Coronavirus is Slowing Production in China – Chicago Companies Must Figure Out How to Cope
AllCell Technologies employees Barry Kirkman, left, and Robert Mallett work on rechargeable battery cells on Feb. 26, 2020, in Chicago’s Back of the Yards neighborhood. Kirkman wraps each cell with a plastic layer while Mallett wraps the cell brick with a fire retardant material. (Abel Uribe/Chicago Tribune)
At AllCell Technologies’ facility in Chicago’s Back of the Yards neighborhood, dozens of employees are cranking out lithium-ion batteries, destined to power drones, electric vehicles and more.
The key component of the rechargeable batteries comes from China and other Asian countries, where the coronavirus has caused factories to shut down or operate at reduced capacity, and travel restrictions have hindered shipping.
Knowing the flow of parts could soon dry up, AllCell stocked up on materials to keep production going. That’s “a big financial burden” for a 40-employee company, said CEO Said Al-Hallaj.
“Who would have thought a small company from the South Side of Chicago would be impacted?” he said. “World trade wars, viruses, global epidemics. You would think, ‘I don’t have to plan for this, I’m not that big.’ … But that’s not the case.”
AllCell Technologies’ rechargeable battery cells come directly from China and other Asian countries, according to CEO Said Al-Hallaj. (Abel Uribe / Chicago Tribune)
The spread of the coronavirus — and the effort to contain it — is rocking supply chains around the world, and Chicago-area companies are not immune. They are searching for alternative suppliers while they worry about how much slowed — or stopped — production will affect their bottom lines and their workforces.
Disruptions from the coronavirus are predicted to limit the growth of the global average gross domestic product to 2.3% this year, its weakest mark since 2009, according to financial forecaster Oxford Economics. In the U.S., GDP growth is expected to slow to 1.5%.
In a report, titled “No mask can prevent financial market contagion,” Oxford Economics predicts that if the coronavirus outbreak becomes a global pandemic, it could lead to a recession.
Few expect a quick resolution.
Initially, the Lunar New Year celebration cushioned the economic fallout of the outbreak, as many factories and businesses in China typically close for one to two weeks for the holiday and workers travel home to visit family. American companies placed orders in advance of the holiday to ensure a steady supply. But that cushion is eroding.
“We’ve been lulled into a false sense of security,” said Justin Formella, chief strategy officer at MBX Systems, which provides server and computing equipment for streaming services, security companies and other customers.
The Libertyville-based company stocked up on storage and graphic processing hardware from U.S. distributors. But Formella said access to those products is becoming constrained.
“It’s like when there’s a tsunami, and you know a wave is coming,” Formella said. “It’s just delayed in how it’s going to hit.”
The World Health Organization has confirmed more than 80,200 cases of the new coronavirus, called COVID-19, and about 2,800 people have died. Most of the cases have been in China.
Though the epidemic appears to be slowing in China’s Hubei province, the virus’ epicenter, clusters of cases have popped up in Iran, South Korea and Italy.
The Centers for Disease Control and Prevention has advised travelers to avoid China and South Korea, and told older adults and those with chronic medical conditions to postpone nonessential travel to Iran, Italy and Japan.
In the U.S., stocks tumbled this week over fears coronavirus might become a pandemic. On Thursday alone, the Dow Jones Industrial Average fell almost 4.5%.
On Wednesday, health officials warned Americans to prepare for an outbreak. A total of 53 coronavirus cases have been confirmed in the U.S., and no one has died, according to World Health Organization data.
U.S. consumers are just beginning to see the effects of a disrupted global supply chain, but it’s evident at companies of all sizes and in multiple industries. Apple, Microsoft and Macy’s are among the large companies that have warned about the effects of the virus on their business. How quickly they, as well as small local businesses, can recover remains to be seen.
Logan Square-based Shop4ties had to turn away more than a dozen orders for apparel like ties and shirts because it wouldn’t be able to deliver orders on time, including one $18,000 order due March 13, said CEO and co-owner Becky Feinberg-Galvez.
AllCell Technologies employee Jerlene Jackson uses a heat gun to wrap rechargeable battery cells. (Abel Uribe / Chicago Tribune)
All of the company’s products are made in China. Though Feinberg-Galvez has been in regular contact with her suppliers, some factories didn’t reopen until Feb. 17 or 18 and with only half their normal workforce, she said. A dye factory still hasn’t reopened, she said.
Shop4ties received its first shipment in about six weeks Monday and was able to fill two orders. In a typical month, the company would handle about 70 orders, Feinberg-Galvez said.
“We were looking at big growth this year, but our first quarter is going to be 25 to 30% of what it was last year,” she said. “It’s hard to know what the long-term effect will be.”
Shop4ties’ six full-time employees and three contracted graphic designers are fully aware of the situation, Feinberg-Galvez said. Without knowing how the outbreak will affect sales this year, they’re working to mitigate what they can. she said.
Managing the situation is about the only thing U.S. companies can do at this point, said Phillip Braun, a clinical professor of finance at Northwestern University’s Kellogg School of Management. It’s still unclear whether employers will resort to layoffs.
“If this becomes a global pandemic, the results on economic growth are going to be even worse,” he said.
In South Elgin at Hoffer Plastics, the family owned custom injection molding company is awaiting four orders from a Chinese tool shop that was temporarily closed by the epidemic.
The Shenzhen factory has only recently reopened with a reduced staff, likely delaying delivery of metal molds needed to make plastic components used in everything from dishwashers to auto engines. “From a production standpoint, we need one mold to make millions of parts,” said Alex Hoffer, chief revenue officer.
Among the orders Hoffer Plastics is awaiting is a mold to make a plastic tube for an oral hygiene product used in hospitals. The mold was to be delivered by March 30, with Hoffer set to begin production on a “hot timeline” for a Chicago-area medical equipment manufacturer.
Delays on the $500,000 medical tube order could prove costly. “It won’t jeopardize the whole order, but it will be lost revenue for us in 2020,” Hoffer said.
Hoffer Plastics employs 380 people working three shifts to produce about 3 billion parts a year, generating about $90 million in annual sales. The company is telling employees to stay vigilant and communicate about any changes in production or demand, Hoffer said. It’s business as usual, but there’s a heightened threat level in terms of uncertainty.
The outbreak is likely to affect the medical product supply chain as well, “including potential disruptions to supply or shortages of critical medical products in the U.S.,” Food and Drug Administration Commissioner Dr. Stephen Hahn said in a Feb. 14 statement.
The FDA has been reaching out to manufacturers to identify potential disruptions and shortages, Hahn said. It also has been tracking reports of increased orders of some medical devices, such as respirators, surgical gowns, gloves and masks.
Northfield-based Medline Industries makes hospital supplies such as masks and gowns, among other products. A spokesman declined to give specifics about how the virus is affecting its business, but it said in a statement that restrictions on exporting certain items, such as face masks, could lead to shortages or delayed shipments throughout the industry.
A large percentage of the protective equipment made in China, such as masks and surgical gowns, are manufactured in the Hubei province, and the province has extended a mandatory factory closure through March 10, the company’s statement said.
“Other medical supplies manufactured in the Hubei province — traditional wound care products, surgical drapes and gowns and some surgical pack components — likely will be impacted by the events in China if the restrictions continue for an extended time,” Medline said.
The manufacturing and research and development facilities that north suburban-based Abbott Laboratories has in China are operational, spokeswoman Darcy Ross said in a statement. She declined to comment on whether the virus was affecting the company’s supplies or sales.
Much of Abbott’s manufacturing in China focuses on its nutritional products, and China is a significant market for Abbott’s infant formula business, said Debbie Wang, a senior equity analyst at Morningstar.
Abbott makes Similac formula. The formula made in China is sold in China.
“The whole issue now of shutting down production facilities potentially, it just seems like it could introduce some near-term turbulence in what had been pretty predictable supply,” Wong said.
She said Abbott’s overall sales in the first quarter could be soft as a result of the virus. It’s also possible that Abbott, which sells generic drugs outside the U.S., could, like other companies selling pharmaceuticals, have a tough time making those drugs because a number of active ingredients for medications come from China, she said.
It’s also possible, however, that Abbott could benefit, if it succeeds in making a test to diagnose the virus, she said. Abbott has confirmed that it is working to develop a test.
Even companies with production in the U.S. have experienced coronavirus-related disruptions.
Hazel Technologies, which makes a product that extends the shelf life of produce and other foods, was awaiting delivery on a machine needed to make some of its products when the travel restrictions hit, said co-founder and CEO Aidan Mouat.
Unwilling to wait months, the Chicago company spent 10 times as much to buy the machine elsewhere, Mouat said. He said he had to reallocate resources from other projects to make that happen.
Problems associated with the virus come at an inopportune time for companies that already have been forced to deal with tariffs on Chinese goods imposed by the Trump administration.
“It’s kind of a one-two punch,” said Joe Born, CEO of Chicago-based Bluetooth speaker brand Aiwa.
Born said he’s seen prices that consumers pay for electronics hiked — likely a result of the tariffs coupled with coronavirus issues — and his company might have to do the same.
A shipment of wireless earbuds that was set to arrive in early March will be delayed at least a month because of the coronavirus, Born said. Aiwa had to adjust marketing budgets and stop advertising that product.
For some companies, lessons learned from the tariffs or changes made to ease their blow have proved helpful.
Best Buy has seen a dip in inventory due to coronavirus disruptions in the supply chain, but its suppliers are prepared after handling uncertainty around the tariffs, CEO Corie Barry told CNBC.
Vernon Hills toymaker Learning Resources stocked up on goods before the tariffs went into effect, reducing the coronavirus’ interruption on all but a handful of new items, said CEO Rick Woldenberg. Factories the company works with in China are opening back up and restarting production.
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