China’s zero-Covid policy poses a challenge to manufacturers and supply chains

China’s battle to contain the Omicron variant of the coronavirus risks suffocating already strained global supply chains, manufacturing officials and analysts have warned, threatening production of goods from smartphones to furniture.

Beijing is determined to prevent any large-scale transmission of Covid-19, especially as it prepares to host the Winter Olympics next month, and has been quick to impose restrictions to maintain its goal. from zero Covid.

A lockdown in the central city of Xi’an is set to enter its third week, forcing around 13 million people to stay at home. Measures including mandatory testing have been imposed on Tianjin, a 14m port city about 100km from Beijing, several cities in Henan province, home to the world’s largest iPhone factory run by Taiwan’s Foxconn, and parts of Zhongshan and Zhuhai, manufacturing centers close to Hong Kong.

The brakes are a test for multinational companies and whether they have become better equipped to deal with disruptions to their manufacturing capacity than during the first waves of the pandemic.

“With Covid, the Lunar New Year holidays and the Olympics, we could be looking at a perfect storm,” said Ambrose Conroy, chief executive of Seraph, a US-based supply chain consultancy. “Businesses are a little better prepared for short-term shutdowns now, but a broader shutdown over a few weeks would take its toll.”

A Taiwanese manufacturer executive in Shenzhen said a lockdown in China’s southern manufacturing hub would be “worse than 2020”.

After the virus spread from Wuhan across China during the Lunar New Year holiday two years ago, the government blocked transport through swaths of the country. The restrictions prevented hundreds of millions of migrant workers who had traveled during the holiday period from returning to work. Factories were ordered to close for several weeks.

“This time, I’m more worried because the supply chains around the world are already very tight: there are already long delays in transport and the problem of component shortages is still there,” said Didier Chenneveau, an expert partner at McKinsey, the consulting firm.

The latest restrictions have already given multinationals a taste of what is at stake. Automakers Volkswagen and Toyota both closed their Tianjin factories last week. In Xi’an, chipmaker Samsung has struggled to get its staff to work due to the lockdown.

Toyota, which suffered huge supply chain disruption in Southeast Asia last year, said the closure of its joint venture plant in Tianjin was “unlikely to have a global impact on our supply because the localization has progressed considerably”.

But infections can spread further. Beijing reported its first locally transmitted case of Omicron on Saturday, just weeks before the opening of the Winter Olympics in the capital.

Authorities said the infected person had not been out of Beijing for two weeks and had no contact with other confirmed cases. The person’s residential compound was locked down and 2,430 people were tested in connection with the case, according to Chinese state media.

A case in Shanghai reported on Thursday has also been confirmed to be Omicron, a National Health Commission official said at a press conference on Saturday.

Some business leaders believed that Beijing’s focus on preventing any risk to the Winter Games would protect venues near the capital from a full-blown Omicron crisis.

“Of course, you’re out of luck if you get hit by a lockdown,” the Taiwan executive said. “But the authorities’ attention to places like Tianjin also means they will do anything to help you manage.”

Ningbo, home to the world’s third-largest container port, has reported infections and banned trucks from entering, worsening ship congestion.

At Samsung Electro-Mechanics, a component maker that has a factory in Tianjin, the local government told workers not to leave town for the New Year holiday to avoid the risk of infection.

“These are preventive measures that make sense. Here we are less prepared,” said the Taiwanese executive, whose company is under pressure to let workers go home for the holidays because they have already had to miss the annual trip twice.

Analysts said if infections spread, manufacturers would be hit as hard as they were two years ago, with few companies moving large parts of their supply chains out of China.

“Has anyone really reduced their supply chain risk? Have they moved their Asia-based production on land or near land on a large scale? The answer is no, because these things take a long time,” Chenneveau said.

A McKinsey study found that only 60% of respondents had increased their critical inventory and only half had increased their dual supply.

Mitsubishi Electric is building a platform to share database information with suppliers on parts in short supply, but it won’t be completed until 2025.

Virus-induced shutdowns in economies elsewhere have actually increased the dependence of many industries on China, at least in the short term.

A typical example is the production of multilayer ceramic capacitors, energy storage components used in any product with electrical circuits. Nearly half of MLCC’s global capacity is in China, according to Trendforce, the research firm.

“The MLCC has been in short supply anyway, and often each factory specializes in making a single product, so when one factory is down, no other can step in as a replacement,” Forrest Chen said. , MLCC analyst at Trendforce.

Japanese MLCC maker Murata is building a factory in Thailand to reduce over-concentration in China. But the company has also started making some products at its factory in eastern China’s Wuxi city after the pandemic forced the closure of a Japanese factory that exclusively made them.

“Everyone is trying to build second suppliers in China. This includes finding alternative sources for purchasing components as well as identifying locations among your own factories that could serve as back-ups,” said a consultant who works with electronics companies.

But none of these arrangements went far enough. “It takes three to five years to implement geographic diversification,” Chen said.

Additional reporting by Xueqiao Wang in Shanghai