It\’s May 1, 2020 — do you know where your goods are?
For retailers and the vendors who supply them, the calendar may only read February today, but everyone is more focused on what happens when winter turns to spring, and the impact of the coronavirus is turning supply chains upside down.
As the virus in China continues to spread, both in the country and outside, the short-term business issues have been travel restrictions, show cancellations, shop closures and disruptions in the working relationships between the people who make the goods and the people who buy them. While it\’s difficult to predict, based on past histories of similar outbreaks, the opening crises of the story should start to subside within a month or two as the situation begins to be brought under control and businesses create workarounds.
[callout]Perhaps the most telltale sign of the severity of the situation in China and its impact on American business is the uncertainty surrounding this spring’s Canton Fair, scheduled for mid-April.[/callout]
But longer term, the problems may be significantly more disruptive and could cause serious gaps in supply chains and ultimately on retail shelves. That\’s because traditionally the winter months immediately after the Chinese New Years are critical in the way merchandise intended for American stores and online sellers is processed.
While the supply chain is certainly a major area of concern, it is not the only one. Important Chinese trade shows in furniture and textiles originally scheduled for March have been canceled indefinitely, while U.S. shows in housewares and toys have announced their Chinese pavilions have been canceled as well. In China, reports of retailers closing shop in virtually every product category — especially luxury — are widespread.
How the Supply Chain Schedule Works
Here\’s an approximate nine-month timeline of how the supply chain normally works:
U.S. importers, wholesalers and retailers work with their Chinese factories – owned or subcontracted – to develop new products and programs for the new year.
- Late January – Early February
China essentially shuts down for the Lunar New Year as millions of workers return to their homes to be with family for the holiday.
Workers return, though anywhere from 10 to 20% of the workforce never returns to the cities where their jobs are, choosing to remain home or even search out a new job in a new city. Factories are hamstrung getting back up to full production speed.
Goods begin to enter the shipping system, taking three to four weeks to get from Chinese factories to U.S. ports. Depending on distribution center locations, another one to three weeks of additional time is needed to get merchandise into retailers\’ hands.
New spring and summer goods arrive on store shelves and websites, ready to be purchased.
That\’s been the way the system has worked for decades and while the bulk of our goods come from China, the schedule is not much different with merchandise out of from India, Pakistan, Vietnam, Bangladesh, Indonesia or pretty much anyplace else in Southeast Asia.
Why It\’s Different This Year
In 2020, because of the coronavirus, that supply chain schedule is going to be disrupted in a way we\’ve never seen before. While politics and the Trump Tariff War have already altered the flow of goods over the past two years, this year is going be very different.
That\’s because depending on how quickly China gets the virus under control, lifts travel restrictions and allows factories to reopen and begin production, it could be anywhere from two weeks to as long as two months added to the supply chain schedule. And that\’s once borders are reopened – which is anyone\’s guess at the moment.
Basically, this means goods that should be ready for sale in early and mid-spring may not arrive in retail hands until at least April and possibly as late as July. The impact on spring and seasonal merchandise could be devastating. And it is not just China that is in play. Because the country supplies so many components to factories elsewhere in Southeast Asia, they are all likely to experience slowdowns in their manufacturing processes.
A major vendor in the home furnishings business, who wished to remain unidentified because of the confidential nature of his conversation, said one of his largest customers estimated that deliveries out of China would be delayed \”three weeks plus\” due to the virus.
At the NYNow gift show in New York City last week, a large sales agency that sells many products sourced out of China said they expected delays of \”at least several weeks\” because of the situation there. This executive also wished to remain unidentified so as not to affect his business.
The Impact is Widespread
The economic impact of all of this is difficult to gauge. UBS estimated that global growth will take a 2.5 percent negative hit by the time all is said and done. JPMorgan originally forecast a smaller decline but has since raised it, indicating the fluid – and uncertain – nature of the situation.
Last week the Federal Reserve Board said the coronavirus represented a \”new risk\” to the overall economic outlook in its semi-annual report to Congress. \”Because of the size of the Chinese economy, significant distress in China could spill over to U.S. and global market through a retrenchment of risk appetite, U.S. dollar appreciation and declines in trade and commodity prices.\”
Historical precedents could shed some light on what to expect. When MERS (Middle East respiratory syndrome) hit South Korea in 2015 the authorities reacted swiftly and the estimated economic cost was said to be $8.2 billion. But 12 years earlier, in an eerily similar parallel to today, the Chinese government was slow to respond to the SARS (severe acute respiratory syndrome) outbreak and the economic impact was estimated to be at least five times that according to a Wall Street Journal report.
This time around, while many factories that supply the fashion and home industries are small and not likely to make major public announcements about closings, reports from other industries give a good indication of the depth of the situation. Both Toyota and Honda have announced extensions of their traditional New Year\’s factory closings by about two weeks, which could stretch out even further depending on how the situation unfolds. Apple has also indicated it expects disruptions in its supply chain coming out of China this year. Perhaps the most telltale sign of the severity of the situation in China and its impact on American business is the uncertainty surrounding this spring\’s Canton Fair, scheduled for mid-April. Earlier this week all activities at the show venue were suspended \”until further notice,\” according to Reuters amid speculation this would mean the cancellation of this year\’s Fair, which historically has been the largest gathering of international companies looking to source Chinese products. Such a closing could have a devastating effect on supply chains well beyond the spring window and perhaps into 2021.