Global companies brace for supply disruptions

PUBLISHED : Saturday, 31 January, 2009, 12:00am
UPDATED : Saturday, 31 January, 2009, 12:00am

Global companies are bracing for supply chain disruptions on the mainland as the end of the Lunar New Year brings with it the expectation of further factory closures.

Issues such as workers not returning to the workplace and manufacturers shutting down as a result of the financial crisis are having an impact on the normal flow of global supply chains.

Lay-offs and factory closures are still taking place, said John So, a director of operations at consultancy Control Risks.

Last year, 62,400 factories closed down in the manufacturing hub of Guangdong and about 600,000 migrant workers left the province. The provincial government estimated 5 million more could leave this year.

The mainland, a major investment destination for international corporations because of its cheaper materials costs and vast consumer market, is expected to see another wave of factory closures following the Lunar New Year.

'The global financial crisis has intensified pressure on supply chains in China,' said Mr So.

In a research report issued by consulting firm AMR Research about 130 global companies surveyed said there were many risks attached to investing on the mainland, including intellectual property infringement, supplier and internal product quality, and security breaches.

For the sake of efficiency, global companies needed to focus their investments in a single locale and the mainland was a prime choice because of its good infrastructure, said Dane Chamorro, regional general manager for Great China at Control Risks.

'Meanwhile, they have to mitigate other risks such as rising costs,' he added.

Companies surveyed in AMR's report indicated that volatile fuel, energy and commodity prices were ranked as the three biggest risks. In addition, instability and complex bureaucratic requirements for activities such as land acquisition were a source of frustration for foreign investors, according to Mr Chamorro.

However, Mr Chamorro said he did not believe investors would relocate overnight to other production bases, such as Vietnam or inland provinces on the mainland.

'Other places, such as Malaysia and India, also have challenges,' he said. 'The migration of investments to other regions from China will become more obvious after five to 10 years.'