New brake on the global supply chain

Madrid, April 20, 2022.-  Europe takes off its mask and forgets about the Covid19 pandemic, to see it as just another virus. However, in China, perhaps already the first economy in the world, it is confined by Covid19 and paralyzes certain industries with a terrible impact on the global supply chain. From the magazine FP (Foreign Policy) I have read the following analysis:

This week, more than 50 million people in China were ordered into lockdown—prevented from going to work or even, in some cases, from leaving their homes. It was a rearguard action by the Chinese government to prevent uncontrolled outbreaks of the highly contagious omicron variant of COVID-19.

It’s not yet clear if the lockdowns will be successful in preserving the zero-COVID-19 strategy China has had in place since the start of the pandemic. What already seems obvious is that—with factories closed across China, including in the southern tech hub of Shenzhen—the global economy will take a hit.

They’re certainly serious lockdowns. They’re far more serious than anything we ever saw in the United States. You know, talking about the West in this context, I think, is a little deceptive because—speaking as somebody who lived through the pandemic in New York—we never experienced a lockdown in either the European or the Chinese sense. It was largely enforced by social conformism rather than any kind of actual coercive measures.

I would say what we’re looking at in China is probably comparable to what Europe has repeatedly used since the spring of 2020. It involves the closure of major factories, the closure of public facilities, the maintenance only of essential services. But I don’t think it’s going to be quite as draconian as the measures that China itself imposed in Wuhan in February 2020 to stem the original onset of the disease.

These lockdowns matter as much as they do because of where they’re happening. In the first epidemic in China in 2020, the center was Wuhan, which is a key part of the Chinese economy. But Shenzhen and Shanghai are potentially now affected—and that really takes us to the heart of China’s role in global supply chains. I mean, we’ve already seen closure announcements by the likes of Foxconn, which is Apple’s key supplier of iPhones. Major touch-screen manufacturers have shut down. This is really going to impact global supply chains if it extends much beyond the week. And if the experience of China in the spring of 2020 is anything to go by, the resulting mess in global supply chains could take months.

Well, I think the first thing to say is that zero COVID-19 should have been all our aims. It’s a signal failure of the rest of the world not to have responded to the pandemic that way. China’s problem is that it’s trying to pursue a zero-COVID-19 policy in one country. And it’s a big country with tight border controls. But nevertheless, it’s really hard to make that work when the rest of the world is basically going for some sort of half combination of herd immunity and high-quality vaccination. And we shouldn’t forget that as recently as January this year, that’s only weeks ago now, 2.000 people were dying a day in the United States of this disease. So China’s problem is really the fact that the rest of the world totally failed to come to grips with this disease.

The Chinese crisis seen from the United States

The information and analyzes that come from the United States are those that I review below. If the pandemic is managed well, the analysts said, the outbreaks could help China prepare to reopen its borders. But if not, they said the omicron wave “could cause significant downside to China’s GDP growth and disruption to the global supply chains in the near term, and potentially accelerate the decoupling and supply chain relocation in the medium term.”

So far, the analysts’ research and checks with local factories reveal limited impact on the production of chips, autos, apparel and beer, among other industries. The Android smartphone supply chain could be among the harder-hit, the report said. But, like other industries, production could be shifted to other locations.

For autos, the analysts said that “according to channel checks, a couple of Shanghai-based names saw bigger disruption, while BYD’s Shenzhen plant is operating normally as of 14th March.”

The lockdown and production suspension measures announced by Shenzhen and Dongguan — two manufacturing hubs in the export-heavy province of Guangdong — will last only about a week.

“March may be a different picture depending on how long the restrictions in Shenzhen and Jilin last for,” said Francoise Huang, senior economist at Euler Hermes, a subsidiary of Allianz. “If it just lasts for one or two weeks, it might become a blip in the data.”

The latest Covid wave has hit the northern Chinese province of Jilin the hardest, with the region accounting for the majority of daily new cases. The province banned travel to other parts of China on Monday, and is building emergency hospitals.

Although Jilin’s capital of Changchun is an auto manufacturing center, contribution to China’s GDP is 0.65%, less than Dongguan’s 0.95% and Shenzhen’s 2.73% share, according to Citi.

China has upheld a zero-Covid policy of travel restrictions and swift lockdowns of neighborhoods or office towers to control outbreaks. At least in Beijing, individuals with a travel history linked to confirmed cases may need to quarantine at home for a week or more.

But the implementation of the policy has been targeted. For example, a Shanghai government official said Tuesday there is no need to lock down the city to control the outbreak. And while Shenzhen has ordered overall production halts and remote work, its ports largely remain open.

“We have been notified that all ports and terminals in Shenzhen (Yantian and Chiwan) are currently working as normal,” shipping giant Maersk said in a statement. “This includes vessel operations, yard handling and gate-in-and-out.”

“However, local warehouses have been closed and trucking services have been impacted due to the lockdown. In other Chinese ports, there hasn’t been any operational impact, but landside transportation efficiency has been reduced,” the company said.

Publicado por Pedro Vicente Director Proyectos Innovatrans

Pedro Vicente, Projects & Quality Director at Innovatrans Forwarding S.XXI. S.L

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