China’s lockdowns and pursuit of a zero Covid policy have caused disruption in and around Shanghai’s port – the largest in the world. With congestion and a backlog increasing by the day, the impact on global supply chains – and the economy – could be huge.
Getting goods to – and out of – Shanghai’s port has become increasingly difficult as the city has faced Covid lockdowns. Now some are predicting that the ‘factory of the world’ could come to a complete standstill and global supply chains – which are already stretched – will be severely impacted.
Although some large producers have tried to keep their factories open by using a ‘closed loop’ system – where the same workers stay together in a Covid bubble – many companies have had to halt production. Electronics maker Foxconn has been operating at 60% capacity, while others have had to suspend production, according to Reuters. The head of Huawei’s consumer and auto division’s comments in a WeChat post were widely reported in the media: “If Shanghai cannot resume production by May, all of the tech and industrial players who have supply chains in the area will come to a complete halt, especially those in the automotive industry,” he said.
For those that have managed to stay open, there are very few truckers available to take the goods from the factory to the port. Drivers have had to stay home because of the lockdown, and some have been stuck on the roads. There are reports of some being stranded by quarantine rules, and there was one news report of a driver who lived in his lorry for seven days because he had visited Shanghai and couldn’t travel anywhere afterwards.
The shortage of labour in warehouses, on the roads and at the ports mean that things are getting clogged up. And with supply chains already under stress, this time round the impact could be larger than in previous lockdowns at the beginning of the pandemic. Alex Holmes at Capital Economics in a research note writes that, “There is now a much greater potential for a small bottleneck to have large repercussions.”
Back in January, Russell Group estimated that congestion at Shanghai’s port was costing an estimated US$4.5bn a week in lost trade. Also, the analysis noted there was US$635mn of trade from Shanghai to the United States that was under threat. And things have got worse since then.
Christian Roeloffs, co-founder of logistics company Container xChange, said “Covid-induced lockdowns in China and the Russia-Ukraine war has torn apart the expectations of recovery of the supply chain, which has been grappling to keep up to the pressures of implications resulting from these and many more disruptions.”
Economists Alicia Garcia Herrero and Gary Ng at Natixis say the current lockdowns will be especially painful for certain industries: cars, electronics and chipmakers. “When the Chinese economy sneezes, the global supply chain catches a cold,” they wrote in a research note. “The situation is particularly alarming for manufacturers in Shanghai, Jiangsu, and Jilin, the key hubs for cars, electronics and semiconductors. The risks of supply chain disruptions can grow if the Yangtze River Delta follows Shanghai in stricter lockdowns, including Anhui, Jiangsu, and Zhejiang,” the Natixis research notes.
In the first half of April mobility declined by 92% in Shanghai, the Natixis report notes. The authors continue that in previous lockdowns and electricity shortages, certain industries were prioritised, such as chip production and aimed to reduce disruption as much as possible. Now, however, more companies are halting production. “All in all, Shanghai and the surrounding provinces, namely the Yangtze River Delta, form an important cluster for cars, electronics and chipmakers in China. If the government extends lockdowns, the risk of supply chain disruptions will increase, and firms may use up their inventories,” the Natixis report states.
