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News February 28, 2020

Coronavirus Update: China Manufacturing Resumes

That’s good news for the promo industry, but it comes with caveats, including reduced production capacity and pandemic fears. Also, interest in domestic-made promo products is rising.

By  Christopher Ruvo

Update Feb. 28, 7 a.m.
There have been at least 83,000 confirmed cases of COVID-19 around the world. While the vast majority of those infections have been in China, every continent except Antarctica now has confirmed cases. Fears of a pandemic that could damage the global economy fueled a 4.4% decline in the Dow on Thursday – the worst one-day drop in history.

While the 2019 novel coronavirus infection rate in China appears to be declining and manufacturing hubs there are lumbering back to life, the disease is spreading with greater rapidity around the globe, rattling markets and prompting health officials in the U.S. to prepare for a potential pandemic domestically.

Beyond the harrowing human cost of the virus, which had claimed nearly 3,000 lives worldwide as of Wednesday, the spread of COVID-19 has the potential to damage the global economy, an impact that stands to hurt the promotional products industry in North America. Even so, as concern over the virus grows, more North American promo distributors are looking toward Made-in-the-USA and Made-in-Canada branded merchandise.   

Here’s a glance at some of the issues in play that pertain to promo:   

Manufacturing Restarting In China
Reuters reported this week that many parts of China are starting to ease travel restrictions and certain restrictive emergency response measures. That’s allowing hundreds of thousands of workers to return from the provincial homes they went to for Chinese New Year in late January to the factories where they’re employed in manufacturing hotbeds in China’s east and south.

“At the current daily travel flow rate of more than 14 million people, about 192 million people are likely to return to cities where they work during the last two weeks in February, beating a government projection of 120 million,” Reuters reported.

Chinese Laborers

Chinese laborers work in a cloth factory in China in 2015.

The return of workers, combined with the efforts of factory management and government, is enabling manufacturers to gradually resume operations, albeit at below normal capacity, reports indicate. The phenomenon applies to factories promotional products suppliers partner with, some promo firms say.

“Most factories are open again and slowly getting back to work,” Eddie Blau, CEO of California-based Top 40 supplier Innovation Line (asi/62660), told Counselor. “We had merchandise in our forwarders’ warehouses, which has already shipped to us.”

“We are seeing factories restart production,” David Nicholson, president of Pennsylvania-based Top 40 supplier Polyconcept North America (PCNA; asi/78897), told Counselor. “Most are officially approved to re-open, but several are still waiting for government clearance. Of those that are open, workforce levels are at about 50% due to restrictions on travel for those returning from the new year’s holiday.”

Jing Rong described a similar situation on the ground in China. “All major supplier factories are now open, but only 30%-40% of the workers have returned,” Rong, who is vice president of sourcing and supply chain for Top 40 supplier HPG (asi/61966), told Counselor. Factories could “struggle with labor shortages until the May/June time frame.”

Prolonged disruption to Chinese manufacturing could, industry executives have said, lead to inventory shortages and product price increases. As such, the resumption of factory activity is an undoubted positive for the North American promotional products industry as a whole. The vast majority of the products the industry sells here are produced in China.

Nonetheless, the below-normal production levels and other potential issues continue to jangle nerves. Nicholson articulated some of the concern: “The biggest unknown is the ripple effect throughout the supply chain with regard to raw materials and transportation. Right now, our factories are able to get up and running relatively quickly as they have supplies on hand from before the Chinese New Year break. That won’t be the case in the next two-to-three weeks. The factories may have the workers, but likely will face issues getting enough raw materials.”

While noting that ocean ports in China are open and operational, Rong said that trucking remains a big challenge for shippers, predominantly those that are not in major cities. “Most require advanced bookings and have reported extended transit times due to driver shortages,” Rong told Counselor.

Given those and other challenges, Blau said: “I think we’re in for a slower production cycle for the next couple of months.”

Looking To North American Manufacturers
In a video on coronavirus disruption that was recorded for Top 40 distributor Geiger’s (asi/202900) global sales team and workforce, CEO Jo-an Lantz encouraged associates to, among other things, consider guiding clients toward purchasing products that have been produced domestically. “You can use Made-in-USA products,” Lantz said in the video. 

Apparently, the Lewiston, ME-based company isn’t the only industry distributor with a growing interest in stateside-made ad specialties. Suppliers such as Utah-based Top 40 firm SnugZ/USA (asi/88060) have told Counselor that coronavirus-related fears are starting to materially drive up interest in Made-in-the-USA items. “The fact that we’re a domestic manufacturer has pushed business our way,” CEO Brandon Mackay told Counselor. “We’ve definitely seen a spike in requests asking us to confirm that a product is manufactured in the U.S. I think there were many who hoped that China factories would be open sooner and then ran out of time. That’s led orders to come in like a wave for us.”

Some Canada-based suppliers that specialize in domestic production are also seeing a surge in orders. Foxy Originals (asi/55228), a Toronto-based supplier that makes custom jewelry and accessories, is experiencing a boom in business. It’s directly tied to coronavirus disruption. Unable to wait for China-based production amid the COVID-19 troubles, end-buyers that range from a charity to a soft drink brand have turned to Foxy Originals for swift fulfilment. Foxy Originals Co-Founder Jennifer Ger told CBC that the company is experiencing "an 80% increase in quote requests over this time last year.” Ger is forecasting a 50%  increase in business for the first quarter of 2020 compared to Q1 2019.

Also based in Ontario, Redwood Classics Apparel (asi/81627) produces its wearables in its factory in Canada. The firm has been experiencing a rise in interest, President Kathy Cheng told Counselor. That includes a recent large-scale order from an American-based company that didn’t want to risk sourcing from overseas given the coronavirus disruption. “We stock a lot of raw material, we have production here, and we’re able to have much more control when it comes to ability to deliver,” Cheng told Counselor. “That’s something more people are taking a look at right now.”

Despite the apparent interest in North American-made products, some distributors are leery about having to rely too heavily on sourcing brandable hard goods and apparel from domestic-made lines. Kathy Finnerty Thomas has said that product availability and other factors could limit a potential Made-in-the-USA sales rise. “While we do try to source product in the U.S., quite often the U.S. suppliers don’t have the sufficient quantity or the level of customization needed for a project,” the president of Arizona-based distributor Stowebridge Promotion Group (asi/337500) told Counselor. “U.S.-made products are great, but very limited in scope of available products.”

Pandemic Fears & Economic Worry
One thing that could potentially dry the wellspring for promo products, regardless of where they are produced, is if coronavirus becomes a protracted worldwide pandemic that causes a global recession. It’s too soon to say if such an economic disaster will occur. Still, the viral spread around the globe has quickened, even as the rate of new confirmed cases in China has declined, with few new cases being reported outside the Hubei province disease epicenter. The virus originated in Wuhan, a city of 11 million people in Hubei.

As of late Wednesday, there were more than 81,000 cases of COVID-19 across the globe. The vast majority are in China. Still, cases were starting to expand quicker beyond China’s borders. Countries including South Korea (1,260), Italy (374), Japan, Iran and others around the Middle East were experiencing a rise in infections. This week, the first coronavirus case was reported in Latin America – in Brazil. And in Europe, countries like Switzerland were reporting their first cases.

In the U.S., there have been about 60 confirmed coronavirus infections. This week, Nancy Messonnier, director of the National Center for Immunization and Respiratory Diseases at the Centers for Disease Control and Prevention, forecast a wider spread of the coronavirus in the U.S. She said health authorities are preparing for a possible pandemic. She called for businesses, schools and communities to prepare and plan for potential outbreaks.

“If the virus spreads more widely, it might become difficult or impossible to contain it with the current methods,” The Wall Street Journal reported. “Instead, the efforts would shift to strategies such as closing schools, canceling mass gatherings and requiring employees to work from home.”

Added Messonnier: “The disruption to everyday life might be severe,” which could have a serious negative effect on the economy and thus the promo industry.

“If the coronavirus begins to spread in the U.S., business travel and business gatherings that drive significant promotional product sales will decline, causing related promotional product industry sales declines,” Matt Gresge, CEO of Top 40 distributor AIA Corporation (asi/109480), told Counselor.

“Travel, hospitality, education, retail, and food and beverage may face declines as people choose to stay home rather than be exposed to large groups of people at conventions, shopping malls, restaurants, bars, and higher education classrooms,” continued Gresge, who added that: “On the other hand, sales to the healthcare industry may increase as that industry works hard to recruit workers needed to care for those affected by the virus.”

Still, as of yet, there has been no unchecked spread of the virus in the U.S. “No one can predict what will happen with the coronavirus today,” Lantz told Counselor. “Fortunately, we have had a Pandemic Preparedness Plan in place since the 2010 H1N1 virus scare. On a periodic basis, that plan has been reviewed and updated. This has created a template for our continued preparation.”