Pressure on Chinese factories increases as US demand falls

Employees work on an electronics production line on Feb. 2, 2023, at a factory in Longyan, China’s Fujian province.

China Information Service | China Information Service | Getty Images

BEIJING — For some factories in China, it’s not full steam ahead after the end of zero-Covid.

All of the factories U.S. toymaker Basic Fun works with in China — about 20 of them — have told workers not to return immediately after the Lunar New Year holiday, CEO Jay Foreman said.

That’s because of a flood of inventory in the first half of last year that went unsold as U.S. consumer prices surged over the summer and l fall, he said. Basic Fun’s products include Care Bears and Tonka Trucks.

The official Lunar New Year holiday in China ended on January 27, but the travel period extends until February 15. The festival is usually the only time of year when migrant workers – more than 170 million people in China – can visit their hometowns.

“Every factory I spoke to said they were going to have fewer people employed this year than last year,” Foreman said. He expects US consumer demand to pick up later this year.

Chinese exports to the United States in the category of toys, games and sports account for about 6% of all exports to the country, according to Chinese customs data accessed via Wind Information. This category of toy exports to the United States saw a slight decline in 2022, the data shows.

“Retail, anything consumer discretionary, was hit pretty hard. It was really a combination of high inventories and a significant drop in demand for export markets,” Johan said. Annell, Partner at Asia Perspective, a consulting firm that works primarily with Northern European companies operating in East and Southeast Asia.

He said consumer electronics was experiencing a similar situation.

“For other industries, the situation is much better. Some are struggling to keep up with late orders and catch up on everything they had to deliver last year,” he said.

China abruptly ended its zero-Covid policy in December. But restrictions on business activity have been strict for most of 2022, including a lockdown of Shanghai for around two months in the spring.

US demand slows

Retail sales in the United States — China’s biggest trading partner on a single-country basis — have slowed in recent months. China’s exports to the US barely grew in 2022 and the US economy is expected to slow further in 2023.

This is on top of tariffs and bilateral tensions, which have intensified in recent years.

“We plan to continue to grow, but the pressure is very high,” said Ryan Zhao, director of Jiangsu Green Willow Textile, in Mandarin, translated by CNBC.

“From what I heard in the market, 2023 will be very difficult. American demand is down. The Russian-Ukrainian war is not over.”

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Some US customer orders have disappeared.

Zhao said his company works with a high-end bedding and textile brand in New York that filed for bankruptcy last year. To survive in the “slumping” market, he said the company is turning to low-cost products popular with younger consumers.

This means that to increase his income, Zhao must sell more items than before – and he plans in the coming months to hire 10 more workers locally for his 30-person factory in China.

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Asked by CNBC in January, China’s customs administration acknowledged the pressure on Chinese exports from slowing external demand and noted growing risks of a global recession.

Trade data shows that demand for Chinese products is increasing in other markets, such as Southeast Asia.

Since the end of China’s Covid wave, employers have increased the share of part-time positions and manufacturers are increasingly paying workers weekly, instead of once a month, according to Qingtuanshe, a research platform job within the Alipay mobile application.

Although there is no clear change in wages since the reopening, Qingtuanshe noted that the pay scale for factory jobs has fallen sharply during the pandemic.

Skills mismatch

For China’s domestic economy, the drop in foreign demand reveals a more widespread employment problem: the lack of highly skilled factory workers.

“It generally becomes more difficult to find workers and to find the right workers,” Annell said.

“You have high youth unemployment and there is a labor pool, but when you start looking in a specific city, it’s hard to find both qualified supervisors” and workers techniques, he said.

Manufacturing accounts for 18% of China’s workforce, and construction workers another 11%, said Dan Wang, Shanghai-based chief economist at Hang Seng China. However, the majority only have a high school diploma at best, making it difficult for them to change sectors, she added.

She expects there to be more than a million unemployed in rural areas – who are not counted by official statistics on urban unemployment. She attributed it to falling exports and a push for automation in China, as demand from the real estate sector for construction workers declines.

Weak consumption growth also limits the service sector’s ability to absorb new workers, as it did before the pandemic, Wang said.

“It seems that the ultimate solution still lies in government-sponsored training. Over time, more and more of these workers need to be trained to earn a living.”

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