“Depending on the sector, factory, city, or province, staff turnover in factories can be up to 80% every year. This affects downtime at work," explains Dr. Michał Bogusz from the Centre for Eastern Studies, a Warsaw-based think that undertakes independent research on the political, economic and social situation in Central and Eastern Europe, Balkans, Caucasus and Central Asia.
In this Trans.INFO exclusive, Dorota Ziemkowska-Owsiany speaks to Dr. Michał Bogusz to get the inside track on the impact of the Chinese New Year on supply chains and global trade.
Read on to learn:
- How staff turnover between the calendar New Year and Chinese New Year impacts production
- Why factories in China do not always run ruthlessly around the clock as some perceive
- Why shippers in Western economies are accustomed to the impact of Chinese New Year
- How small and medium-sized businesses are turning to nearshoring
- Why some reports of a spike in demand for rail transport will not yield more rail freight capacity
Dorota Ziemkowska-Owsiany: To what extent will the crisis in the Red Sea worsen the situation of logistics related to the Chinese New Year?
Michał Bogusz, chief specialist in China Department of the Centre for Eastern Studies: It will certainly worsen by the fact that ships, when sailing around Africa, spend more time on the route, even by almost 20 days (there and back).
As a result, the return of empty containers to China will take longer, so the number of available cargo carriers on the market will decrease.
However, it is too early to talk about the scale of this phenomenon. We can only estimate that if the Red Sea is still blocked until Chinese New Year, the number of transports carried out by shipowners will decrease by one cycle (route from China to Europe and back).
Let’s take a look at what Chinese New Year celebrations traditionally look like. The first date of the festivities is February 9 if i’m not mistaken?
Yes, to be more precise – February 9 is New Year’s Eve, which means that all workers leave the factories 5 days earlier. Much depends on the sector, but in general, the labour cycle in China is as follows – migrant workers from around the country tend to arrive in cities in early January and look for a job.
Once finding work and signing a one-year contract, as that’s the only contract available, they work until the next New Year. They then leave the factory and return to the countryside. After the celebrations, about two weeks after the New Year, they look for jobs again in the same city or another one, likewise, in the same factory or another. Sometimes it takes a week, sometimes two.
Depending on the sector, factory, city, or province, staff turnover in factories can be up to 80% every year. This affects downtime at work because a new worker must first be trained, especially if they work on an assembly line for example.
Much depends on the arrangements between the factory authorities and the workers – if they are paid decently and on time, most of the staff will come back, and production can be started faster. If the employees feel cheated, the factory will look for new staff every year.
Estimates from Dachser, one of the well-known logistics operators, show that most Chinese factories may be closed for a whole month, and some even longer. This shows what a challenge the recipients of orders and the logistics industry cooperating with them have to face.
Of course. However, please remember that a recipient ordering goods from China is perfectly aware of the local production cycle. Therefore, preparations for the closure of factories are made well in advance. What arrived in Europe for Christmas was contracted already in February or March, following the previous Chinese New Year.
Moreover, when importing goods from China, you must also remember that the New Year is not the only period when production slows down.
Next is May Day, when the break can last up to 10 days, then the anniversary of the founding of the People’s Republic of China, which, combined with the Mid-Autumn Festival (this year on September 17 – editor’s note), also results in up to 10 days of celebration. Of course, the impact on logistics is incomparably smaller than in the case of the New Year, because workers do not change jobs and factories do not have to replace crews.
However, production in China is divided into three cycles each year. After Chinese New Year, new orders are placed and staff work until May Day. Afterwards, it works similarly until October. After the autumn break, production is in full swing until the next New Year.
To have a full picture of what is happening in China, we must remember that our idea of workers who sit in factories all day long, from dawn to dusk, and fulfill orders, is not entirely true. Yes, this is very often the case. However, it is also often the case that workers sit in factories all day long and do nothing because either there are no orders or semi-finished products that have not been delivered.
Generally, poor work organisation in Chinese factories causes constant congestion, which results in employees either having absolutely nothing to do, or suddenly being burdened with a huge pile of orders that they have to fulfill quickly.
It is interesting what you said – that generally, on an annual basis, production in China is cyclical, just as downtime is cyclical. Does this mean that the difficulties that the media warn against are not so severe since recipients of goods from China can prepare for them and, ultimately, get used to the situation?
A lot depends on what company we are talking about. If it is a large corporation, for example, a clothing company, then the production cycle, from obtaining models, through quality checking, importing to Europe, distribution to stores, and ending with sales, is carefully planned. We are talking about 1.5-year cycles, sometimes even longer.
On the other hand, there are small and medium-sized entrepreneurs ordering various products from China, the demand for which is not necessarily cyclical. In their case, orders are often placed ad hoc, which often means the need to change suppliers or look for additional ones.
Moreover, the situation is similar in larger companies, where demand for products is not cyclical. Let me give you an example. I was once in a factory in Italy where workers were taking screws from large baskets standing on scales.
When the weight of one of the baskets dropped, the system automatically placed an order for new screws from China. The order cycle was therefore related to the demand for a specific product and was in no way linked to a calendar that would take into account what was happening in China.
Sure, that’s why there are huge concerns about storage capacity in ports, access to empty containers, and rates that have been rising for several weeks.
The concerns exist, but as we said, they relate to certain natural processes that companies should take into account and include in their full operating costs. Alternatively, anyone who has capital and free storage space can try to stock up, but much depends on the type of cargo.
For example, I can’t imagine that someone who assembles computers in Europe will buy hard drives in stock before the Chinese New Year. In addition, there are signs of more diversification in production. This means that operators not only ship cargo via a handful of Chinese ports, but also many ports in various different Asian countries.
A very interesting observation related to this was recently shared by Cichen Shen from Lloyd’s List Intelligence, writing that “demand resulting from this year’s mini boom before the Chinese New Year does not seem to be as large as expected.”
This is because we are actually witnessing the transfer of production closer to sales markets. It doesn’t happen with much fanfare and sometimes it goes virtually unnoticed, because the largest corporations aren’t doing it yet.
However, this is happening in the case of small and medium-sized enterprises. The result is a negative change in investment dynamics in China.
This is interesting, especially since China is still referred to as the world’s factory.
Physically, it is still the factory of the world. The Chinese invest a lot in production capacity, but this does not change the fact that, mainly for political reasons, developed countries will not be willing to continue purchasing large quantities of products there.
Coming back to the Red Sea crisis, it is said that there is a sector that benefits from the increase in maritime rates (according to Bloomberg Intelligence, rates for transpacific transport increased by 56% in the first week of January compared to the previous week). It was stated that the popularity of rail transport between China and Europe was expected to return.
This is something of a fairy tale.
Really?
We looked into it some time ago and did some calculations. At the height of the pandemic, when Chinese ports were blocked due to COVID, so nothing could enter or leave, all possible cargo went by rail. The maximum efficiency of this transport was used. Do you know how much Chinese exports left the country by rail at that time?
Just 0.6 percent.
This is less than the monthly export fluctuations. There is no way that rail will replace ships, at least in the foreseeable future, because there simply isn’t the capacity. Even if an additional middle corridor were opened, increasing the capacity between China and Europe threefold, this would give us an effect of 1.8% of all exports. So we have nothing to talk about.
Let me add something here – the operator New Silk Road International recently announced that due to the increase in sea transport rates, the popularity of China-Europe rail connections has returned. It said the number of inquiries has recently increased, which will translate into an increase in rail transport rates. Based on what you’ve said, I understand that this can be considered propaganda?
Well, what you’ve read out to me is true. There has been an increase in inquiries about what is possible, because most people are unaware of the limitations I mentioned.
So when companies see that maritime rates have increased, it is natural to look for a cheaper alternative. So they ask about rail transport. Has the number of inquiries has increased? Yes it has. This does not mean, however, that the number of journeys has increased.
In your opinion, if disruptions in the Red Sea continue, can we expect shortages of certain products in Europe and a further aggravation of the problem with empty containers?
At this moment, in my opinion, we cannot talk about the cumulative effect of the Chinese New Year and traffic stops in the Red Sea.
The crisis related to attacks by Houthi militants is too short-lived for now. I even think that it may be used by some shipowners and container suppliers as an excuse to increase rates.
Please remember that in this industry, additional capacity was created during the pandemic, which has not been fully used recently. Moreover, as I said, the demand for products from China is decreasing. All this means that the situation may be difficult, but it is far from a catastrophe.
It will be one thing if the closure of this popular sea route drags on; for example, it catches already for the Chinese May Day. Then we will have a much bigger problem.
