China’s zero Covid policy still causing supply chains chaos

Disturbing pictures have emerged from China showing the consequences of President Xi Jinping’s on-going zero-tolerance approach to Covid. Video footage shows workers at Foxconn’s Zhengzhou plant – responsible for making around 60% of Apple’s iPhones – staging a ‘break out’ by scaling walls in order to avoid being locked down within the factory. A report in the Financial Times suggested that although production would be switched to alternative facilities, up to 10% of Apple’s global output was likely to be affected.

Lockdowns of various Chinese cities have been on-going since the start of the pandemic, despite restrictions now being lifted in most other parts of the world. The policy has inflicted considerable pain on the economy with many manufacturers reporting falls in output of up to 40% in affected regions. Economist Global Data believes that China’s GDP will reach just 4.5% in 2022, well below the government’s target; its share of the world export market is also likely to decline.

Global fashion brands, such as Nike, have faced the double hit that, as well as closing factories, they have also been forced to shutter their retail outlets for the duration of each lockdown. One estimate suggests that sales have dropped by more than 50% in affected areas.

Even if staff are allowed to go to work, lockdowns are having disastrous consequences for inbound and outbound logistics. A reduction in trucking capacity in Shanghai of 45% in spring 2022 resulted in 80% of vessels being delayed, compared with just 20% two years earlier. Imports were also affected with containers waiting for up to 12 days for collection compared with pre-lockdown 4-5 days, according to digital forwarding platform, Freightos.

Most recently in October authorities locked down the north eastern port city of Ningbo resulting in the closure of terminals and warehouses. They also instituted a whitelist of ‘Covid-clear’ truck drivers although this did not prevent a subsequent outbreak amongst the driving community. Such disruptions and capacity constraints as these have led to falling export volumes which have combined with weaker demand in the US and Europe to put downward pressure on shipping rates. Air cargo volumes and rates also remain weak for the same reasons.

The problems have resulted in significant volatility and uncertainty for global manufacturers and retailers and this in turn has led to increasing levels of inventory; orders being placed earlier and – most critically for China’s economy – the use of suppliers based in neighbouring countries. Vietnam has been a key beneficiary of this trend, its furniture industry, for example, growing its share of global exports from 11% in 2019 to 17% in 2022 at the same time as China’s has fallen from 61% to 53% (MDS Transmodal). Although rising Chinese labour costs, the imposition of Trump’s tariffs and a whole host of risk mitigation measures taken by manufacturers have also been responsible for ‘China +’ sourcing strategies, lockdowns for many are proving to be the final straw.

The key question is how long the Chinese government will persist with this policy. Many analysts believe that it could last well into 2023 although rumours have circulated in the past few days that a ‘roadmap’ is being developed by a government committee pointing the way towards the relaxation of many of the zero-Covid measures. This could well be speculation, however, as there was no discussion of liberalization at the Communist Party’s Congress when President Xi was re-elected. In fact, he is so closely associated with the policy that any relaxation would be politically embarrassing and consequently unthinkable.

Source: Transport Intelligence, 3rd November 2022

Author: John Manners-Bell

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