As a result of challenges posed by the novel coronavirus, manufacturing activity in China – the world’s workshop – experienced historic declines in February, according to two recent studies.

The North American promotional products industry, which sources most of the products it sells domestically from China, has felt the effects of the supply chain shutdown. Still, suppliers say manufacturing is beginning to resume at their China-based partner factories and there are positive developments to report, though continued disruption lies ahead, at least in the short term.

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At the macro level, the Caixin China manufacturing purchasing managers index tallied 40.3 for February – the lowest monthly reading since the survey started in April 2004. Released Monday, the index was down from 51.1 in January. Readings above 50 indicate expansion; below 50 equates to contraction. Production, new orders and staffing levels declined at the most rapid rate in the 16-year survey’s history, as the Chinese government extended the Lunar New Year and imposed travel restrictions to contain the COVID-19 outbreak.

“The supply and demand sides both weakened, supply chains became stagnant and there was a big backlog of previous orders,” Zhengsheng Zhong, chairman and chief economist at CEBM Group, said in a statement accompanying the data.

A woman at work in a factory in China prior to the COVID-19 outbreak.

The Caixin index acutely focuses on business sentiment and activity at smaller private manufacturers. Meanwhile, another index from China’s National Bureau of Statistics concentrates on activity and sentiment at larger state-owned manufacturers. Released over the weekend, the 15-year-old index plunged to an all-time monthly low reading of 35.7 for February. Down from 50 in January, the reading is even lower than the worst point reached during the Great Recession of 2008-09. Tallies below 50 suggest contraction in manufacturing.  

“The fate of China’s economy is of crucial importance to a world with few solid drivers of growth,” The Wall Street Journal reported. “The country’s gross domestic product dipped to a three-decade low of 6.1% last year, yet that was still enough to power about 40% of the world’s economic expansion.” Some analysts see China’s growth slowing further in 2020, to around 4%.

Supply Chain Challenges Persist for Promo
The overarching data on Chinese manufacturing bears out what promotional products suppliers say they’ve been experiencing over the last month or so – namely, that their China-based factory partners have either not been operating or, as of last week, starting to operate but at reduced capacity.

Suppliers have voiced concerns about the production plunge, saying that prolonged low activity at China factories could lead to inventory shortages for the U.S. and Canadian promotional products market. Even so, certain suppliers were reporting some movement in the right direction.

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As of Feb. 27, Philadelphia-based supplier Pop! Promos (asi/45657) said that 80% of its factories had reopened. “We expect all of our factories and offices in China to reopen by Monday, March 2nd and to return to normal production times on all of our products by March 10th,” the supplier said in a communication to clients.

While good news, Pop! executives acknowledged that their firm – and the promo industry as a whole – were far from out of the woods. “We expect continued challenges in the coming weeks as factories deal with labor shortages and work with their sub-suppliers to get back up to full production capacity,” CEO Erin Reilly and President Sterling Wilson wrote in the letter. “We are also conscious of the possibility of further shutdowns and travel restrictions as the situation evolves. … We will continue to keep you updated on changes in the situation.”

Alphabroder (asi/34063), the largest supplier in the $25.8 billion North American promotional products industry, detailed a similar situation in a Feb. 28 letter to distributor customers. Norm Hullinger, CEO of the Trevose, PA-based company, noted that factories were coming back online, but operating at “a fraction of full capacity.” Furthermore, “speed to shipment completion largely depends not on our (factories) coming back online and up to speed, but their raw material factories,” Hullinger said. “For example: If a factory can sew a bag together, but the zipper is out of stock, we must rely on the zipper raw material supplier to come back online.”

Further complicating matters is the reduction in tourist and business travel in and out of China. That’s led to shortages of air cargo space, which has slowed the export and import of goods. “Ships are stuck in Chinese harbors waiting to unload incoming freight, which impacts ability to move export freight out,” Hullinger wrote in the letter.

For now, suppliers are trying to adapt, and hoping for the best. Alphabroder, for instance, has been increasing orders from factory partners outside China and collaborating with factory partners to prioritize open hard good orders, among other measures. “The long-term impact of the virus is still yet to be seen,” Hullinger said. “Surely, there has been and will continue to be some level of disruption.”

The novel coronavirus, formally known as COVID-19, originated around the turn of the year in Wuhan, a city of about 11 million people in China. As of this writing, more than 3,000 people around the world have died as a result of the virus. Most of those deaths have occurred in mainland China. Globally, approximately 88,000 people have been infected. Confirmed cases exist on every continent except Antarctica.