China’s Zero Outbreak Policy Challenges Manufacturers and Supply Chains

Manufacturing managers and analysts have warned that China’s fight to contain Omicron variants could stifle an already stretched global supply chain, threatening the production of everything from smartphones to furniture.

Beijing is determined to stem any large-scale spread of Covid-19, especially as it prepares to host the Winter Olympics next month, and has imposed restrictions to maintain its zero-coronavirus strategy.

Lockdown of Central City Xi’an will enter its third week, forcing some 13 million people to stay in in their home.Restrictions such as mandatory testing are already in place Tianjin, a 14m port city about 100km from Beijing, located in several cities in Henan Province, with the world’s largest iPhone factory operated in Taiwan Foxconn, as well as parts of Zhongshan and Zhuhai close to Hong Kong’s manufacturing hubs.

These measures are a test of multinationals and whether they are better equipped to respond interrupt Their manufacturing capacity compared to during the first wave of the pandemic.

Ambrose Conroy, chief executive of U.S.-based supply chain consultancy Seraph, said: “With Covid-19, the Lunar New Year holidays and the Olympics, we could see a perfect storm. “Companies are now better prepared for short-term shutdowns, but wider ones in a few weeks will wreak havoc.”

A blockade at the southern Chinese manufacturing hub will be “worse than in 2020,” said an executive at a Taiwanese manufacturer in Shenzhen.

After the virus spread from Wuhan to various parts of China during the Lunar New Year holiday two years ago, the government blocked Shipping across large areas of the country.These restrictions prevent hundreds of millions of immigrants Worker Those returning to work after a holiday trip. Factories were ordered to close for weeks.

“I’m more worried this time around, because supply chains around the world are already very strained: there have been long delays in transport and parts shortages remain,” said Didier Chennevo, an expert partner at consulting firm McKinsey & Company.

The latest restrictions have given multinationals a taste of the risk. Automakers Volkswagen and Toyota both closed their factories in Tianjin last week. In Xi’an, chip maker Samsung has struggled to get employees to work because of the lockdown.

Toyota suffered huge losses Supply Chain Disruption in Southeast Asia Last year, the company said the closure of its Tianjin joint venture plant was “unlikely to have a global impact on our supply, as localisation has made great strides”.

But the infection could spread further. Ningbo, which has the world’s third-largest container port, has reported infections and banned lorries from entering, exacerbating congestion on ships.

Some managers believe that Beijing is focusing on preventing any risk to the Winter Olympics, which would protect sites near the capital from the risk of a full-blown Omicron crisis.

“Of course, if you’re blocked, you’re out of luck,” the Taiwanese executive said. “But the authorities’ focus on places like Tianjin also means they’ll do everything they can to help you manage.”

Samsung Electro-Mechanics, a component maker with a factory in Tianjin, has been told by the local government to keep workers from leaving the city during the New Year holiday to avoid the risk of infection.

“These are meaningful precautions. Here, we are underprepared,” said the Taiwanese executive, whose company is under pressure to send workers home for the holiday after they have twice missed their annual trip.

Students wearing personal protective equipment arrive in Ningbo to take exams, where lorries are restricted from entering the city’s port after the Omicron case was detected © AFP via Getty Images

If the infection spreads, manufacturers will be hit as hard as they were two years ago, as few companies have moved much of their supply chains outside of China, analysts said.

“Has anyone really de-risked their supply chain? Have they moved their production back to onshore or nearshore at scale in Asia? The answer is no, because these things take a long time,” Chenneveau said.

A McKinsey study found that only 60% of respondents increased critical inventory and only half increased double purchasing.

Mitsubishi Electric is building a platform to share database information on parts shortages with suppliers, but that platform will be completed by 2025.

Virus-induced shutdowns in other economies have actually increased job losses in many industries rely China, at least in the short term.

A typical example is the production of multilayer ceramic capacitors (MLCCs), which are components used to store energy, used in any product that has an electrical circuit. Nearly half of the world’s MLCC production capacity is in China, according to research firm Trendforce.

Forrest Chen, an analyst at Trendforce MLCC, said: “MLCCs are always in shortage anyway, and usually each factory specializes in a unique product, so when one factory shuts down, there is no other factory to back up.”

Japanese MLCC maker Murata is building a new factory in Thailand to reduce excessive concentration in China. But the company has also started making some products at its factory in the eastern Chinese city of Wuxi, after it was forced to close its Japanese factory that specialized in making them.

“Everyone is trying to establish a second supplier in China. This includes finding alternative sources to buy components and identifying locations in their own factories that can serve as backups,” said a consultant who works with electronics companies.

But these arrangements are far from enough. “It will take three to five years to achieve geographic diversification,” Chen said.

Additional reporting by Wang Xueqiao in Shanghai

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