The prospect of another extension of the suspension of work in Chinese cities is sending shivers across the globe. According to industry sources in China, there is a strong likelihood that the authorities may extend the Lunar new year holiday till February 17 in some key provinces, especially in greater China from February 10. This means that companies and factories will continue to remain shut, resulting in uncertainty looming large globally, including in India.
More than half the provincial governments have already extended the closure, a discretionary measure to ensure that migrant workers, travelling from infected regions, will not come back to work soon. Some global car manufacturers in China plan to restart production in the next two weeks, while others are still figuring out the exact date.
Some of China’s preventive measures include monitoring temperatures of workers daily, stocking up on protection gear and sanitising work areas.
There is no guarantee that the February 17 deadline won’t be extended, said people in the know. An announcement of a longer shutdown at this point could increase panic levels. China accounts for a substantial chunk of supplies to companies across the world and major industries, including auto, consumer durables and electronics have started feeling the pinch of reduced availability of Chinese supplies.
It Is Difficult to Switch Suppliers
Sheet metal and electronic parts used by automobile and consumer durable manufacturers will soon be in short supply, experts said. “This can be a tough situation for all of us in India,” said Confederation of Indian Industry (CII) president Vikram Kirloskar. “With most manufacturing companies having a global supply chain, they tend to be caught between a lean production schedule and trying to keep costs down.”
It’s difficult to switch suppliers for mass-production items and, in this context, it would be better to wait than shift vendors, he said. “Now will be the real challenge,” said Hemant Sikka, chief purchase officer at Mahindra & Mahindra.
“As there is no guarantee that operations will resume even on February 17, the entire global supply chain will get disrupted. This disruption will not only be for the Indian automotive industry, which depends largely on Chinese parts but will also have a spiraling effect on other industries as well.” The Indian economy has been battling a prolonged slowdown. A large number of industries depend on Chinese supplies and any further extension of the closure may force companies to look for alternative supplies source. But that won’t be easy.
“We can rely on an alternative source for standard parts, but parts of a circuit board or any software development cannot be immediately sourced from an alternative source,” Sikka said.
SUPPLY OBLIGATIONS
Manufacturers told ET that suppliers have invoked the force majeure clause that allows for unavoidable catastrophe and protects companies from fulfilling obligations.
“Since such a situation is indefinite and uncertain, suppliers would want to take help of the clause as they cannot fulfil the contract entered,” said Ankita Singh, founding partner, AAS Regina Legal. “The companies can alter or terminate the contract too. The financial implications cannot be imposed if it’s proved to be a force majeure clause.”
To be sure, China can quickly recoup the shortfall when factories restart, said Navkendar Singh, research director, client devices & IPDS, International Data Corporation (IDC), a market intelligence provider.
“Mobile companies generally plan for 8-12 weeks of production,” Singh said.
“It will be worrisome to tide through beyond February, post which the production cycle will be disrupted and will spiral for the next 2-3 months. Since there is no clarity when operations would start, scaling up production will also be an issue.”
Currently, 90% of mobile phones are assembled in India but some critical parts still come from China, he said. “Generally mobile companies fill up the supply chain between September and December and the inventory goes through February,” Singh said.
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