China Energy Communication # 1

From David Power – President Exact Medical Manufacturing 

 

Summary Notations

  • China currently is experiencing an energy crisis with lack of available electric service.
  • Many Manufacturing Factories are forced to close a certain number of days per month.
  • Exact Medical is not affected by these closures.
  • Some Exact Medical Raw Material Suppliers are affected but due to our long standing and partnership relationship with them we are assured of needed Raw Material Supplies.

 

As this is currently becoming a major news story, China is experiencing their worst energy crisis since 2011. The crisis is manifesting itself with a lack of available electric service in many parts of the country.  The Province of Jiangsu and the City of Changzhou, where Exact Medical is located, is experiencing significant shortages and problems.

 

The reasons for this situation have several main causes.

  • Beijing regulates the price that electric providers can charge for electric service but the cost of coal needed to fire the electric power plants has increased dramatically in recent months. Since coal fired plants provide over ½ of the electricity in China, this has forced many power plants into operational financial losses. As a result, many electric generation stations have reduced output to the minimum allowed to them.
  • Unusually high temperatures and weather has been running above average and later into the months than is normal. Use of air conditioning and refrigeration has been well above normal this summer and early fall.
  • Higher than expected demand for products in both the Chinese domestic market and the export market have placed unplanned pressure and increased requirements for electric service. It was expected that the pandemic would depress worldwide demand for goods, but the opposite happened. With massive populations under quarantine spending for restaurants, entertainment, travel and leisure were massively reduced. Instead, everyone sat at home and ordered products on the internet in enormous quantities. This caused an unplanned increase in production in China and also contributed to the logistics crisis we have experienced this year.
  • Local Government and Party officials have been given strict targets for reducing energy and emissions intensity. As there are still several months to the end of the year and their limits are fast approaching, the government is taking drastic steps to reduce electric usage so their year-end targets are achieved.

 

Because of this crisis situation, our local government officials have taken the following steps to reduce power consumption and mitigate the situation.

  • All manufacturing factories have been rated and designated into 1 of 4 groups
    • Group A – light industry operations that use minimal quantities of electric per employee. Such companies keep the maximum number of Chinese households with employment and income for the minimum usage of electricity.
    • Group B – light industry operations that use minimal quantities of electric but have few employees. These companies use more electric per person employed than Group A
    • Group C – heavier industry operation that use significant quantities of electric and electric usage per person employed is greater than Group B
    • Group D – very heavy operations that use massive amounts of electric and few employees.

 

Because Exact Medical employs a large number of people with over 750 employees and we are also considered light industry, Exact has been classified as a Group A company. (i.e., supporting a lot of citizens income with minimal use of electric).  Having strong positive relationships with the local Government, these being managed by my wife Xiao Ping, has also aided our status.

 

The Government has then set a schedule of operations per the below

  • Group A companies are not affected and allowed to operate their normal work schedules and working days each month
  • Group B companies are allowed to operate 20 days per month of production. Electric service to these companies is turned off at the street on all other days each month.
  • Group C companies are allowed to operate 15 days per month of production. Electric service to these companies is turned off at the street on all other days each month.
  • Group D companies are allowed to operate 10 days per month of production. Electric service to these companies is turned off at the street on all other days each month.

 

So, starting this week there are many manufacturing facilities closed near us, and as a side consequence, our front gate is besieged with people from reduced production factories inquiring if Exact Medical is hiring as they hope for full time and not their current part time employment.

 

Another area of concern, of course, is the availability of raw materials. As much of our material such as PE, SMS, PSB and such requires production equipment that are high users of electric, this is of course an immediate concern.

 

First, as a result of the pandemic experience, Exact Medical has taken the position of maintaining a minimum of 2 months safety stock of critical raw materials so we of course have no immediate concerns.

 

In addition, Exact has communicated with all of our raw material suppliers and any fears have been put to rest. Many of our suppliers have been classified as Group C companies, with 15 operating days per month.  However, from the beginning so many years ago, Exact has done business as a stable, consistent and loyal customer to all of our suppliers and having built those relationships over a couple of decades, we are in true partnerships with those companies.  They are responding now with assurance that Exact will receive our needed supplies as the first company they will ship to during their allowed days of operation.

 

In times like this we recall that the Chinese Symbol for Disaster is actually the combination of two symbols. The first being Danger and the second being Opportunity.  We view the current crisis and situation as equal parts danger and opportunity.  Reduced production in China hopefully will have a positive impact on the logistics crisis and challenges we all face now. In addition, Exact Medical has positioned itself over the years in design and relationships to weather almost any storm that presents itself, and we are well positioned to handle this crisis without unpleasant effect.

 

I will continue future communications as circumstances change and/or warrant.

 

With Best Personal Regards,

David Power

President

Exact Medical Manufacturing