Jan Zhang reports that COVID-19 is forcing manufacturers to rely more on automation and digitalisation for long-term operations to reduce the financial impact

FINAL WORD

Will Coronavirus force manufacturers to enhance automation and digitalisation?

Jan Zhang reports that COVID-19 is forcing manufacturers to rely more on automation and digitalisation for long-term operations to reduce the financial impact from epidemics and other potential economic challenges.

The COVID-19 outbreak is becoming a global stress test. As the outbreak subsides in China, there are some major short- and long-term effects the Chinese manufacturing industry is feeling, which will carry over to other countries.

For many of the infected regions, the economy will fall sharply in the short term, and then rebound after the epidemic is over, but COVID-19 is unlikely to have a huge long-term impact. Epidemic prevention and control measures from local governments will be a key factor.

In February 2020, China’s manufacturing purchasing manager index (PMI) was 35.7%, down 14.3 percentage points from the previous month. Meanwhile, the Production Index was 27.8%, down by 23.5 percentage points from the previous month, indicating that manufacturing production activity had slowed down radically. As outbreaks continue to unfold around the world, external demand will falter, further hampering recovery.

According to analysis of data segments such as power generation, population migration, and transportation; the work resumption rate in China is about 65% (except for students). Although the overall recovery of enterprises is better, it is more difficult for small and medium-sized enterprises and lifestyleservice industries to return to work. It is expected that production and operation will get back to normal completely by May.

COVID-19 may have a far-reaching impact on the capacity layout and supply chain network of many enterprises. Multinational enterprises in particular will further improve their disaster emergency mechanisms and supply chain management.

Many enterprises will now be thinking about relocating manufacturing. During the 2011 earthquake in Japan, even companies who were hardly hit by supply chain issues decided to relocate. However, cross-border relocation of production capacity is not an easy decision to make, and many factors need to be taken into account, such as local market capacity, time and investment required, local government policies, infrastructure and logistics, labour costs, and skill levels.

Exposing problems

For manufacturing enterprises, the epidemic has exposed problems and risks that already existed. As such, it might force industry to undertake much needed reforms to automation, digitalisation and logistics processes and systems.

For manufacturing enterprises, the short-term impact of the epidemic is a decline in revenue and profits. For example, under China’s stringent prevention and control measures, a large number of manufacturing enterprises were completely suspended, and the loss of production capacity is expected to be 1 to 3 months in total. Production recovery cannot be achieved overnight, and the resumption of work may also face difficulties in the form of recruitment problems, an insufficient supply of raw materials, and other issues such as logistics and cash flow. Operating costs will also clearly remain high during this period, further eroding profit.

Small and medium-sized enterprises, and those with insufficient cash flow, will feel the pressure most. For enterprises with good operation and high capacity utilisation, the focus must be to restore production as soon as possible.

The COVID-19 epidemic has brought unexpected difficulties and challenges to governments, industries and enterprises around the world. But it is a shortterm effect and it will eventually pass. In the long run, COVID-19 is a chance for industries to make much-needed operational improvements.

Jan Zhang is a research director at market analyst firm Interact Analysis.

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