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February 14, 2020

Impact from Coronavirus to Deepen, Promo Pros Say

That’s according to some experts who predict more supply chain and business travel disruption, as well as higher shipping and product costs.

By  Christopher Ruvo

UPDATE Feb. 14, 2020, 2:45 PM (ET)

As of Friday afternoon, Wuhan Coronavirus had killed at least 1,383 people, including three people outside mainland China. The people who passed away outside China were a 44-year-old Chinese man in the Philippines, a 39-year-old man in Hong Kong, and a Japanese woman in her 80s. Globally, the virus had infected approximately 64,435 people, with the vast majority of those cases being in mainland China. There have been at least 15 confirmed Wuhan Coronavirus cases in the United States and seven in Canada. Since the initial posting below, Intertextile Shanghai Apparel Fabrics – a large textile show planned for March – has been postponed as a result of the virus.

Increased product prices, rising shipping costs, inventory shortages, prolonged supply chain disruption, health concerns and business travel/trade show upheaval are some of the issues the North American promotional products industry is facing or could soon face as result of the Wuhan Coronavirus outbreak in China, leading industry executives have told Counselor.

The vast majority of products that U.S. and Canadian promo suppliers and distributors sell in the North American market are produced in China. That supply chain has been under considerable stress over the last couple of years due to the trade war between the U.S. and China, which has seen tariffs imposed on approximately $370 billion in Chinese imports – a move that has driven up prices on domestically sold promo products.

Barely was the January ink dry on a “Phase One” trade deal that included a partial rollback on some import levies and what appeared to be the beginning of a return to normalized relations when the coronavirus began to spread with growing rapidity from its origin point in Wuhan, a city of 11 million people in Hubei province, China.

The new respiratory virus, also known as the 2019 Novel Coronavirus, had infected nearly 42,700 people as of Tuesday morning (Feb. 11), according to press reports. The overwhelming number of those cases are in China, but the disease has spread to countries around the world, including 12 cases in the United States. More than 1,000 people have died, which already makes Wuhan Coronavirus more deadly than the Severe Acute Respiratory Syndrome (SARS) of 2002 and 2003, which claimed 774 lives.  

Beyond the harrowing human impact, the virus is impacting the business of the promotional products industry. Some industry executives think things will deteriorate further before they get better. They caution that the potential for lasting, pervasive disruption is real. “There are choppy waters ahead,” Joshua White, general counsel and senior vice president of strategic partnerships at Los Angeles-based Top 40 distributor BAMKO (asi/131431), told Counselor. “Our industry is headed for a lot more pain than many might realize.”

Travelers wearing protective masks

Travelers at an airport in China wear masks to protect themselves from contracting Wuhan Coronavirus.

Supply Chain Stress

The potential pain is rooted in supply chain disruption. To check the spread of the virus, Chinese authorities extended the Chinese New Year holiday – a time when work essentially comes to a standstill in the country – an additional week to Feb. 10. What’s more, authorities have instituted travel restrictions and are cautioning people to stay home unless it’s absolutely necessary that they venture out.

The upshot, from the ad specialty industry’s perspective, is that factories where promo products are made are expected to remain dormant for at least the short term or operate at a reduced capacity amid anticipated manpower shortages. That has the potential to delay promo suppliers’ replenishing of stock, leading to possible erosion of inventory levels.

“Factories are completely shut down,” Rob Spector, president of Montreal-based Top 40 supplier Spector & Co. (asi/88660), told Counselor. “Office workers are able to work remotely from their homes. But without factories being open, it restricts the ability for the production centers to accept and process new orders.”

Alan Tabasky, vice president and general manager of Florida-based BEL USA, told Counselor that various Chinese factories the company sources from are delaying their opening until at least the end of February. “Seems, at best, that production will start a few weeks later than anticipated,” said Tabasky, whose BEL USA is parent company of Top 40 distributor DiscountMugs.com (asi/181120) and supplier BEL Promo (asi/39552).

Certain suppliers told Counselor that their inventories are more than sufficient for the time being, but extended delays in factory openings and bogged down production could eventually lead to inventory shortages, especially on top-selling products. Top 40 supplier BIC Graphic (asi/40480) wasn’t yet anticipating inventory shortages, but the firm does expect “to experience some delays in receiving planned inventories,” Melissa Ralston, chief marketing officer, told Counselor. “However, we are prioritizing orders with our manufacturing partners to provide our customers with product as quickly as possible, as well as reminding customers of the current stock of USA-made items that we have available.” Ralston added: “We do have ample inventories on hand at the moment. However, in the event that we are out of stock, we will practice our normal policy of offering a similar or upgraded item at the same price.”

Caution on the part of factory owners could extend the production downtimes further, as could cases of Wuhan Coronavirus possibly rearing among a facility’s labor pool. “The concern is that if a returning worker is affected with the virus still in the incubation period, the potential effect would be that the factory would have to be quarantined by local authorities for another 14 days,” Trevor Gnesin, CEO of Tustin, CA-based Top 40 supplier Logomark (asi/67866), told Counselor.

Of course, even if factories reopen as soon as possible, there’s potential for capacity levels to be below the norm, as at least a percentage of the labor force will decide to not return to work – that’s to say, even more than is normally the case following a Chinese New Year. Furthermore, as Ralston noted, production could lag upon reopening as factories must follow strict guidelines with regards to sterilization of their facilities and implement daily health checks on employees to avoid viral spread. “It’s very difficult to get information from our suppliers, so there’s definitely a lack of communication on what we can expect,” Eddie Blau, CEO of Los Angeles-based Top 40 supplier Innovation Line (asi/62660), told Counselor.

How Long Will the Disruption Last?

Nostradamus would be hard-pressed to answer that one, industry executives said. Still, promo supply chain experts believe it’s likely to be at least weeks. “Most suppliers are preparing for a minimum of a two- to three-week delay in getting our shipments,” Blau said. “The situation is fluid, but we’d be naïve not to expect more than a blip in supply chain disruption.”

Others think the upheaval could stretch into the spring and even longer. CJ Schmidt, president/COO of Largo, FL-based Top 40 supplier Hit Promotional Products (asi/61125), told Counselor that uncertainty about how things will develop means the disruption could last a minimum of three weeks to a maximum of three months. “No one really knows for sure what’s going to happen, but I’m expecting at least another two weeks of factory shutdown,” said Spector. “China seems to be very vigilant in containing the disease. It appears they will not allow any kind of citizen mobility until it’s contained.” Indeed, some industry sources said that certain factory partners have indicated the earliest they’d be able to get containers stateside would be May.

“We’re looking at – at least – a couple of months of ongoing impact,” White told Counselor. “It could be more. If we’re lucky, it’ll be a couple of weeks delay. Even a couple of weeks of halted production will have a months-long impact downstream. If the travel restrictions remain in place into March, which they very well could, that will have a serious impact on the global economy in 2020.” 

Potential for Rising Product Prices and Shipping Costs

Of course, it’s not just promo supply chains that are being impacted. China is the world’s workshop, and its industrial infrastructure has been temporarily crippled by the Wuhan Coronavirus outbreak. That can have ripple effects on the shipping/air freight industries that carry China-made products around the globe. There wasn’t consensus among industry executives on whether shipping/freight costs will rise, but some promo pros expect that to occur, with others saying they were as yet unsure.

Tabasky is among those anticipating an increase. He noted that shippers have already begun reducing export capacity from China. “Once there are less ships and containers, supply and demand takes over, and the prices rise,” he told Counselor. “I would not be surprised with a 10% increase until the market stabilizes again.”

“In the short term, the surge in demand of outbound space (air freight) will definitely increase, and given the shortage of passenger carriers, the rates will most likely hit peak season levels,” Jim Hagan, CEO of California-based Top 40 supplier Sweda (asi/90305), told Counselor. “We can also expect delays in being able to book the space.”

Dan Jellinek, executive vice president at Alpharetta, GA-headquartered Top 40 supplier The Magnet Group (asi/68507), also believes it’s going to soon cost more to get product from China to North America. “The production delays will yield to increased demand for boats or planes, and therefore, I do expect to see some cost rises,” Jellinek told Counselor. 

Some industry pros said the arithmetic of delayed factory openings, reduced production capacities, possible inventory shortages and potential shipping cost hikes will add up to a likelihood of higher prices on promotional products in the North American market. “I definitely expect price increases,” White told Counselor. “Some stuff is just going to be nearly impossible to get. Other items will have to come from non-China sources that will cost significantly more. The supply side of the supply chain is going to tighten pretty significantly. That’s going to drive up prices.”

Tabasky outlined his reasons for believing that heftier price tags are a soon-to-be reality across the promo industry: “Up the supply chain, before the factory level, you have the raw materials. These are just as affected by disruption. The product factory that pays the most will get the raw materials, which increases the finished product cost. If all the workers are not able to travel back freely to their place of employment, then the factory paying the highest wage will have the workers. Again, that contributes to a higher cost for the product. And then, of course, there’s the shipping issue.”

Even so, Tabasky said it’s possible that Beijing would step in to dissuade price increases to keep demand strong, possibly even using government subsidies to help mitigate impact. “Initially, the factories would make price concessions to avoid losing business, and the government can assist with currency adjustments to lower the cost,” Ira Neaman, president of Avenel, NJ-based Top 40 supplier Vantage Apparel (asi/93390), told Counselor.

Meanwhile, others think price rises won’t occur immediately, but could come down the line, depending on the duration of the disruption. “If it takes longer than six to eight weeks for factories to be up and running at full capacity, there will be a strong likelihood of price increases. It comes down to supply and demand,” Gnesin said. Jeff Lederer, president of Prime Line (asi/79530), Top 40 supplier alphabroder’s (asi/34063) hard goods division, said that “if the delays last more than 45-60 days, I suspect that it will impact the inventory levels and therefore suppliers will be discounting less and potentially raising their prices. If sales are impacted, then suppliers will need to cover their fixed overhead that they budgeted.”

Beyond stock items, there’s likely to be impacts on custom order quotes, including uncertainty on pricing and stateside arrival times. “Unfortunately, right now, it’s difficult to give a production time for something custom from China,” said Tabasky. “Until we know exactly when the factories will reopen, it’s difficult to give an estimated in-hands date.”

“Can We Catch Coronavirus From Imported Products?”

Product availability and costs are certainly concerns, but so is something even more pressing. Promo pros – and Americans in general – have aired fears that the virus could spread through imported items, if those products were touched or breathed upon by infected people. The Centers for Disease Control and Prevention (CDC), the U.S.’s leading national public health institute, has continued to maintain that there’s no evidence to suggest the virus could spread by such means.

“Because of poor survivability of these coronaviruses on surfaces, there is likely very low risk of spread from products or packaging that are shipped over a period of days or weeks at ambient temperatures,” the CDC said in a statement. “Coronaviruses are generally thought to be spread most often by respiratory droplets. Currently there is no evidence to support transmission of 2019-nCoV (Wuhan Coronavirus) associated with imported goods and there have not been any cases of 2019-nCoV in the United States associated with imported goods.”

Trade Show and Business Travel Disruption

Nonetheless, the virus can spread by person-to-person contact or by being in close proximity, especially in tight quarters, to people who are infected. That’s a key reason the venue for Canton Fair, China’s oldest and biggest trade fair, which is attended by many promo industry leaders, has suspended exhibition activities until further notice due to the outbreak of the Wuhan Coronavirus. Canton Fair was originally scheduled to hold its spring season exhibition at the Canton Fair Complex on April 15.

Health concerns are prompting North American promo pros to cancel trips to China and impacting the work of domestic ad specialty firms’ overseas staff. Blau’s Innovation Line has postponed its normal spring travel to China until the situation improves. Logomark personnel are not traveling to Asia until further notice, and all the company’s China-based staffers are working from home. Spector has canceled all China travel plans, and even called off traveling to Frankfurt, Germany on a product development trip that had been scheduled for this coming weekend. Prime Line has sent masks to its office in China, and asked personnel to limit their travel until things settle down.

Meanwhile, employees of BEL USA’s Asian office have been staying home. The office is expected to open about 10 days later than what would be the norm following Chinese New Year. BEL’s U.S. team has canceled plans to go to China in April and is evaluating whether to call off planned spring travel to other Asian countries. Taking a similar approach, BIC Graphic has called off all China travel plans for its domestic teams, while its Asia-based teams have been working from home. “The Hong Kong team is going back to the office in various shifts starting this week, and the Shenzhen office will remain closed through this week,” Ralston said.

In an anecdote that emphasizes the upheaval overseas, certain overseas BAMKO employees have not been able to get back from their home provinces in China to the distributor’s office in Guangzhou, White told Counselor. “BAMKO’s China general manager will spend the next few weeks traveling the globe establishing alternative sourcing channels for us,” said White. “We are not planning on sending any members of our team to China until this is resolved. Those restrictions don’t apply to the rest of Asia, and we’ll continue to expand on our sourcing office in Vietnam.” 

Trying to Cope

Savvy promo suppliers and distributors are taking what steps they can to mitigate impacts to end-clients. BIC Graphic, for instance, has been working closely with factories to prioritize orders. BAMKO, which does direct sourcing in addition to buying from domestic-based industry suppliers, is leaning heavily on its alternative supply chain options in countries like Vietnam, Bangladesh and India. “We are preparing assiduously for a prolonged and very serious challenge,” said White. “Thank goodness we spent the last few years intentionally diversifying our supply chain to countries beyond China.”

As some promo executives see it, the Wuhan Coronavirus and the ongoing import tariff challenges that preceded them should serve as a wake-up call to the promo industry and other sectors that rely so heavily on Chinese production, some executives said.

“Our industry is at risk for supply chain disruptions, and it always has been,” Tabasky told Counselor. “We are all very reliant on our overseas partners, whether it is for raw materials or finished goods. Between political pressures we have all had over the past couple years, and this new, serious health threat, it would be prudent for everyone to evaluate the risks imposed by your current model, and make plans to develop a proper strategy moving forward. Hoping things will get better and not happen again is not a strategy.”