“Orders are good but every factory has a serious and worsening shortage of cash flow. Shipments are being delayed and payments are being deferred.”
Date: Wednesday, September 8, 2021
Small and medium-sized Chinese export manufacturers are rejecting orders and scaling back production to avoid mounting inventory and cash flow problems caused by extended shipping times.
Disruptions to shipping – both sea and air – as a result of increased pandemic control measures, including lockdowns, are stretching out payment terms for Chinese factories.
Cash is being tied up in inventory that cannot be shipped quickly, forcing people like Betty Chen, who runs garment factories and wholesale shops in Guangzhou, to cancel orders to stay afloat.
The problem is adding pressure on Chen and other business owners already struggling with the high cost of raw materials.
“I’ve been in export manufacturing for over a decade, and I’ve never seen a situation like this year,” Chen said.
Before the pandemic, it took three months for Chen’s orders to be made and paid for, but that has been pushed out to at least four. To add to the problem, upstream material suppliers are now asking for payment terms of 15 days or less, and sometimes even cash on sale.
“How do small and medium-sized enterprises [SMEs] operate with such capital turnover?” she said. “The more we produce, the more inventory we have.”
Raymond Ye, an original equipment manufacturer producing footwear products in Zhejiang, also made the difficult decision last weekend to reduce his production by a third for the rest of the year, even though his factory was expected to be at full capacity and export orders were still coming in.
He cancelled most of the orders placed by Chinese online merchants, saying the risk of slower payments from cross-border e-commerce traders is high.
Chen and other manufacturers’ cutbacks are reflected in the latest factory activity data.
The Caixin/Markit manufacturing purchasing managers’ index dropped to 49.2 last month, from 50.3 in July, falling below the 50-mark that separates growth from contraction for the first time in nearly one and a half years.
Both the new order and export order components also fell below 50, implying more firms are reporting a decline in orders than a rise.
But as actual exports are still buoyant and overseas demand for Chinese goods is healthy – as shown in August trade data – the slowdown among small producers is supply driven; in that manufacturers are taking the initiative to reduce production to stay solvent.
Kevin Huang, who produces hardware in Guangdong province for export, said he is not short on orders or foreign demand.
“There are a lot of orders, but I don’t dare accept them,” he said.
“Now we have an inventory of 80 containers waiting for shipment. I’m running out of funds and under a lot of pressure to pay for my operations, like other factories here.”
But filling these orders presents its own problems, according to another garment producer, Huang Weijie.
“There are foreign buyers to place orders in China,” Huang said. “That’s because everyone knows the US currency is overissued.
“But if we Chinese factories can’t ship in time and the clothes are out of season, the buyers can easily cancel the orders.”
This conundrum has been present since the pandemic started, as congestion at ports hit by lockdowns and staffing shortages forces up container prices
In major exporting countries across Asia, exporters are scrambling to find available containers for goods, while in the United States, Europe and Australia, empty containers are piling up at ports because production has not returned to pre-pandemic levels, delaying their return to China.
When big ports like Yantian in Shenzhen and Ningbo-Zhoushan in Zhejiang have gone into lockdown due to coronavirus outbreaks, container prices and shipping have jumped.
Late last month, the Drewry World Container Index, which provides weekly assessments of container freight rates, surged for the 19th consecutive week to US$9,817.72 per 40-foot container – a 351 per cent increase versus the same week in 2020.
It is no longer unusual for it to cost more than US$20,000 to ship a 40-foot container to the United States, according to state-funded Chinese media site thepaper.cn. The value of a single container of Chinese furniture imported to the US is basically comparable to the cost of shipping.
Virus outbreaks and lockdowns have also caused delays and driven up costs at airports. Air freight prices surged at Shanghai Pudong International Airport after an outbreak of coronavirus cases closed its cargo operations last month.