Manufacturing in China: COVID-19 Supplier Risks

In this guest post, the team at Movley discusses how COVID-19 has impacted suppliers and how to mitigate the issues you may face in the months ahead.

Back to work does not mean back to normal! With factories re-opening and production resuming, the landscape looks very different from what it did a few months ago.

Supplier bankruptcies have skyrocketed, and our reports show product quality has taken a nosedive. Here’s everything you need to know about the current state of manufacturing in China, and what it will mean for your business going forward.

How Have Suppliers Been Impacted?

The impact of COVID-19 on suppliers in China has certainly been immense. This is what’s happening now.

1. Production Rates Are Down: Production quantities have taken a big hit. One reason for this is the persistence of social distancing measures within China. Large gatherings of people are still prohibited, which is forcing factories to operate with fewer workers, and more space in between production line steps, than is optimal.
2. Raw Material Backlogs: Supply chains in China have been greatly disrupted by the various lockdowns and travel restrictions mandated by the government. Factories are having trouble getting their hands on the raw materials required to make their products. Manufacturers of automotive, tech, and chemical products have been especially affected, as they source their materials from the Hubei Province the one at the epicenter of the coronavirus pandemic, which has created a large backlog in availability.
3. General Financial Impact: Being out of production for several months while still paying employee salaries, rent, financing, and other fixed expenses can take a hit on any business. In China, factory shareholders are often responsible for paying debts, specifically payroll. This means they are incentivized to collect as much cash as possible from other lenders (such as you and your order deposits) to pay off their personal debt before declaring bankruptcy.
4. PPE is More Profitable: Since the pandemic began, there has been a global shortage of personal protective equipment (PPE), like face masks, respirators, and gloves. Many manufacturers in China have seen this as a profitable opportunity and have converted their factories to manufacture PPE instead of their usual products. Manufacturers that used to produce high-tech electronics are now making PPE.

This all amounts to a pretty serious shrinkage in factory outputs. Many suppliers simply cannot return to the level of production they were at prior to the outbreak. Many others are not even trying.

Mitigating the Risks of Manufacturing in China for Importers

The new, rapidly changing landscape in China is creating the following risks for importers:

• Supplier bankruptcy
• Product quality issues

Supplier Bankruptcy

The Risk: Suppliers have been hit hard by the coronavirus outbreak, by both the shutdowns themselves as well as the subsequent production difficulties. Importers rarely find out a supplier is going bankrupt until after it happens. This can leave them high and dry, scrambling to find a new supplier in time to fill orders and at a loss for cash deposits, R&D investments, and infrastructure (such as tooling and product molds).

To help combat the threat of supplier bankruptcy, importers should:

• Strengthen Relationships: Put an emphasis on strengthening your relationships with suppliers and monitoring any changes within factories. Keep an eye out for red flags coming from the factory. Any drastic changes can be a telling sign.
• Maintain Multiple Points of Contact: Get 2 or more points of contact in the factory in case one loses their job or is not aware. Build rapport and check in all your contacts on the factory’s health.
• Be Aware of Changing Employee Counts: Monitor each department regularly. This is something Movley includes standard in every product inspection report.
• Look Out for R&D Cuts: Engineers are often the first to go. Cuts here can also indicate serious quality issues to come.
• Watch for General Worker Cuts: This is the result of a production reduction, and can be indicative of shutdowns and other serious issues to come.
• Prepare for Lead Time Changes: Lead time changes are natural due to the backlogs and demands. However, if your factory’s lead times are considerably longer than the industry average at the same time for other similar suppliers in the region, it could be that your supplier is trying to collect as much money as possible from low-risk lenders to pay expenses such as payroll (which shareholders are often responsible for) before shutting down.
• Look Out for Less Favorable Payment Terms: Your supplier might ask you to accept a new, less favorable payment term such as 100% up-front, or 50-50 down from 30-70. This is not a good sign and can signal major financial problems in the happenings.
• Stop Investing in R&D: To protect your investment, it might be worthwhile to consider postponing new capital-intensive R&D projects such as new product molds without significant auditing and vetting of your partner.

If you suspect your supplier is at-risk of shutting down, you should start looking for a new supplier as soon as possible.

Product Quality Issues

The Risk: Movley has noticed a considerable increase in manufacturing errors and product defect rates, and a decrease in overall product quality.

Suppliers still operating are improving their margins and lead times by aggressively cutting costs in raw materials and skipping quality control steps in the manufacturing process. They are shifting to cheaper, lower-quality material suppliers. Even products that are visually similar to their pre-COVID counterparts are breaking down or wearing out far sooner than usual. For example, your fabric might look the same but fade much faster. This means bad reviews, product returns, and even lawsuits in the short-term and especially in the long-term.

Even products that are visually similar to their pre-COVID counterparts are breaking down or wearing out far sooner than usual.

No products are spared from this dip in quality, not even PPE. When Movley conducted quality inspections on a medical-grade FDA approved factory manufacturing KN95 for healthcare workers, we found that 15% of the masks inspected had holes in them!

Something like this just goes to show the lengths to which suppliers will go to cut costs during this crisis, and how dangerous that can be for the importers or the end-users buying their goods.

When it comes to mitigating quality issues, the best strategy is to be more stringent than ever in your quality control testing. We recommend the following in the time of COVID-19:

• More Inspections: If you aren’t conducting inspections, you should start immediately. You should be inspecting products both during the manufacturing process and prior to shipment. Factories are MUCH more cooperative fixing issues they find earlier on in production. And for the inspections you already do, be more stringent and thorough than ever before.
• Larger Sample Sizes & AQLs: Inspect more units. Reduce your acceptable quality limits to be more stringent with defects.
• Better Testing: Conduct more tests on your products than you normally would, and make sure you are testing the function and durability of the product, not just the appearance. Most inspection companies only visually check the product.

Being this rigorous in your quality control may sound like a pain, but it’s nothing compared to how painful the fallout from a batch of defective products can be for your Amazon business. Good quality control only costs a few extra cents per unit.

Stay Attentive

Suppliers in China are going through a truly tumultuous time, one which can lead to a lot of risk for importers. The new challenges certainly are serious, but they’re not insurmountable.

Being proactive, attentive, and scrupulous is the best way to defend yourself from the new and hazardous Chinese manufacturing environment, and ensure your business makes it through the pandemic unharmed.