247,000 Chinese Companies Declare Bankruptcy
David Iwinski Jr.
247,000 Chinese Companies Declare Bankruptcy
We thought that the China supply chain collapse would be calamitous for American business… it’s going to be worse, much worse
April 14, 2020
By David Iwinski
Back in February, Blue Water Growth published a special edition of our regular newsletter. It focused on an analysis of what we thought would be the ripple effects of a very specific sequence of events triggered by the coronavirus crisis. You can find the link to that original article here.
In essence, while much of the world sees the coronavirus crisis as primarily a public health issue and a human tragedy resulting in needless deaths and short-term inconvenience, we felt that the timing of the outbreak coupled with the incidence of the Chinese Spring Festival (Chinese New Year) would trigger a cascade of consequences that would lead to widescale business closures in China. This would mean that, when America comes out of the current isolation and shelter-at-home environment we are dealing with, it will not be “business as usual”, because many of the companies we have come to rely on in their supply chain for vital products and components will have completely disappeared.
We felt, then, that dramatic action in reevaluating supply chain and reconsidering process and methodology would be key to the very survival of many American and European businesses. It wouldn’t be a matter of a weak first and second quarter followed by things roaring back to life in the fall, but the permanent and dramatic disruption of international supply chains would lead to a simultaneous global realignment. It would be an extraordinary scramble, as companies all over the planet struggle with the immediate loss of suppliers and customers alike, suppliers and customers that are not coming back to do business as usual.
It turns out that, if anything, we may have underestimated the impact. Yesterday, a China-focused news source disclosed that a recent article by China business writer Wú Xiaobō documented that in the first two months of 2020 about 247,000 Chinese companies declared bankruptcy. The Chinese province of Guangdong - the manufacturing core of China - was the most impacted and had 30,000 businesses declare bankruptcy, but there were also major impacts in Shandong, Jiangsu, Sichuan, and Zhejiang.
Let’s keep in mind that these are the numbers just reported yesterday. We predict the bankruptcies in March and April will be even more dramatic and the numbers even more staggering. The extended coronavirus crisis for the business community started in China with a 2 to 3 months’ shutdown, but the nightmare continued, because just as they were starting to go back to work, the Covid-19 disaster rolled into Europe and North America, effectively closing their markets just as they desperately needed to collect vital capital to stay alive.
A survey conducted by Tsinghua University found that 60% of small and medium-size enterprises in Shandong advised that they could only hold out for a maximum of three months, but that survey was released in February. We are now in the middle of April, and no doubt many of the people that gave that advice in February have already padlocked their doors and moved on.
To be certain, many of these businesses that declared bankruptcy were probably small, and might also have been regional service companies or recent start-ups, where the capital crisis from the current slowdown would have doomed them in any case. It is also fair to say that there are a small group of agile and aggressive companies in China thriving during the crisis, those that quickly re-tooled and transformed their manufacturing businesses to make global quality medical devices, masks and other necessary protective gear. While there are plenty of counterfeits in the market, there are many excellent healthcare products coming out of China that are desperately needed by North America and Europe alike.
Those bright spots, however, cannot erase reality. Not only have 247,000 businesses already declared bankruptcy, but when the numbers for March and April roll in, they will almost certainly be dramatically worse. This means that many American and European companies currently weathering the storm and expecting supplies that they have been waiting for (and hoping for) so they can get back to normal once the health issues subside - those supplies will never arrive. Never.
What’s more, also as we predicted: this will lead to an immediate global scramble as companies all over the planet desperately seek alternative suppliers. And, if it is their customers that have gone bankrupt, they will frantically try to find new customers or re-align their factories to make new products that will be in demand in the world we face. It is going to be an extraordinarily tumultuous, challenging and difficult time for businesses to survive, as they are compelled to deal with changing realities.
I was discussing this with a business associate this morning who queried, “Is there any silver lining in this at all?” The answer is an unequivocal yes! In every crisis and in every collapse, companies that can evaluate the data to accurately assess the damage coming can take immediate and aggressive corrective action, put themselves on a path to survival, and eventually thrive in the chaos, uncertainty and turmoil that is to follow.
We at Blue Water Growth may have felt back in February that we were like a canary in the coal mine, but the unfortunate validation of our premise and prediction has brought home the reality of just what’s coming in global supply chain realignment. We are optimistic that the readers of this article will be among those who take immediate and aggressive corrective action.
In the next week, we will publish a newsletter with a detailed list of recommendations about how to not only weather the inevitable global supply chain catastrophe and survive, but how to put yourself and your company in a position to grow, thrive and prevail in what we predict will turn out to be one of the most tumultuous business transitions of the past century, perhaps rivaled only by the Great Depression. Let’s face the reality squarely and get to work!
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