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Industry Awaits Good News on China’s Factory Front in the Week Ahead

Next week could provide more conclusive details on what global supply chains could expect in terms of factory production in China in light of the disruptive coronavirus.

What to expect

Many firms in China reopened for business—including some Shanghai manufacturers—on Feb. 10, following the government’s decision to extend the holiday break for the Lunar New Year as a measure to contain the outbreak of the coronavirus. Companies that did reopen also saw many employees work from home where possible.

In other cities, factories opened for operational checks and sanitization measures. Once those initiatives are completed, they’ll need to await a governmental check to get final approval before they can fully reopen to begin production. Even then, there are new rules that will need to be implemented, such as having workers wear masks and take hourly checks of their temperature as precautionary measures to ensure workers’ health.

Factories that didn’t reopen this week are hoping to do so at some point over the course of the next week. But even if the factories get clearance to open, they could get hampered if they can’t find a sufficient supply of something as basic as masks–which are said to be in short supply, even for health care professionals.

What’s more, there’s the operational logistics to think about. A factory able to reopen likely won’t operate with full staffing, as many are either unable to travel back to work or are under quarantine. And full production might not be possible for any number of reasons, including a limited supply of components on hand to complete orders.

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So far, word from the manufacturing side is that electronics components and auto parts are in short supply. Even if automakers and electronics firms can move production to other countries, there’s a chance the new manufacturers can’t ramp up production since many of the parts they will need come from China.

Possible sourcing risk

Many apparel firms over the last few years have diversified their sourcing and supply chains and now rely less on China for production. That has intensified in the last year due to the U.S.-China trade war and tariffs. But there could still be a surprise down the road for some firms in connection with raw materials needed for production, not unlike what’s happening in the auto and electronics sectors.

“Political pressure has accelerated the push beyond China,” Josh Green, CEO of S&P Global Market Intelligence firm Panjiva, said.

In Southeast Asia, production has grown in Vietnam, Thailand, Malaysia, Indonesia and the Philippines.

Vietnam has emerged as the clearest winner,” Green said. While Vietnam initially saw production growth in apparel and textiles, it now includes a wider range goods, including electronics. “The country has climbed the value chain,” the Panjiva CEO said.

Green, who spoke at an S&P event Friday on the 2020 outlook for global supply chains, made a key point in connection to the fashion sector. For all the movement that has occurred to broaden the supply chains, Green believes there’s a chance there may be far less diversification than some companies realize. One example he gave was H&M, whose manufacturers are spread across multiple countries. But digging deeper to find out who are the manufacturers’ raw materials suppliers show that there is a heavy concentration among Indian and Bangladeshi firms.

As factories in China reopen, presuming no further delays, there’s a chance some fashion firms may come to realize they’re not as diversified as they may have thought.