Shanghai Covid-19 Lockdown Poses Fresh Test to Supply Chains

Date: Tuesday, March 29th, 2022
Source: Wall Street Journal

A lockdown in Shanghai marks another potential setback for China’s export machine, reigniting concerns over the risk of renewed disruption to global supply chains pummeled by the pandemic and war in Ukraine.

Authorities imposed a two-stage lockdown on China’s most populous city on Monday, the latest reverberation from the country’s zero-tolerance Covid-19 strategy that is facing its toughest test yet from the highly contagious Omicron variant.

Tesla Inc. is suspending production at its car plant in Shanghai for four days, people familiar with the matter said, but chip maker Semiconductor Manufacturing International Corp., which has two fabrication plants in the city, is producing and operating as usual, a company representative said Monday. Shanghai’s port remains open, but exporters are bracing for delays as the lockdowns hit warehouses, transport and staffing, a pattern experienced during similar targeted lockdowns such as the one in the southern city of Shenzhen.

Though China is getting better at keeping ports open and factories humming when restrictions tighten in response to rising caseloads, economists and company executives say the repeated flare-ups and logistical headaches of navigating shifting public-health measures are nonetheless weighing on industry, keeping up inflationary pressure on a world economy already struggling with surging prices.

“China is getting better at managing the shocks, but the shocks are getting bigger,” said Hui Shan, chief China economist at Goldman Sachs in Hong Kong.

A surge in coronavirus cases earlier this month prompted Chinese authorities to impose lockdowns and factory closures in chunks of the country, including manufacturing hubs such as Shenzhen and the city of Changchun in the northern province of Jilin.

Shanghai ordered citizens on the eastern side of the city to stay home Monday and shut down public transportation for four days while public-health officials conduct a testing blitz. The lockdown is due to switch to the western half of the metropolis of about 25 million on April 1.

For now, the city’s port remains open 24-hours-a-day as usual, according to operator Shanghai International Port Group. Essential workers and service providers such as medical staff, police and food delivery workers will still be allowed to move about provided they show a work pass.

Companies and factories will be allowed to maintain operations under “closed-loop production,” municipal authorities said, a system that involves staff working, living and staying within the factory campus.

But even with such measures, keeping the flow of goods moving from factory to port to customers overseas is tricky as the lockdown ensnares truckers, warehouses and other critical links in supply chains.

“Warehouses have shut down and transportation to and from the port has been disrupted,” Zou Xiaodong, vice general manager at Shanghai Gangxian International Freight Forwarding Co., Ltd., said Monday.

Truck drivers are required to show a negative result from a coronavirus test taken within 48 hours if they want to enter the city, representatives of several logistics companies said. Some drivers are avoiding transporting goods through Shanghai altogether, fearful of ending up in quarantine.

“Many drivers worry that they can transport the goods to the port, but cannot return from the port because of the stringent pandemic restrictions,” said Mr. Zou.

Even if factories can continue producing in the bubblelike environment, with no one to pick up what they have manufactured “there is only so much that can be done before production slows down due to warehouses filling up,” said Cameron Johnson, head of APAC Strategy at FAO Global, a strategic business and advisory firm.

To minimize delays, Kuehne+Nagel International AG, a global logistics operator based in Switzerland, has diverted some ships bound for Shanghai to the port at the city of Ningbo, around 100 miles away, and airfreight to the city of Zhengzhou, around 500 miles away, said Siew Loong Wong, president of Asia Pacific. He said that he anticipates a challenging four to eight days as the two-stage lockdown plays out but that he is relatively confident the disruption will be short term.

In imposing a limited, two-stage lockdown while trying to keep the fallout for manufacturing and exporting to a minimum, Shanghai is following a playbook refined in Shenzhen, a southern technology hub that eased containment measures after a week of restrictions and mass testing.

A full lockdown to contain a Covid-19 outbreak in June last year shut Shenzhen port’s Yantian terminal for a month, causing a huge backlog of containers that snarled up ocean traffic and sent freight costs soaring.

This time around, the port stayed open and some employers instituted closed-loop systems to keep workers at or near the factory overnight to keep production running. The weeklong lockdown in Shenzhen halted public transport and required most businesses to shut while authorities rolled out citywide testing to screen for infections.

Foxconn Technology Group, the biggest assembler of Apple Inc.’s iPhones, was able to resume operations after only a two-day suspension at campuses in the city, where workers live in dormitories alongside its factories. It said last week it was back to full capacity.

Taixiang Vehicle Replaceparts (Shenzhen) Co., a subsidiary of German engineering Robert Bosch GmbH that makes car parts in Shenzhen, was able to maintain production because about 200 workers agreed to live at dormitories on site during the lockdown, according to a Bosch spokeswoman.

As in Shanghai, company executives and logistics managers say their biggest headache now isn’t maintaining production, but getting their products to the ports and on to the customer.

“Although our production has not been largely affected, the lockdown has a great impact on logistics,” said the manager of Shenzhen Hongxin Photoelectric Co., Ltd., which makes LED lighting in the city. The firm also persuaded workers to stay overnight during the lockdown, but its foreign customers face delays of at least 10 days, the manager said, because it wasn’t possible to transport goods to waiting ships.

Those moving goods across provincial boundaries must contend with a patchwork of different health regulations, said Akhil Nair, vice president of global carrier management and ocean strategy at SEKO Logistics. Truckers making a long journey often need to show test results more than once. Failure to have the right digital code for the right province leads to delays. Sometimes they get stopped on the highway, too. Disinfecting trucks and their cargoes can add hours to journey times, Mr. Nair said.

“There are a lot of moving parts,” he said. In another inflationary warning sign, trucking costs in China are rising by between 8% and 10% as drivers contend with higher oil prices following Russia’s invasion of Ukraine, according to Mr. Nair.

Before the lockdown in Shanghai, data on the number of containers moving through Chinese ports suggest that, for now, export-oriented industries are faring better than those focused on the domestic market. Container throughput at eight major ports shows domestic trade in mid-March was 24.4% lower than it was a year earlier because of Covid-19 restrictions and bad weather. Foreign trade declined only 1.2% over the same period.

The reason is some of those areas bearing the brunt of infections and restrictions, such as Jiangsu and Jilin, host big industries such as chemicals, timber and vehicle manufacturing that are geared for domestic consumption rather than export, analysts say. Overseas demand for Chinese goods is also stronger than demand at home, where the economy is slowing.

Still, the concern is the pressure on global supply chains won’t ease while Omicron outbreaks keep popping up. The disruption so far to the flow of goods isn’t huge. but “it slows it down when already there are quite a few bottlenecks to worry about,” said Craig Botham, chief China economist at Pantheon Macroeconomics in London.

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