Survival test for foreign trade during the epidemic: Enhancing supply chain and waiting for improvement
By Huiyun Xu, China Business News
Amid the coronavirus epidemic, many foreign trade companies are being forced to change how they operate.
Just before Spring Festival, the “full match” for foreign trade companies contending with the coronavirus epidemic began: in the first half, Chinese companies were unable to resume production and worried that overseas orders could not be fulfilled on time. During the second half, there simply weren’t any overseas orders.
Several risks compounded this problem, such as insufficient overseas production levels, a shortage of international cargo capacity, major changes in supply chain timelines and costs, and a greatly increased probability of customer default. As one head of global purchasing at a foreign elevator company in Shanghai puts it, “We have been in dire straits since the Spring Festival, constantly.”
A number of foreign trade companies have reported that their sales for this year were expected to decline by between 20% and 50%. At present, companies are adjusting their development strategies and mulling plans to survive the crisis. Some of these include lowering expectations, holding together with others, and enhancing internal strengths. These should minimize losses for, and impacts on, organizations, all the while searching for new market opportunities.
The biggest challenge: orders drop, and delivery fails
“This is probably the most severe challenge I have encountered since entering the sector,” says Li Qiangsheng, deputy general manager of Shanghai Defeiler International Trade Co., Ltd (Defeiler).
Defeiler is a trading company established by Henan Yongtong Aluminum Industry Co. Ltd., in Shanghai Waigaoqiao, in 2014. Its operations cover the export of aluminum sheets and coils. In 2019, the firm generated over US$60 million in sales.
As the inventory of foreign customers was almost empty during the Spring Festival holiday, Defeiler saw a slight peak in orders in February as clients sought to replenish stocks. However, just as the company was about to ship products in March, the Coronavirus epidemic struck overseas, and the goods could not be delivered.
What Defeiler currently faces is that 20% of its orders have been requested to be postponed, while 30% of production has been requested to be suspended. As for refund requests, Li Qiangsheng notes that there have been some, but they are uncommon. The reason is that after orders went through, the aluminum price fell sharply. “During this period, the price of aluminum ingots fell by CNY2,000 per ton, hence customers would rather cancel their orders and lose their deposits of US$10,000 to US$20,000, rather than bear the penalty for refunds,” he says.
Changes to its orders put Defeiler’s cash flow under heavy pressure. Li Qiangsheng again: “In February, we received orders of 6,000 tons worth nearly CNY80 million, but with the delivery of 20% of orders postponed and the production of 30% suspended, CNY40 million of our income was affected.”
By March, Defeiler had fewer orders and its business decreased by 30% to 40%, compared with the same period last year. As the epidemic continues, Li Qiangsheng is not hopeful for improvement in the near future. “We expect the overall decline this year to be between 20% and 30%.”
The non-ferrous metal sector isn’t the only one affected. The virus has had a great impact on apparel, daily necessities, automobiles, and other, with annual sales expected to fall by between 20% and 50%.
Another firm, Shanghai New Union Textra Import and Export Co., Ltd. (New Union Textra), has an annual import and export volume of US$1.3 billion, with exports generating the bulk of this at around US$1 billion. It is also a supplier of fast fashion brands such as H&M and ZARA.
“We were lucky that during the first phase in February, we didn’t have any canceled orders and no customers came to us for compensation,” says Chen Zheng, general manager of New Union Textra. This is largely due to the company’s close relationship with customers and the fact that they it would be difficult for them to find a replacement supplier in the short term. Therefore, delivery for its February order was allowed to be postponed. In order to minimize the impact of the delay, New Union Textra sent goods by air instead of by sea.
Chen Zheng says that the main concern at that stage was that the supply chain might not recover and customers could be lost as a result. Fortunately, efforts to control the epidemic in China worked just in time. “We thought that the impact would be limited, and no huge damage was done. Everything would then resume as normal in April and May,” he reflects.
But things changed. In early March, with the epidemic spreading further, foreign customers suddenly were reluctant to place any orders because no sooner had clothes had been put on the shelves than shopping malls were closed. The garments that had been delivered after the delay end up being stored in a warehouse waiting for next year’s orders.
As a result of a lack of orders, the supply chain stopped. “The factories in Myanmar and Cambodia are still running as they are producing for the last orders in-hand, but there will be no more afterwards,” says Chen.
New Union Textra’s export data for March show a decline of more than 50% compared with the same period in 2019. “Last year, our monthly exports could be worth as much as US$80 million, but now we make less than US$50 million,” says Chen.
The chairman of a supply chain company that covers the import and export of trucks and components notes that his company’s sales last year were CNY500 million, but this year he expects them to decline by 30% to 40%. “One of my revenue streams comes from export rebates, but as cargo remains static—and currently I have goods worth CNY20 to CNY30 million held up at Shanghai’s docks—I cannot apply for any rebates without the ships departing and going through custom clearance. The tax rate is 13%, which means I currently have CNY3 million held up,” he says.
Shanghai Ranchen International Trade Co., Ltd. is not large in scale, and mainly exports 2C goods, such as bathroom supplies, consumer goods, and clothing through platforms like Amazon. Taking bathroom lighting mirrors as an example, Fang Yu, business development manager at the company, says that its sales on Amazon were soaring before the new year, with monthly figures of approximately US$200,000. However, due to the Spring Festival holiday, and the epidemic, the company’s suppliers have not been able to deliver components. As a result, the factory could not complete the orders. In February, its overseas warehouse ran out of stock.
The production capacity of Chinese factories has resumed, but the overseas epidemic has stretched international transportation and is now much more expensive. “Currently, air cargo is mainly used for masks and medical supplies. The cost for shipping these to the United States was CNY15 per kilogram last year, but is now CNY60. This is too expensive, so we chose to ship by sea. It was not until a few days ago that we could fill our overseas warehouse,” says Fang Yu.
Air cargo within China is mainly transported in the holds of passenger aircraft, and accounts for about 70% of the country’s total air freight. The figure for China’s international air freight is 49%. Since the outbreak of Covid-19, passenger flights on international routes have been slashed, which has also affected cargo capacity. On March 29, Ren Hong, a first-level inspector of the Infrastructure Development Division of the National Development and Reform Commission, said at a press conference of the State Council that cargo-only flights will continue, but their networks and capacity will be severely limited. The disadvantage that thrusts upon exporters is clear.
When his company’s goods were finally shipped overseas, Fang Yu found that the lighting mirrors did not sell well anymore, and the sales dropped sharply by 90%. “People in many countries are paid weekly and barely have savings, so their consumption power for non-essential items has declined,” he reflects.
It is even more difficult for merchants without overseas warehouses. Fang Yu says that Amazon’s warehouses currently only accept medical supplies and necessities, and other goods are not allowed to be stored there. During normal periods, merchants only need to sell their goods, but now they also need to find overseas warehouses and contact the warehouse for each delivery. This creates a higher workload and incurs greater costs.
The decline in trade has also led to a decline in orders for export-oriented factories. The factories that Fang Yu cooperates with are generally small and medium-sized, and often they have no ability to explore overseas markets themselves. The factory making lighting mirrors is located in Haiyan, Zhejiang province. “There are still orders for factories, but much less than before,” he says.
Tian Guofeng, executive deputy secretary-general of the China Association of Trade in Services, says that since the outbreak of Covid-19, the overall foreign trade has declined. But new businesses in foreign trade, such as those involved with cross-border e-commerce, is rising sharply due to an abundance of overseas channels, extensive information, and flexible linkage, and it has become the main export channel for small and medium-sized, as well as micro, enterprises. Indeed, it serves as the main supply channel for ensuring people’s livelihoods during difficult periods like the current one. In response to a domestic shortage of medical supplies, cross-border e-commerce merchants quickly organized the import of medical materials through their global supply chain and made up for the shortage of domestic supply by purchasing from suppliers across the globe. They have helped import 65 million masks and 1.1 million items of protective clothing. In the past two weeks, however, a large amount of anti-epidemic materials has been shipped overseas, with online transaction and online brands growing noticeably. At the same time, the ideas advocated by cross-border e-commerce, such as “no closure for the Spring Festival holiday”, “contactless delivery”, and “buying at home from world-wide suppliers” meets consumer demand during this time of quarantine. Searches and cross-border transactions for products, such as imported milk powder, food, and disinfectant have increased significantly from the previous year.
But despite this, Tian Guofeng says that cross-border e-commerce has also encountered severe challenges during the epidemic: logistics crises, supply crises, a lack of liquidity, and survival crises for small and medium-sized enterprises.
The chairman of a supply chain company says that the epidemic has severely affected his industry. “In order to ensure a smooth global supply chain, our customers in the first stage hoped to transfer their production capacity away from China, but now they want it back in China. Moving back and forth in the space of three months is an unbearable cost for many to bear,” he notes.
He continues: “Under current situation, high levels of support should be given to freight forwarding and supply chain companies, especially logistics companies with annual sales of more than CNY20m to CNY30m, otherwise the entire supply chain will stagnate.”
Enterprise orders are still rising and the Chinese market is relatively stable
However, not all imports and exports are in trouble.
Amkor Technology (AMKR.NASDAQ) is the world’s second largest independent provider of packaging and test services. Amkor Assembly & Test (Shanghai) Co., Ltd. is their only investment in China and the second largest production base in the world, contributing a sixth of the Group’s annual revenue and profits.
As of the second quarter, Amkor Shanghai’s orders increased by about 10%. Amkor staff in Shanghai told reporters that the company’s customers are mainly located in the Asia-Pacific region, and new orders have not been taken into account. In addition, 2020 is to be a big year for 5G products. If the epidemic can be controlled in the second half of the year, 2020 may even perform better than 2019.
For import companies with a market in China, orders and business are relatively stable.
The vacuum pumps sold by Edwards Technologies Trading (Shanghai) Co., Ltd (Edwards Technologies) are mainly used in the semiconductor and liquid crystal panel industries. During the epidemic, even the Yangtze Memory Technology Corp. in Wuhan was not suspended, as domestic demand is currently not affected.
Edwards Technologies currently has annual sales of US$3 billion in the Chinese market, half of which comes from production at the Qingdao plant and half from imports from the British parent company.
In February, Edwards Technologies’ sales dropped 25% from the daily average monthly sales, from US$36 million to US$30 million. In March, however, the decline slowed to 10%. “The next month will basically be about rushing to fill the gap between February and March,” says Xu Jian, president of Edwards Technologies.
But his company now faces the biggest uncertainty on the supply side—whether 50% of overseas imports can stabilize supply. Overseas suppliers are distributed in the United Kingdom, the Czech Republic, South Korea, and Japan. “Now, it seems that Japan and South Korea have no problem, and there is no shutdown during the epidemic. The only concern is the supply chain in Europe and the United States,” he warns.
Vacuum pumps mainly comprise castings and electronic control systems. The supply of castings is relatively replaceable, but 70% of the various components of the electronic control systems come from Asia, and then they are assembled in the United Kingdom. “Production at the UK headquarters factory is continuous, and output will be affected, but it can meet the demand of the Chinese market after all,” Xu Jian says.
In the global sales pattern of Edwards Technologies’ vacuum pumps, China occupies 25% of the market, which is equivalent to the whole market share of the United States. The Asian market, including China, is the most important, accounting for 68% of global sales.
In China’s semiconductor industry, Edwards Technologies vacuum pumps have a market share of 60%, and sales exceed the sum of the last ten vacuum pump sales, ranking first in the market. In leading companies, the proportion is even higher. For example, the proportion using Edwards’ vacuum pumps at Yangtze Storage Technology is 75%, SMIC is about 80%, and Changxin Storage is about 85%.
Because the Chinese market is relatively stable, when Xu Jian met with head office last week, the president asked him to focus on the Chinese market to stabilize the company’s global business.
For one foreign-funded elevator company, a Swiss supplier of high-end elevator doors, 75% of its business volume is in China, but certain raw materials and parts depend on imports, accounting for 30% of the purchase amount. The unstable overseas supply has also affected the company’s business.
For example, the firm used to deliver 50 doors a week, but the supply chain has been very slow since March 12. Presently, it can only deliver three to five doors per week. “Now, it’s good to have 20 doors a week, what with 60% of the supply capacity being gone. Without the doors, the Shanghai factory can’t deliver the goods,” the company’s head of global procurement says.
Now, the person in charge spends a lot of time every day checking orders. It is necessary to explain to the supplier which order is urgent and which order has lower priority. In addition to prioritizing orders, he also negotiates with customers on whether they will accept the replacement of certain parts from imported to domestically produced, since he does not know when the supply status can be restored. For example, can the previously used imported 6 mm track be replaced with a domestic 8 mm track for the time being.
Shanghai Waigaoqiao International Trading Operation Center Co., Ltd. is the largest and most powerful comprehensive trade logistics service provider in the Shanghai Waigaoqiao Free Trade Zone. The controlling shareholder is the Waigaoqiao Group (600648.SH). Its official website shows that the annual revenue of Waigaoqiao International Trade Operation Center exceeds CNY5 billion, and the import and export trade volume exceeds US$5 billion.
“High-end consumer goods, cosmetics, and medical devices are growing, and there will be no reduction throughout the year. Intelligent manufacturing may be flat or slightly lower,” says Shanghai Yi Waqiao International Trade and Operation Center Co., Ltd.’s Chen Yifeng.
From January to February solely, the data shows the import of Shanghai’s beauty cosmetics and skin care products was CNY5.79 billion, up 15.23% year on year. Among them, Shanghai Unidev Import & Export Co Ltd. imported CNY521 million of these commodities, up 13.7% year on year and ranking third in the city.
Restructuring the global supply chain
Short-term uncertainty has made practitioners cautious. Many companies have expressed that they must work hard to enhance their competitiveness, but that they should also work together to prepare for the next round of re-starts.
“If one link in the supply chain breaks, everything will collapse,” says the head of the procurement of the foreign-funded elevator company. In order to prevent the suppliers from bankruptcy, the company is providing support to more than 10 key parts suppliers that have cash flow issues, such as shortening the payment period.
“Originally, our payment period was 90 days, but now it has been shortened to 30 days.” He says that suppliers will also actively provide assistance to enterprises, such as working overtime.
Shanghai New Union Textra is helping customers purchase masks and other materials for the prevention and control of Covid-19. “H&M wants to purchase two million masks for their country of origin. We will immediately transform our operations and sell Chinese masks to Europe. This will generate income and maintain close contact with our customers,” Chen Zheng says.
“Throughout the epidemic, you can make many friends who share joys and sorrows,” says Chen Yifeng. He also expressed that the Waigaoqiao International Trade Operation Center has gained many overseas customers through the epidemic and has established business contacts. When overseas customers purchase masks, they are also impressed by China’s strong manufacturing capabilities.
Some enterprises also choose to turn to the domestic market, waiting for the foreign trade situation to improve.
Because there are domestic online sales channels, Fang Yu says that, this year, the company intends to focus on the domestic market. “Now that our products exported to Australia are all sold, we find that the exchange rate has dropped a lot, so we purchase some Australian milk powder, honey, and healthcare products and sell them back to China.”
Xu Jian is still optimistic about the future. He believes that the Chinese semiconductor market will continue to develop vigorously over the next two decades. “Only by taking root can we seize business opportunities in this process. I joined the company 16 years ago, and in that time, it has gone from 65 people and CNY100 million in sales to more than 700 people and CNY3 billion in sales. The staff count has increased by a factor of 10 and business has increased 30 times over,” he notes.
The stability of the Chinese market is very important for multinational companies to make investment decisions. Recently, Xu Jian talked to the Waigaoqiao Group about the establishment of a logistics center and an innovation center: “In August, the innovation center will open. We will turn China into a manufacturing center, R&D center, and a logistics center, and then move more products to China.”
Because of the epidemic situation, the industry generally expects that the supply chain will undergo a process of rebalancing and redistribution to achieve a new stability and intensification of the supply chain.
International supply chain giant LLamasoft CEO Razat Gaurav told reporters that there are several risk points in the current supply chain. One is that many companies have very high concentration on supply and production due to the cost and liquidity efficiency considerations. Second, some companies hope that inventories will be kept at a relatively streamlined level. Third, there are still some bottlenecks and obstacles in logistics capabilities. Fourth, many consumer goods companies may only know who the first-tier suppliers are, but not second and third-tier suppliers.
“Based on these risk points, we predict that after the epidemic, some major changes in the global supply chain will occur to reduce these risks and ensure that the entire supply chain will not collapse due to a single link problem,” says Razat Gaurav. Cost, service level, product quality, and the epidemic situation are all important in these considerations.
However, after the global epidemic is under control, many companies told reporters that they expect China’s supply chain to offer more advantages.
Chen Zheng says that the epidemic will instead help China stabilize its position in the global supply chain, because the world has seen China’s management model and capabilities, which are very important for the stability of the supply chain.
Xu Jian says that the idea of a supply chain of European companies is basically around the main market layout (local for local), so the supply chain layout in China is for the Chinese and Asian markets.
The person in charge of procurement of the foreign-funded elevator company says that from the perspective of risk management of foreign companies, an adjustment of the supply chain layout will definitely occur after the epidemic. He believes that it will eventually adjust to a discrete structure, with suppliers not all concentrated in one region. Ultimately, Chinese suppliers must rely on their own competitiveness to win back orders and market share.
“From another perspective, it will force Chinese suppliers to upgrade their industries and upgrade China’s industrial supply chain capabilities. They cannot continue over the next 10 to 20 years with an extensive mode of growth,” he says.
Flexible financial reporting and urgent need for reform
At present, the coronavirus epidemic is being analyzed by WTO economists, and their trade forecasts for 2020 and 2021 will be published in due course.
Although the report will be released in a few weeks, on March 25 local time, WTO Director-General Roberto Azevêdo said that WTO economists foresee a sharp decline in cross-border trade.
According to customs statistics, the import and export of China’s goods trade in the first two months of this year decreased by 9.6% year on year, of which export decreased by 15.9%. From January to February, Shanghai achieved a total import and export volume of CNY482.449 billion, down 5.4% from the same period last year.
At the press conference of the Joint Prevention and Control Mechanism of the State Council on March 30, Xin Guobin, Vice Minister of the Ministry of Industry and Information Technology, said that the spread of the international epidemic is bound to have a greater economic impact on China’s industrial chain, supply chain, and foreign trade export. As the virus continues to increase its presence around the world, China’s foreign trade import and export situation could deteriorate further. In this regard, Xin Goubin stated that we should closely follow up the development and changes of the situation and make preparations as soon as possible.
The situation leaves little scope for optimism. Enterprises need more support to reform as they work hard to stay afloat.
Chen Zheng says that as the epidemic continues, the deterioration of the financial statements of enterprises this year is inevitable, and companies will make every effort to ensure that no serious problems occur. At the same time, the government also needs to provide a relatively loose environment to help enterprises improve their finances.
“For example, the SASAC can assess state-owned enterprises more flexibly, ignoring the level of some financial data and the growth of profit scale. Otherwise, the action will deform and the results will also deform.” Chen Zheng says.
At present, Shanghai New Union Textra is focusing on adjusting its structure on the basis of maintaining stability so as to increase the profitability of enterprises, such as having more customers like ZARA and H&M doing more import business, entering the medical and health sector, and other actions.
But in this time of crisis, the need for reform is more urgent. At present, Waigaoqiao International Trade Operation Center is taking advantage of the epidemic situation to perform certain tasks, such as how to use the advantages offered by free trade zones to promote the development of offshore and entrepot trade.
“After the epidemic, instances of trade protectionism may rise. Are we ready to deal with it? Is Shanghai’s business environment fully integrated with the world’s? If we are ready, Shanghai will still have the advantage of going up. We have the first-mover advantage, and there are ways and means to optimize the business environment,” says Chen Yifeng.
Tian Guofeng also put forward suggestions for the development of cross-border e-commerce. He says that 1210 (bonded mode) and 9610 (direct mail mode) have been applied well in cross-border e-commerce imports. Is it possible to make reverse replications for exports the next item on the agenda? “We need to make the cross-border e-commerce model of general trade bigger,” he says.Media Contact
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