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COVID-19 and China’s Manufacturing Sectors: Influences and Shifts
COVID-19 and China
White sewing machine. Image credit: Agto Nugroho/Unsplash

The pandemic has affected the normal operation of China's manufacturing industry and has also brought a certain crisis to the global supply chain.

First, inventory has been affected. In the process of digital transformation, manufacturing enterprises aim to achieve ‘zero inventory’ also known as ‘Just in Time.’ The epidemic situation has led to conflict between flexible manufacturing and safety stock.

For instance, at present, there are 40 tier 1 and tier 2 suppliers that provide parts and components to Korean OEMs. If the supply continues to fall short, the production capacity of Hyundai and Kia alone in China will shrink by nearly 50,000 vehicles, resulting in lost sales that will exceed CNY 5.88 billion.

In the quest for fully flexible and reliable production, whether a given inventory is ready to respond to emergencies is the type of question that needs to be asked more frequently after this outbreak.

The second is the relocation of enterprises. The global manufacturing supply chain system has shown signs of instability. If the gap cannot be filled in time, it will cause more foreign companies to transfer production lines and this will affect our economy. There are two ways to adapt – one is to move foreign companies in Wuhan to other low-cost countries, and the other is to move production back to companies’ home countries. For example, Weifu Technology (a supplier of Honda CR-V's brake pedals) announced at the end of January that it would transfer its production capacity at the Wuhan plant to the Philippines plant. Japan's Daikin Industries said it is considering relocating the assembly of commercial air conditioners from Wuhan to Malaysia or other countries. If work resumes, key production lines, such as for compressors, may be transferred to Japan or Thailand.

In order to complete Apple's order, Foxconn formulated relevant provisions at the end of January to transfer some production work to India and Taiwan. Japanese sportswear company Asics said it is preparing to shift outsourced production in Wuhan to Vietnam and Indonesia.

The epidemic has also tightened the supply chain. The tightening of the supply chain will lead to the tightening of the capital chain and the decline in the international supply capacity of the manufacturing industry.

If the epidemic continues to ferment, knowing the moment when work and 100% production capacity can be restored has become an urgent problem for more and more manufacturing companies. As the epidemic situation may lead to the risk of the fracturing of its global supply chain and the lack of strong support for new capacity, China's production capacity will decline to some extent.

However, manufacturing marked the highest SaaS penetration level in China among all sectors. With the acceleration of Industry 4.0, the pace of the intelligent transformation of the manufacturing industry is speeding up.  For example, infrared technology has been spreading for the screening of suspected patients with human temperature measurement. In nature, any object with a temperature above absolute zero will emit infrared radiation, and a medical infrared camera can passively receive infrared radiation emitted by an object to transform it into a thermal image. The different colors on the thermal image represent different temperatures of objects. At the time of the national prevention of COVID-19, the return journey to the Spring Festival also ushered in a peak. Most airports, stations, hospitals, and other densely populated areas have installed professional medical infrared cameras for human body temperature measurement. Major domestic manufacturers of infrared thermometers started emergency resumption in the short term to work overtime. 

Not only has the demand for medical infrared thermal imagers increased sharply but also the demand for infrared temperature measurement chips.

In China, COVID-19 has pressed the deacceleration button for the country’s economy. The National Bureau of Statistics has revealed that the PMI (Purchasing Managers’ Index) for February dropped to 35.7%, which is 14.3% lower than the number for January. Compared to the threshold of 50.0%, a low PMI implies a slowing-down of economic activities as well as being a red flag to all economic bodies. However, with the new demands, touchless technology and hardware will be inversely pushed and so will the digitalization level of the industry as a whole.

Editor: Luke Sheehan
ANALYST
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