When over half of the world’s population were staying at home in early 2020, firstly China, as the World’s Factory, got hit dramatically almost in every industry by the Chinese lockdown. Followed by the rest of the world. Orders were cancelled, or demand slowed down. Many small factories went bankrupt overnight. As the coronavirus continues raging in most parts of the world, the demand seemed to surge and became greater than the supply worldwide.

What happened? Here’s what you need to know:

Demand changed and increased during the rolling lockdowns

The F&B (Food and Beverage) sectors, tourism, and retail stores got hit hardest by the virus. Work-from-home and stay-at-home have changed people’s lifestyle as well as (perhaps the long-term) consumer habits. As a result, products such as outdoor furniture, office chairs, and consumer electronics, such as gaming equipment and electronic accessories, were seen a surge in demand during the lockdowns. 

In addition, online educational tools and platforms were urgently needed to support schools and students’ online courses. Products in support of taking courses from home spiked in demand. 

Even carmakers underestimated auto consumption. The chips were delivered to the consumer electronic sectors to meet the demand during the lockdowns. Yet, the chips needed for the auto industry were not prepared while the demand was there. 

Meanwhile, the emerging sectors like 5G, ICT, AI, and Ultra HD have accelerated demand for chips, resulting in overdemand and the subsequent global chip shortage.

Manufacturing supply chains are switching from India and Vietnam back to China

Statistics  showed a 32.3% YoY surge to 263.92 US$ billion in exports from China in April 2021. China export growth is expected to remain robust and beat expectations, according to Trading Economics.

Since July 2018, China’s manufacturers had suffered from the US-China trade war, making labour-intensive electronic sectors move their supply chains out of China. As a result, countries like Vietnam and India were the biggest “winners”.

However, the Pandemic changed the whole situation. 

Recently, the second wave raging in India and Vietnam has forced small and big companies to temporarily shut down businesses, including big multinational companies — Samsung and Foxconn — to shut down their facilities there. Due to the international travel restriction, the relocation of supply chains has been put on hold for quite some time.

Dating back to January 2020, China was the first large-scale epidemic centre. When the rest of the world was still suffering from the virus, China’s significant success in tackling the outbreak made it possible to reboot its economy in mid-2020. Although some newly confirmed cases from time to time, situations were under well control by the local government’s harsh restrictions and rigid enforcement and people’s cooperation. The country’s capability in tackling small-scale outbreaks in a short time makes it one of the most stable economies. Additionally, China has complete supply chains located within the country, making it able to meet the overall demand in the wake of COVID-19.

Cases in India and Vietnam hit record-breaking highs in May. The situation will only move more demand towards China.

In other words, over half of the worldwide production counts on China’s supply chains to meet the changed and increased demand. 

Uncertain over demand is restricting China’s manufacturers from expanding capacity

A large number of manufacturing businesses permanently shut down due to COVID

Nearly half a million Chinese businesses shut down in Q1 2020 as COVID-19 batters the economy, according to the South China Morning Post. 

Companies either had to lay off their employees or cut the payroll for survival amid the economic fallout from the COVID outbreak. “Street-stall economy” (ditan jingji / 地摊经济) was encouraged by the central government to boost consumer spending.

Although the success in tackling the outbreak was seen, millions of privately owned businesses are still struggling to fully bounce back to normal life. The return of the supply chains from Vietnam and India is good news to the local supply chains and factories in China.

However, the COVID traumatic stress and uncertainty of over demand have created barriers for businesses to hire new employees and expand capacity. 

• The effect of monetary policy changes on commodity prices

The global economy was freezing up. The IMF (International Monetary Fund) estimated a Real GDP (Gross Domestic Product) shrinkage by as much as 3.5%  in 2020.

In response to the impact on the world’s economy by the virus, sweeping and sizeable stimulus measures have been taken by the governments and central banks worldwide to ease the market disruption.

China was the first country that acted fast after the outbreak to stimulate market demand with a series of strong monetary and fiscal measures. Responding to the emergency calls, developed and emerging regions around the world, including Hong Kong, Japan, the EU, Germany, France, Italy, the UK, the US, Canada, Brazil, India, Russia, South Korea, and Australia, unveiled massive stimulus packages. The international aggressive monetary and fiscal policies in response to the crisis boosted consumer spending during the lockdowns.

On the other hand, monetary and fiscal policy shocks can directly drive up broad commodity prices. Low interest rates and quantitative easing have surged the costs of raw materials, such as oil, metals (copper), agricultural commodities, furniture (lumber), and more. The rising raw material costs cut down the margins in manufacturing sectors. Manufacturers tend to be interest-driven with stable benefits and the least inputs to survive. They are most likely to choose stability and hold on to their existing capacity instead of taking the surge in demand as a new business opportunity to expand that might require time and capital investment.

Given the cloud on uncertain export prospects, the combination of the surging cost of raw materials and a weak global economic recovery is the crucial factor that restricts the capacity expansion.

To strike a balance between sufficient inventory and consumer demand, a unique supply chain demand planning is essential for all sizes of business to cope up with the constantly changing supply chain environment in Asia and China.

Conclusion

Given the above, the global overdemand and supply shortage could last long and continue affecting all business sectors, including retail industries and our everyday life.

Key takeaways:

• Demand surged in many sectors, while capacity to cope with the supply soared.
• Lockdowns, change in consumer spending habit and government stimulus packages resulted in a surge of demand for Chinese produced products.
• Manufacturing supply chains have switched from India and Vietnam back to China.
• Specific demand witnessed a continuous increase due to massive stimulus packages all over the world.
• Manufacturing supply chains are switching from India and Vietnam back to China.
• China’s manufacturing supply chains will continue to play a significant role in support of reducing the intensity of the global supply shortage.

For more insightful news about supply chains in China and Asia, follow us and stay updated.