China’s zero-Covid policy poses a challenge to manufacturers and supply chains

China’s struggle to push back the Omicron version runs the risk of stifling already strained global supply chains, warns production executives and analysts, threatening the production of goods ranging from smartphones to furniture.

Beijing is determined to prevent the large-scale spread of Covid-19, especially in preparation for next month’s Winter Olympics, and has introduced restrictions to maintain its zero-Covid strategy.

The closure is entering its third week in the central city of Xi’an and about 13 million people will have to stay home. Restrictions such as mandatory testing have been introduced in Tianjin, a 14-meter port city about 100 km from Beijing, several cities in Henan Province, home to the world’s largest iPhone factory operated by Foxconn in Taiwan, and parts of Zhongshan and Zhuhai. manufacturing centers close to Hong Kong.

The measures will be a test for multinational companies and whether they are better prepared to deal with disruptions in their production capacity than in the first wave of the epidemic.

“When Covid, Lunar New Year and the Olympics go together, we face a perfect storm,” said Ambrose Conroy, CEO of Seraph, a U.S. supply chain consulting firm. “Companies are now a little better prepared for short-term closures, but a wider shutdown over a few weeks would wreak havoc.”

According to a leader in a Taiwanese manufacturer in Shenzhen, the closure of a manufacturing center in southern China would be “worse than 2020”.

After the virus spread from Wuhan in China two years ago during the Lunar New Year celebration, the government blocked shipping in much of the country. Restrictions have prevented hundreds of millions of migrant workers from returning to work who were on holiday. The factories were closed for several weeks.

“This time I’m more worried because supply chains around the world are very tense: there are already long delays in delivery, and parts shortages persist,” said Didier Chenneveau, an expert partner at consulting firm McKinsey.

The latest restrictions have already given multinationals a taste of the stakes. Both automakers Volkswagen and Toyota closed their plant in Tianjin last week. In Xi’an, Samsung chip maker has had difficulty hiring employees due to the closure.

Toyota, which suffered a huge supply chain disruption in Southeast Asia last year, said the shutdown of the Tianjin joint venture “is unlikely to have a global impact on our supply as localization has progressed significantly”.

But infections can spread further. Ningbo, home to the world’s third-largest container port, has reported infections and banned trucks from entering, further exacerbating ship congestion.

Some managers believe that focusing on preventing the risk of the Winter Olympics in Beijing will protect places close to the capital from the risk of a total Omicron crisis.

“Of course, you’re not lucky to be locked up,” the Taiwanese executive said. “But the authorities’ attention to places like Tianjin also means they’re doing everything they can to help deal with it.”

At Samsung Electro-Mechanics, a parts company that has a factory in Tianjin, local government has asked workers not to leave the city for the New Year holiday to avoid the risk of infection.

“These are preventative measures that make sense. We’re less prepared down here, ”said the Taiwanese executive, whose company is under pressure to let workers home on vacation because they’ve had to skip the annual trip twice already.

Students in personal protective equipment arrive in Ningbo to take exams, where trucks cannot enter city port due to Omicron discovery © AFP with Getty Images

Analysts say if the infections continue to spread, it will hit manufacturers as badly as it did two years ago, as few companies move much of their supply chain outside China.

“Has anyone really reduced supply chain risk? Have their Asian-based production been largely relocated to the mainland or close to the coast? The answer is no, because these things take a lot of time, ”Chenneveau said.

A McKinsey study found that only 60 percent of those surveyed increased critical stocks and only half of them increased double sourcing.

Mitsubishi Electric is building a platform to share database information with suppliers about missing parts, but that won’t be completed until 2025.

Disruptions caused by the virus have increased the dependence of many industries on China elsewhere, at least in the short term.

A typical example is the manufacture of multilayer ceramic capacitors (MLCCs), which use energy storage components in any product with an electrical circuit. Nearly half of the world’s MLCC capacity is in China, according to research firm Trendforce.

“MLCC was in short supply anyway, and often each plant specialized in producing a single product, so when a plant shuts down, no one else can enter as a backup,” said Forrest Chen, an analyst at Trendforce MLCC.

Japanese MLCC maker Murata is building a new plant in Thailand to reduce over-concentration in China. However, the company also began manufacturing certain products at its plant in Wuxi, East China, following the closure of a Japanese plant that had previously produced exclusively for them due to the epidemic.

“Everyone is trying to build a second supplier in China. This includes finding alternative sources to buy parts, as well as identifying locations within your own factories that can serve as a backup, ”said a consultant working with electronics companies.

But none of these agreements have gone far enough. “It will take three to five years to implement geographical diversification,” Chen said.

More reports from Xueqiao Wang in Shanghai

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