CHINA ESQUIRE

I had a few posts on this topic already, but Jack Perkowski at Managing the Dragon has a couple of very good posts ( here and here) about how the weather in China (despite my generalized warning) is actually affecting Chinese businesses. ( h/t to Dan Harris at China Law Blog) I have not heard of any such problems from our clients as of yet, but I suspect the China-based ones are having similar issues but feel no need to inform their outside counsel of the fact. He writes:

I realize that I have already written a post on this topic Monday. However, given China’s importance in the global supply chain, I want to emphasize to every company around the world that is depending on goods from China that the situation in China is serious, and it is widespread. Forget about everything else. This is the story in China today. Literally, millions of people and thousands of businesses are being affected.

My latest information is as follows:

• Highways in as many as 13 or 14 provinces are closed. Supplies and products cannot be received or shipped.
• Electricity is limited, and only certain operations in many factories are running.
• Roads are not expected to be open for another week. When opened, people and coal transfer will be the first priority.
• Travelers in major transportation hubs including Shanghai are experiencing one and two-day delays in getting outbound flights.

If you are depending upon supplies from China, I suggest that you contact your Chinese suppliers to obtain the latest update, and insist upon periodic updates in the weeks ahead. Expect at least a two- to four-week interruption in supply.

I cannot agree more. It will be interesting to see the backlog as a result of the weather. I don’t think it will damage the Chinese economy too much, but for those of you involved with China-based companies or suppliers, it sure can hurt you. Jack says in his more detailed post:

We believe that factories in as many as 17 provinces are being affected, with those in Hubei, Hunan and Jiangsu being amongst the hardest hit. Many are facing power shortages and significant delays in receiving raw materials. Due to priorities being placed on getting much needed coal to power plants, some are being told by logistics providers that shipments of finished products to customers may be delayed for as much as two weeks. This means that both production and sales of many factories in China will be negatively affected in both January and February.

When doing business (internationally, in China or anywhere), always prepare for the worst and have a contingency plan.

Update: I totally skipped over this blog post that made some good suggestions. From All Roads Lead to China:

If you are a manufacturer in China and supplying export market, call your forwarders when you get back to the office to find out what the backlog at the docks is likely to be. Perhaps we will get lucky on this and the impact will not be that great, but it is possible that some of the docks that are typically reserved for containers are prioritized for bulk shipments like coal

Ongoing, safety stocks should be increased through the spring and summer just in case. this is a problem that will impact manufacturers for time time… particularly if this summer brings another drought

If you are manufacturing in China, and in Guangdong. Have your GA (Government affairs) person contact the local officials to see what the power supply looks like. Like I said, this is not some freak inefficiency in pricing that the power stations are trying to take advantage of. This shortage was something that was reported widely this summer, and I expect that it will continue well after the snow thaws (although, the snow pack melt may helps alleviate short term hydro issues).

Ongoing, safety stocks should be increased through the spring and summer just in case. this is a problem that will impact manufacturers for time time… particularly if this summer brings another drought

If you are manufacturing in China, and are buying bulk materials (especially metals). Wait to place your orders, particularly if you need aluminum, iron ore, or god forbid coal. These goods are ones that will see impact right away. Smelters are already down in Guizhou (10% of capacity), and I would expect others will be taken off as they are huge energy consumers and the power needs to be diverted to support other things. Prices should go down if you can wait as emergency orders are processed and supply can resume normal levels

CNN.com had an article today entitled “ Chinese PM apologizes for snow chaos” that piqued my interest. I am all for the Chinese government (and any government for that matter) admitting its mistakes with candor and frankness. Truth is always a good policy. But was this really necessary?

In a rare move for a Chinese politician, Prime Minister Wen Jiabao apologized Tuesday to the hundreds of thousands of people stranded in train stations across the country as the worst winter weather in half a century — combined with crippling power problems — nearly brought travel to a standstill for millions trying to go home for the Chinese New Year holiday.

“I apologize to you all,” said Wen, using a bullhorn to address stranded travelers at a train station in Hunan province. “We are currently trying our best to repair the system.

Chinese media replayed the apology several times. The unusual gesture is likely to go a long way in pacifying the anger and frustrations of the thousands stranded across the country, CNN’s Jaime Florcruz said.

It is also interesting to see that it is the central government that is making an apology whereas it is just as much the fault of the local authorities here. (Read between the lines: corrupt local authorities) We all know the central government in Beijing has come a long away and distanced itself from the local fiefdom mentality of the provincial authorities:

They’re also a signal to local officials to stop bickering over power usage. Provinces have been ordered to share power and energy sources so they can be diverted to where it’s most needed.

But I digress. Is this really the fault of the government? Yes, governments exist to serve the people. Governments should do their best to maintain infrastructure. And I am certain the Chinese government probably could have done better in this situation as hindsight is always 20-20. But even the most well-run government cannot prevent natural disasters and/or uncommonly bad weather. The government is not a deity. The article explains (emphasis added):

The weather couldn’t have come at a worse time: Millions of Chinese workers were trying to leave the cities where they work to travel home to their families for the Lunar New Year holiday, the Xinhua news agency reported, putting intense pressure on the country’s transportation network. The holiday, also known as the Spring Festival, falls on February 7.

Brutal winter weather has pounded China’s central, eastern and southern sections, stranding hundreds of thousands of travelers ahead of the holiday.

Airports in at least 10 cities were closed temporarily Monday and, adding to the woes, seven of the eight highways connecting Guangdong and Hunan provinces have been cut off, Xinhua reported.

I close on this thought: the government should not apologize for something that it clearly cannot control. That is just plain strange to me. Bad weather and holidays don’t mix. But then again, life is just hard sometimes. Don’t apologize about that.