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March 17, 2020

Activity Rises at China Promo Factories

Still, inventory shortages, shipping issues and economic disruption in the U.S. remain challenges.

By  Christopher Ruvo

With the viral spread of COVID-19 on the decline in China, more factories that leading promotional products suppliers partner with there have resumed operations and are building back toward full production capabilities, executives told Counselor.

Chinese Workers

Female factory workers at a facility in China in 2016

Nonetheless, suppliers in the $25.8 billion North American promotional products industry still expect to deal with some inventory shortages and shipping challenges as a result of the coronavirus-driven disruption to factory activity in China, which produces the vast majority of the products sold in the domestic promo market.

“All of our factories are back and operational as of last week,” David Nicholson, president of Pennsylvania-based Top 40 supplier Polyconcept North America (PCNA; asi/78897), told Counselor. “We are seeing shipments starting again out of China and estimate overall factory capacity to be at 75%.”

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The story was similar for Seattle-based Top 40 supplier iClick (asi/62124). The firm says about 95% of its factories in China are back online. Those facilities are operating at around 75% capacity. “We’re optimistic that we’ll see 100% capacity at our factories at some point in May,” Rob Alley, iClick’s vice president of marketing, told Counselor.

Clearwater, FL-based BIC Graphic North America (asi/40480), the industry’s seventh largest supplier by revenue, reported that all of its factories in China have restarted production at full capacity.

“After Chinese New Year was extended due to COVID-19, we did have to extend lead times on a small number of overseas items, primarily in the technology category,” Melissa Ralston, BIC’s chief marketing officer, told Counselor. “However, these extensions lasted less than a month, and we were back to standard lead times on these overseas items as of Wednesday, March 11.”

Inventory Shortages, Shipping Issues
Even so, suppliers do expect some challenges related to shipping. “We aren’t seeing any major issues with ocean freight right now, but we have experienced capacity and pricing issues with air freight,” said Nicholson. “This is consistent across all of Asia. We expect the air freight issues to continue given the additional international travel restrictions.”

Alley added: “Transit times remain slightly longer due to government screening of the shipping vessels. Both air and ocean deliveries are experiencing additional compliance and safety checks before entering ports. In total, these measures have added two to seven days to our receiving timelines.”

Ralston noted that BIC’s teams in Asia are working closely with both its factories and freight carriers to prioritize the most urgent orders.

Despite factory activity in China getting closer to normal, suppliers throughout promo have dealt with inventory shortages as a result of the vastly reduced production activity during the winter, especially in February, when Chinese manufacturing experienced historic declines.

And while the inventory issues could be worse if deeper-reaching factory disruption last longer, the shortages aren’t done yet.

Nicholson said PCNA’s current inventory position remains healthy, but noted that “manageable” inventory shortages are expected in April and May, particularly on new and seasonal products. “We recommend planning projects and submitting your PO’s as far ahead as possible,” Nicholson wrote in a letter to distributors. “The impact on supplier inventory levels will be widespread across the industry, so communicating with your clients now with regard to the situation will be an advantage,” said Nicholson, adding that PCNA’s Leed’s and Bullet lines might not release their holiday products until September, instead of August as is the norm.

While asserting that inventory impacts for iClick should be minimal, Alley noted that certain components for power banks are in short supply across the technology industry, which could cause some issues for the tech-focused supplier. “This is a worldwide problem,” said Alley. “South Korea, Japan, etc. are all impacted. Therefore, parts from those countries and others are causing delays.”

With COVID-19 cases now occurring throughout the U.S., distributors have flooded suppliers with orders for hand sanitizer. That’s resulted in BIC, and other suppliers, having to temporarily suspend new orders on the product due to shortages – a problem BIC and others are working fast to rectify. Still, Ralston said BIC is in a good position on inventory otherwise for the time being. “In the event that we are out of stock on a product, we will practice our normal policy of offering a similar or upgraded item at the same price,” she told Counselor.

‘Beyond A Supply Chain Issue’
Even with Chinese factories retooling and getting closer to normal production, the looming economic downturn in the U.S. stands to have a potentially dramatic negative effect on demand for promo products. With events being canceled, schools and businesses closing, President Trump issuing recommendations for people not to gather in groups of more than 10, all in an effort to check COVID-19’s spread, it’s increasingly possible that the promo industry’s collective sales will decline, at least in the near term.

“The virus’ impact has moved well beyond a supply chain issue to a demand challenge for our industry,” Nicholson told Counselor. “We are hearing reports from distributors that incoming order volumes were down 20% to 30% last week.”

In his letter, Nicholson added: “Best case scenarios right now would have a sharp decline in U.S./Global GDP in the first half of 2020 followed by a recovery and rebound later in the year. Should the virus impact extend well into Q2, we would likely see full-year GDP decline in 2020. In either scenario, it is a given that end-user demand will be constrained as a result of event cancellations, travel restrictions and general business uncertainty. For now, the bigger question is the extent and timing of these impacts on the broader economy and our industry.”

Promo companies are also contending with alterations to their normal operations in an effort to keep employees safe and help prevent the spread of COVID-19. Read more about that here.