Shanghai Lockdown Reignites Supply-Chain Problems for U.S. Companies

Date: Thursday, May 5, 2022
Source: The Wall Street Journal

Some U.S. companies are warning that Covid-19 lockdowns in Shanghai and elsewhere in China are denting sales, disrupting operations and putting added strain on supply chains that could be felt well into the summer.

Apple Inc. AAPL -3.71% said it could take a sales hit of as much as $8 billion in its current quarter, primarily because of the Shanghai lockdowns. Industrial giant Honeywell International Inc. HON -2.29% said the Covid measures had curbed production at half of its Chinese plants. J.B. Hunt Transport Services Inc. JBHT -0.81% said the freight carrier’s customers are worried about deliveries scheduled for July.

Since the emergence of the virus, China generally has stuck to a zero-tolerance approach to dealing with flare-ups, using mass testing and travel restrictions along with widespread lockdowns. The latest wave in Shanghai started in early March, closing factories of companies including electric-car maker Tesla Inc. TSLA -5.94% and consumer-products maker Procter & Gamble Co. PG -0.92%

Much of the rest of the developed world has adopted a strategy of minimizing Covid infections and managing waves while avoiding severe disruptions to business and daily life. Given China’s role as a key supplier to the world, the policy disparity has created an imbalance. Shanghai, a manufacturing and shipping hub of 25 million residents, accounted for 3.8% of China’s gross domestic product in 2021 and 7.2% of the country’s exports, according to Bank of America.

The Institute for Supply Management said its index of U.S. manufacturing activity in April hit its lowest level since July 2020, and the average time to receive production materials increased to 100 days in April, its longest span ever. In the survey, 15% of panelists expressed concern about the ability of partners in Asia to reliably make deliveries in the summer months, up from 5% in March.

Apple said it expects to lose $4 billion to $8 billion in sales during its fiscal third quarter ending in June because of its inability to meet customer demand, citing disruptions from Covid lockdowns and semiconductor shortages. The company said both problems are centered around the Shanghai corridor. Apple had $97.3 billion in second-quarter revenue.

Apple and other companies said they have restarted some operations that had been closed, as falling Covid case numbers have allowed more than half of the city’s residents to leave isolation.

Silicon Valley neighbor Intel Corp. said assuming the restrictions in Shanghai are nearing an end, the disruption to its business would be relatively contained. “Even under a short lockdown, we anticipate it will take some time for the supply chain to normalize,” Chief Financial Officer David A. Zinsner said on a conference call last week.

“If the lockdowns persist or spread beyond Shanghai,” Mr. Zinsner added, “we could see more material impacts to our outlook.”

Honeywell said about half of its 20 manufacturing facilities in China aren’t fully operational, a situation it expects to improve in May with a return to normal production in June. CEO Darius Adamczyk said the cost of the disruption is impossible to quantify but that Honeywell’s second-quarter financial projections depend on that timeline for production resuming.

Industrial peer General Electric Co. also said it was affected by the shutdowns in the first quarter, mostly in its Healthcare division, both for production and delivery of products. Chief Executive Larry Culp said the uncertainty that comes with China’s Covid policies makes it difficult to predict how the Shanghai shutdown would play out.

“I don’t think our crystal ball on that is any better than anyone else’s,” he said in an interview.

While China’s government can boost GDP through stimulus measures, analysts at Bank of America expect that it will be harder to restore the confidence of the private sector after such severe measures. “Supply-chain relocation out of China may accelerate, unless there is a timely relaxation of the zero-Covid policy,” the analysts wrote.

Even if the lockdowns lift soon, the ripple effects may be felt for months as many of the cargo ships currently waiting outside Shanghai will make their way to the U.S., where ports are starting to improve after months of congestion.

“That certainly is going to make its way back into the U.S. here this summer,” said J.B. Hunt Transport Services Inc.’s Chief Commercial Officer Shelley Simpson on a conference call Thursday. The freight carrier transports goods by truck and rail and its operations include last-mile delivery services.

“Our customers are concerned about the July time frame,” Ms. Simpson said.

Industrial supplier W.W. Grainger Inc. also said it expects the shutdowns to hit supply lines in coming months, and the company has been increasing inventory levels since the middle of 2021 to maintain service.

Aside from supply chains, companies were hurt by the shutdown of the regional economy itself as China is a key consumer market for many multinational companies. Estée Lauder Cos. EL -4.97% expects bleak weeks ahead as lockdowns hurt demand and prevented the beauty company from getting products to stores and online shoppers. The company’s main China distribution center is in Shanghai.

“We are encouraged by some recent signs that we’ve seen in terms of some of the cases coming down. But it’s quite volatile,” Chief Financial Officer Tracey Travis said on a conference call.

P&G has two plants and a contract manufacturer in the Shanghai area that were shut down and it has tried to offset the losses. The market size in its sales categories in China was flat for the first three months of the year and April will be flat to negative, the company reported last month.

Coca-Cola Co., which got 13% of its $10.5 billion in first-quarter revenue from its Asia-Pacific segment, had a strong start to the year in the country before the restrictions started. Operating income for the three months dropped 3% in the region.

“The lockdowns, particularly Shanghai, took the steam out of things,” said CEO James Robert Quincey on a conference call last week. “We feel better prepared and more resilient for the Covid journey of 2022 in China than we did in 2020.”

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