Managing Your China Manufacturing & Supply Chains During COVID Outbreaks 

As China shifts to a “living with COVID” strategy, businesses and investors are anticipating manufacturing and supply chain disruptions as a result of a spike in COVID-19 cases. With a peak predicted over the winter months, businesses should, to the best of their ability, prepare for the impending disruption and formulate risk mitigation plans for at least the period until mid-2023. To help with this, we provide practical advice on dealing with disruptions in manufacturing and supply chains and highlight the positive impact that the lifting of COVID restrictions may have on businesses in China.

The COVID-19 pandemic has impacted every aspect of the supply chain, from the procurement of raw materials to the end consumer. It has exposed vulnerabilities and resiliency gaps for many organizations while challenging the commercial, operational, financial, and organizational resilience of businesses worldwide. China is now shifting to a “living with COVID” strategy, following a 10-measure notice issued by the National Health Commission on December 7, 2022, which effectively removed requirements such as mandatory centralized quarantine, compulsory testing, and sweeping lockdowns. While this sudden pivot in its COVID-19 approach has been welcomed by many businesses, the switch to living with COVID comes with its own risks and difficulties, such as a sudden spike in the number of cases. 

As such challenges may continue to hamper the recovery of manufacturing and supply chains, it is essential for businesses to find practical solutions. How can firms attempt to strengthen their supply chains going ahead as COVID-19 continues to impact global supply chains? In this article, we explore some of the disruptions to China’s manufacturing and supply chains and discuss key strategies for companies to become more resilient in the face of these sudden changes.  

Major challenges faced by manufacturing and supply chains

One of the numerous negative repercussions of COVID-19 was the disruption of supply chains, particularly those connected to China. Beijing’s industry and transportation infrastructure often worked well below capacity from 2020 to 2022 because of the government’s zero-tolerance policy toward the virus, and the resulting lockdowns and mobility restrictions. Meanwhile, since the relaxation of COVID measures announced by the government, the number of cases has increased rapidly due to the spread of the highly contagious Omicron variant. This has created more difficulties in several areas. 

Workforce and labor shortages

Due to the recent surge in cases, companies are faced with workforce and labor shortages as employees testing positive may be required to take sick leave or do home quarantine. 

Generally speaking, a lack of qualified workers has made it even more difficult for many industries to recover from the pandemic. Organizations will therefore have to address these non-COVID-related labor issues to reduce staffing concerns.

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Moreover, the introduction of new technologies has significantly altered how supply networks function internationally. Supply networks are changing at a quickening pace as consumers become more demanding. Supply chains have become more advanced thanks to this renewed emphasis on technology and innovation. With supply chain and industrial operations requiring a combination of both physical labor and technology talent to sustain and expand in the present and the future, the distinctions between the skill sets of blue- and white-collar professionals are diminishing. 

Logistics disruption

As a result of the ongoing case surge, which has been a major cause of labor shortages, the flow of consumer goods to the international market has been constrained, with an inevitable negative impact on businesses and consumers. Major logistics disruptions have had a knock-on effect on global supply chains and resulted in the accumulation of goods in storage. As these disruptions continue throughout 2022 and beyond, they represent a difficult challenge for many enterprises operating within the impacted industries. 

On the receiving end, customers may anticipate increased pricing (as higher freight expenses are passed down) and lengthier wait times for retail shelf replenishment in the meantime (especially for imported products). 

Practical tips for businesses

There has been a lack of focus on current transformation mandates in many organizations because of the aforementioned supply chain challenges taking center stage in board-level talks. Discussions are being sparked by and mostly focused on driver shortages, logistics provider capacity concerns, inflation, shipment delays, increasing freight charges, decreased inventory levels, labor shortages, and demand peaks.

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Industry leaders are now redirecting their energy from major transformation initiatives to daily operations, employee requirements, and customer needs. Boards are also learning how to strike a balance between crisis management and the strategic thinking needed beyond these pressing issues.

The success of businesses in China’s post-pandemic era will likely depend on how well transformation mandates are implemented. To balance short- and long-term goals, management should make sure they have a scalable crisis management approach, have adequate leadership qualities in place, and document their experiences and learnings throughout this journey.

How to avoid labor shortages and manufacturing delays

Companies can consider the following when dealing with labor shortages in China:

• Promote work-from-home and hybrid work measures: Both domestic and foreign companies in China have been encouraging employees to work from home to curb the spread of COVID-19. Notable examples include Alibaba, Ping An, Google, and Ford. Such widespread remote employment is unique and will have a long-lasting impact on how people live and work in the future. China, after all, was a pioneer in this field as it was the first country to experience the effects of the pandemic.
• Allow employees with mild cases to return to work: Multiple regions in China announced that employees that test positive for COVID-19 can go to work as usual. In Zhejiang Province, employees that test positive for COVID-19 can still go to work, if necessary, when asymptomatic. Similarly, both Chongqing and Wuhu announced that asymptomatic employees or those who show mild symptoms can return to the office if their health situations allow them to. Beijing proposed that people be allowed to return to work after being released from quarantine without nucleic acid and antigen testing. Businesses should pay attention to the evolution of such regulations and stay up to date with them as the situation keeps changing.
• Switch to closed-loop management mode: Closed-loop systems are a set of working conditions in which personnel is kept away from the public and routinely tested to maintain production active. They were intended to be the magic bullet that would keep China’s economy humming even while COVID regulations restricted travel. This strategy was famously implemented during the Beijing Winter Olympics as a means of separating athletes and support personnel from the general populace. Four of Bosch’s plants in China — three of which produce automotive components — are implementing the closed-loop management procedures outlined in China’s virus prevention policy. According to Bosch, factories producing auto components in Chongqing, Chengdu, and Jinan, as well as an industrial technology plant in Beijing, have all implemented closed-loop systems.
• Improve communication and plan ahead of the holidays: As we approach a period of travel and gatherings with the upcoming holidays, businesses should plan ahead to ensure an optimized and safe return to work for all involved. To ensure that production won’t suffer in the coming weeks as the country’s optimized anti-COVID-19 measures are implemented, factories in the major economic hubs of the Yangtze River Delta and Pearl River Delta have already begun to survey their employees’ intentions to return to their hometowns during the Chinese Lunar New Year holidays (January 21–27). Some are considering strengthening reward programs to encourage workers to stay at their posts or return on time. For instance, Zhejiang province unveiled a set of measures that include rewarding non-local employees with RMB 800 (US$114) in compensation to stay and work during the Lunar New Year, along with admission tickets to local scenic spots.

How to deal with supply chain disruptions

Companies can consider the following when dealing with supply chain disruptions in China:

• Check inventory of key raw materials to plan in advance: Building up a supply of essentials that can see the company through several months of disruption is a practical way of preparing for supply chain disruptions. If a company’s supply chains are momentarily disrupted, keeping a reserve of completed items, components, or even raw materials may be necessary to keep the firm running.
• Identify alternative suppliers: In the case of disruptions, a company’s usual suppliers may be unable to deliver items. Companies can try to mitigate this setback by considering alternative suppliers. This will probably include finding suppliers in other areas and establishing a preliminary connection with them so that they can fill in as needed.
• Increase investment in technology: Many businesses made early investments to automate important supply chain nodes, such as intelligent automation, to allow efficient, effective, and safe operations in retail, warehouses, manufacturing facilities, and even office buildings. As companies adopt more sophisticated digital enablers like cognitive planning and AI-driven predictive analytics, 2023 will likely bring about an accelerated level of investments in this direction. It is evident that a lack of insight across broad supply networks is now troubling many supply chain managers. Leading businesses are utilizing cutting-edge technology to drastically increase visibility and improve response mechanisms and flexibility in the face of large disruptions and fluctuations in their local, regional, and international supply chains.

Other good practices include making precautionary arrangements for contracts that have strict delivery dates and maintaining close communication with key suppliers.

Alternatives: China+1 – Relocating some production to Vietnam

There is nothing new about foreign businesses outsourcing activities to cut costs and increase market share. The only facet that seems to alter is how businesses shift their operations and the nations that are successful in luring capital inflows. Vietnam, in particular, has quickly distinguished itself over the last ten years as a Southeast Asian destination that is advantageous for relocation.

Vietnam’s ability to compete as a China+1 destination has been largely attributed to its proximity to China, affordable labor, and robust network of trade agreements. Investors can cut costs with little disruption or delay to the present supply chains by placing manufacturing cost centers adjacent to established hubs in mainland China.

Looking ahead

Mainland China quickly lifted several COVID-19 restrictions, exposing a fresh set of economic difficulties. In recent weeks, local and national government authorities have removed a number of regulations that had required many individuals to stay at home and most companies to work remotely – for daily updates, visit our dedicated COVID-19 page. Experts have predicted three winter waves of infections, spiking between the next one to two months, and that cases will be “relatively stabilized” in March. It will take between three and six months for the Omicron wave to subside nationwide. Accordingly, businesses should prepare for this period of time and outline medium-term adaptation strategies for the first half of 2023.

On the other hand, China is also opening up to international travelers and foreign investors, which will also benefit the economy. Any further relaxation of the quarantine regulations for inbound travelers would result in an inflow of international executives who have been prevented from visiting China and networking with local partners and employees for almost three years. To keep up to date with changes in travel policy, refer to our article dedicated to monitoring China’s travel news.

In addition, the cost of doing business with China may be lowered through measures such as tax breaks, government incentives, and international agreements like free trade agreements. Overseas importers and exporters are therefore encouraged to keep an eye out for these developments. The recent Central Economic Work Conference (CEWC) indicates that Chinese authorities will be far more focused on delivering growth in 2023 than they have been in recent years. Indeed, additional government actions are expected in the new year to stabilize the economy and support growth, including more measures to support businesses and investors.

Meanwhile, as businesses become optimistic for the future, Dezan Shira & Associates provides qualified supply chain re-engineering solutions to support companies reduce the risks of supply chain disruptions by diversifying their Asian suppliers. For assistance, kindly email China@dezshira.com.

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