India may face supply shortage as China extends factory shutdown

Rapid spread of the coronavirus in China has forced several factories to defer their plans to open shop post Lunar New Year holiday to next month

Feb 10, 2020

Rapid spread of the coronavirus in China has forced several factories to defer their plans to open shop post Lunar New Year holiday to next month. Indian companies dependent on Chinese factories are expecting a break in supply that will result in slowdown in manufacturing process and hike in prices. So far they remained unaffected as they had stocked up their stores in adavance anticipating the Lunar New Year holiday, Hindustan Times reported.  

First reported in December-end, the coronavirus has killed 908 people in China. The accumulated number of infections in the country has risen to 40,171. While the spread of the infection to India has been low, with three positive cases reported in Kerala, the disruption at factories as well as travel curbs imposed to contain the spread are bound to hit Indian businesses dependent on Chinese factories.

“Since many factories have stopped production in China, they won’t be dispatching goods. We may face problems in sectors where we maintain low inventories, for example electronics,” said Ajay Sahai, director general and CEO of the Federation of Indian Export Organisations was quoted as saying to HIndustan Times. 

Over the past two decades, Indian economy has become highly dependent on China that has transformed itself into a manufacturing hub for the world. Trade with the world’s second-largest economy has expanded more than 18 times to $87 billion in 2018-19 since 2002-03, when China was grappling with the SARS virus.  

Economists believe that a prolonged prevalence of the coronavirus in China would hurt India’s imports far more than exports. A high-end phone maker in India is left with stocks that would last for the next 15 days an industry executive, familiar with the matter said. Most of the importers had plans to place orders in February. They were hoping that the situation would improve by mid-February, but the situation appears to be getting worse.

“We are expecting prices to rise due to the coronavirus scare, because supply is short and demand isn’t slowing down,” said Arjun Bajaj, director of TV maker Daiwa. Bajaj said manufacturers in China are not sure when they would be able to open shop.

Not only India firms accross the globe are feeling the heat. Facebook is expecting the coronavirus to impact the production of its Oculus Quest virtual reality headsets. Some even expect delays to hit global icons such as Apple’s iPhone, according to a CNBC report.

Despite the government’s Make in India initiative, nearly 80% of components required for making phones in India come from China, said NK Goyal, president of Cellular Manufacturers Association of India. The manufacturers in China will be having backlogs to clear as orders are placed months in advance and won’t be in a position to take fresh orders unless the situation improves.  

Even makers of automobiles and their components are worried. Electrical and electronic parts such as sensors, power controls, engine control units, motors, and batteries are imported from China.

If the virus threat goes out of control, then all major automakers and their suppliers worldwide would get affected, said an auto parts supplier. “The automotive supply chain is so integrated that if the supply of one part stops, the entire vehicle assembly stops.”

For the Indian automotive industry, the outbreak could not have come at a worse time as manufacturers are transiting to the stringent Bharat Stage-VI emission norms amid a sales slump. Auto industry executives say if there is a shortage of parts, manufacturers’ investments and planning to comply with the emission norms from 1 April would be disrupted.

Chinese manufacturers supply to most of the top parts makers in India, which means production of vehicles may slow down in the next few months. Some of the product supplies that were in transit have already been hit due to port closures in China, an industry executive said.

In anticipation of the supply crunch, Indian retailers of consumer goods have started negotiations to source goods locally. “Our internal mandate is clear that whatever little dependency we have on Chinese imports, we will try and convert it into domestic sourcing,” said JP Shukla, co-founder and CEO of 1-India Family Mart, a chain of retail stores in India.