The domino effect of the Chinese New Year on global markets

Friday the 31^st of January 2014 marked the beginning of the Chinese New Year, leaving the year of the snake and entering the year of the horse. Perhaps you saw some parades or other festivities celebrated locally; large cities really embraced the spirit of the occasion.  In China however, the holiday takes on a whole other level of meaning. For workers in industrial sectors working in large plants or factories, it is a period to celebrate and spend time with family. Workers are often given a two week vacation before the New Year, and sometimes two weeks after the date, allowing them to travel back and forth between the big cities to their native provinces. Companies whose supply chain operations originate, or are involved in some part in China during this period can be faced with some unique challenges.

The Chinese New Year acts like a catalyst for several issues many foreign companies must contend with. It starts with, as previously noted, manufacturing coming to a standstill for a month, as 250 million workers migrate back to their family homes. This naturally has a knock on affect for foreign companies wishing to import goods from China during this period. While not being able to place or receive orders during this period can prove to be an inconvenience, further difficulties arise when many workers do not return to their former posts. Meaning factories often struggle to restart production back to full capacity, resulting in further delayed shipments.

Increasingly, many migrant workers use the break as an opportunity to look for better job prospects. Work in electronics for example, is currently more profitable compared with apparel or toy manufacturing. The Hon Hai Precision Industry Co.,
‘the anchor company’ for Foxconn, reported that more than 90% of its staff returned back to work following the New Year. The Bridge Direct however, an American toy manufacturer, loses between 15% to 30% of its factory workers in China.  To make up for this shortfall in staff, new workers are drafted in, which combined with the pressure to meet production targets and shipping demands, can result in lapses in quality control, with goods being shipped that are not quite up to spec. One final factor, which is not helping the problem, is China’s shrinking labor pool, due in part to its strictly enforced one child policy. There were 120.7 million people in China between the ages of 15 and 19, in 2005; it is estimated that this will have fallen to 94.9 million by 2015.

How have foreign companies adapted to these disruptions, and are they changing their supply chain operations as a result?

To avoid costly delays and being understocked for Easter, many companies place their orders in August. Yet this level of foresight carries its own risks and downsides, as it makes it more difficult to predict and understand how well items will sell, while planning this far into the future.  Paying this far ahead of time, before items have actually been sold can also create cash-flow restrictions.

As we noted in a previous blog post, outsourcing to China is becoming increasingly less appealing for foreign companies, due in part to rising manufacturing prices. Unreliability and uncertainty are however also playing a role. Delayed shipments, caused by smaller workforces returning after the New Year, are also influencing companies’ decisions to move production either back to home turf or somewhere else altogether.

Are your supply chain plans affected by the Chinese New Year celebration. How would you/do you mitigate any risks as a result?