virus situation persists but critically, also how well firms respond and plan or diversify their supply chains accordingly.”

“There is an impact at the retail end with channel inventory,” said Jefferies consumer analyst Anne Ling. “Distributors and franchisees have cash flow problems. No cash for the next order with huge inventory [back up, meaning] they will need to clear the inventory in the market with discounts.”

While local press reports said around 30 percent of the workers had returned last week, Ling said the number needs to be around 80 percent to prevent significant disruption. Casualwear, which tends to be less vertically integrated, is more challenged, she said. Moreover, if suppliers are able to meet their deadlines, it could come at added cost.

“Due to potential delays, some of the products might need to use air freight versus sea and some manufacturers are expecting the brands to bear some of these costs,” Ling said. “In any case, some of the orders have been routed to Turkey and Vietnam.”

Although beauty is more sheltered than seasonally focused apparel, Julian Reis, founder and chief executive officer of SuperOrdinary, a China beauty distributor that works with brands including Drunk Elephant, Supergoop and Ouai, said his firm was facing disruption along their internal supply chain due to quarantined workers.

“Production of packaging and components has been limited, and ultimately delays the delivery of beauty products [by] one-to-two weeks to the end consumer,” Reis said.

Given that China’s own population is wearing face masks and staying at home most of the time, demand for color cosmetics could dip, Ling noted, but the need for skin-care products is still high at this time due to increased hygiene practices.

“Hand cream and face cream are needed to prevent the skin from being too dry after washing and cracking, which might result in easier infection,” Ling said.

Dan Wang, China analyst at the Economist Intelligence Unit, said the key regions to watch are the coastal provinces of Guangdong, Jiangsu, Shandong and Zhejiang. “Not only do these have the highest number of infections outside of Hubei, they are also drivers of economic activity,” she said. “In 2018, they accounted for 35 percent of nominal GDP. They are also very important for exports and manufacturing and accounted for nearly 40 percent of exports that year.

“If production falls in this region it would have serious ramifications not just for China but international supply chains,” Wang said.

Authorities are reluctant to push workers back to their jobs and risk another spike in infections — several Communist Party officials responsible for Wuhan and Hubei province at large have been fired or demoted for bungling early communications about the virus.

“Many officials wouldn’t want to run the risk [and instead will opt for] postponing the production a bit longer rather than rushing people back,” Wang said. “I think in one to two weeks in March we will start to see a massive encouraging of people to go back to work but not this month.”

“The key indicator is how we are going to be in two weeks from now in major hubs,” said Rodrigo Cambiaghi, APAC and Greater China supply chain and operations practice leader for EY. As the virus’ incubation period is 14 days and most workplaces moved to restart on Feb. 10, if there is no second large outbreak at the end of the month, experts have indicated that it would mean the virus has plateaued.

In the meantime, Cambiaghi encouraged companies to look for opportunities in new consumer purchasing patterns that are likely to stick even after the virus subsides.

“There might be a need for healthier choices and for consumers to pay more attention to health products,” he said. Additionally, “there was a clear shift with the quarantine and lockdown in those major hubs in demand from offline to online. China is very strong in online but even more so in this period of time, people move towards digital. As the situation gets better, we should see a pickup in online in China.”

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