Fears grow for China’s supply chains

With antilockdown convulsions gripping China, the authorities in Beijing have responded by easing some restrictions in big manufacturing centres as they map out a “new stage and mission” in the country’s unpopular zero-Covid policy.

There are concerns that more freedom of movement could allow the virus to rip through a population in which immunity is lower than in the west. Those health risks mean the world’s workshop is headed for a difficult winter, casting a shadow over the prospects for international trade.

Western companies have learned lessons from the first wave of lockdowns, and some may be better prepared, but for others, at a time when supply chains are still recovering from nearly three years of on-off pandemic problems, there is trouble ahead.

Apple has already warned of Christmas shortages. Now analysts have told the Guardian the recent shutdown of Foxconn’s huge iPhone factory in Zhengzhou could have cost Apple a third of its Christmas inventory. “It is a debacle of epic proportions for Apple,” said the data researcher Dan Ives. “In many Apple stores we are seeing major iPhone 14 Pro shortages of up to 35%-40% of typical inventory heading into December. The Chinese supply chain is the Grinch that stole Christmas.”

Apple is not the only company affected: logistics and transport data point to a general production slowdown. Last week, truck and rail shipments in China dropped by 36%, according to the supply chain data firm Four Kites. Chinese shipping to the US has continued to decline and is down 34% compared

‘China is much more vulnerable than most western observers had predicted’

Dennis Unkovic US trade expert

with earlier in the year. As a result, car manufacturers are seeing shortages of supply. Honda has paused production at its factory in Wuhan while Volkswagen said this week it had been forced to suspend making vehicles at its facility in Chengdu because of a rising number of Covid cases. The German carmaker has also placed two of the five production lines at its Changchun plant on hold because of a shortage of parts.

Although some factories may reopen now that the Chinese government is easing lockdowns Guangzhou, the latest flare-up of problems could be the “straw that breaks the camel’s back” for western companies’ relationships with suppliers in the world’s second largest economy, Ives says.

Having spent billions of dollars in building a state-of-the-art assembly system in China, the continuing, unsustainable problems and lack of visibility on policy from Beijing are a “gut punch” for executives in Apple’s California headquarters. “This is going to have strategic long-term impact for Apple, Tesla and other companies that rely on China for the chip supply chain,” said Ives.

A wider shift away from reliance on China has already begun, encouraged by the Donald Trumpled trade wars against China and the pandemic disruptions of the past three years. Mark Swift of Make.UK, the manufacturers’ lobby group, said the supply chain snarl-ups of the last three years had

already blighted British companies, making it difficult to measure the impact of the latest difficulties.

But he warned that six out of 10 companies surveyed by Make.UK thought supply chain problems were the biggest risk to their businesses. As a result, more companies were beginning to move away from the fabled “just in time” system of supply management to one best described as “just in case”.

“That’s a significant change to business models,” he said. “They can’t afford to have their supply chains solely in China. They’d rather have components coming from Manchester or Munich.”

Flavio Romero Macau, associate professor of business at Edith Cowan University in Australia and an expert on supply chains, said the final outcome would depend on how well China managed the next few months of Covid outbreaks.

Macau points to China’s very low rate of cases – currently of 218 per million – which is likely to rise if the zero-Covid policy is eased. Hong Kong, for example, has a rate of 228,415 cases per million.

Much would depend on Beijing’s ability to control any outbreak, or whether Covid spreads more rapidly through China than it has so far.

The former would mean mild supply chain disruption, but the latter scenario could see “a sharp increase in absenteeism that ceases manufacturing capacity for a time” said Macau. “The risk of a major disruption is high, with supply chains paralysed for a few weeks.”

Dennis Unkovic, a US corporate lawyer, trade expert and author of Transforming the Global Supply Chain, said it was becoming clear to companies that “China is much more vulnerable overall than most western observers had predicted”.

“The Xi-enforced closures of cities throughout China have severely impacted the Chinese economy,” he said. “This has affected more than just the growth potential of the Chinese economy. The closures have exacerbated the ongoing fracturing of the global supply chain.”