WASHINGTON — Companies are bracing for another round of potentially debilitating supply chain disruptions as China, home to about a third of global manufacturing, imposes sweeping lockdowns in an attempt to keep the Omicron variant at bay.
Tens of millions of people have been confined to their homes in several Chinese cities. The measures also resulted in the suspension of international flights to Hong Kong for the month. At least 20 million people, or about 1.5 percent of China’s population, are in lockdown, mostly in the city of Xi’an in western China and in Henan Province in north-central China.
The country’s zero-tolerance policy has manufacturers — already on edge from spending the past two years dealing with crippling supply chain woes — worried about another round of shutdowns at Chinese factories and ports. Companies, already struggling with rising raw material and shipping prices, extended delivery times and worker shortages, would face additional disruptions in the global supply chain.
China used quarantines, contact trace and lockdowns to stop the spread the coronavirus in China nearly two years ago, after it was first discovered in Wuhan. These tactics have been highly effective, but the extreme transmissibility of the Omicron variant poses the biggest test yet of China’s system.
The effects of the Chinese factory production and delivery lockdowns have been minimal. Four of China’s largest port cities — Shanghai, Dalian, Tianjin and Shenzhen — have imposed narrowly targeted lockdowns to try to control small outbreaks of the Omicron variant. These cities hadn’t locked down their docks as of this weekend. Volkswagen and Toyota still announced last week that they would suspend operations temporarily in Tianjin due to lockdowns.
Analysts warn that there could be disruptions in the flow in many industries as China tries its best to eliminate coronavirus infections before the Winter Olympics, which are scheduled for Beijing next month. On Saturday, Beijing officials reported the city’s first case of the Omicron variant, prompting the authorities to lock down the infected person’s residential compound and workplace.
The effects of China’s massive lockdowns on supply chains could have a ripple effect across the United States. Major disruptions could cause consumer anxiety and increase inflation, already at a 40 year high. This could pose a challenge for the Federal Reserve and the Biden administration.
“Will the Chinese be able to control it or not I think is a really important question,” said Craig Allen, the president of the U.S.-China Business Council. “If they’re going to have to begin closing down port cities, you’re going to have additional supply chain disruptions.”
Companies fear setbacks just as they had hoped to see some relief from the supply chain bottlenecks that have plagued the world since the pandemic.
The combination of intermittent shutdowns at factories, ports and warehouses around the world and American consumers’ surging demand for foreign goods has thrown the global delivery system out of whack. Transportation costs have risen and ports and warehouses have seen pileups of products that are waiting to be shipped or driven somewhere else, while other parts of supply chains are being hampered by shortages.
Understanding the Supply Chain Crisis
Customers were able to avoid these problems by ordering early for the holiday season 2021. High shipping prices began to ease after the holiday rush, and some analysts speculated that next month’s Lunar New Year, when many Chinese factories will idle, might be a moment for ports, warehouses and trucking companies to catch up on moving backlogged orders and allow global supply chains to return to normal.
However, the Omicron variant spreading is threatening to derail any hopes of a quick recovery. It highlights not only how dependent America is on Chinese goods but also how fragile the supply chains remain within the United States.
American trucking companies and warehouses are already experiencing shortages of workers. They are also losing more workers to illness and quarantines. Weather disruptions are leading American supermarkets to have empty shelves. Delivery times for products shipped from Chinese factories to the West Coast of the United States are as long as ever — stretching to a record high of 113 days in early January, according to Flexport, a logistics firm. This was an increase of 50 days from the beginning 2019.
The Biden administration has taken a number of steps to reduce bottlenecks in the United States and around the world. This includes dedicating $17 billion to American ports as part the new infrastructure law. Major U.S. ports are handling more cargo than ever before and working through their backlog of containers — in part because ports have threatened additional fees for containers that sit too long in their yards.
However, these greater efficiency have been undermined by ongoing problems at other stages in the supply chain, such as a shortage truckers and warehouse workers to transport the goods to their destination. A push to make the Port of Los Angeles operate 24/7, which was the centerpiece of the Biden administration’s efforts to address supply chain issues this fall, has still seen few trucks showing up for overnight pickups, according to port officials, and cargo ships are still waiting for weeks outside West Coast ports for their turn for a berth to dock in.
West Coast ports could experience further disruptions as they renegotiate a labor agreement for more than 22,000 dockworkers, which expires on July 1. Prior negotiations caused delays in shipping and work slowdowns.
“If you have four closed doors to get through and one of them opens up, that doesn’t necessarily mean quick passage,” said Phil Levy, the chief economist at Flexport. “We should not delude ourselves that if our ports become 10 percent more efficient, we’ve solved the whole problem.”
Chris Netram (the managing vice president of tax and domestic economic strategy at the National Association of Manufacturers), who represents 14,000 businesses, stated that American companies had experienced a succession of supply-chain problems since the start of the pandemic.
“Right now, we are at the tail end of one flavor of those challenges, the port snarls,” he said, adding that Chinese lockdowns could be “the next flavor of this.”
Manufacturers are monitoring closely to see if Omicron spreads further in China.
Neither Xi’an nor Henan Province, the site of China’s most expansive lockdowns, has an economy heavily reliant on exports, although Xi’an does produce some semiconductors, including for Samsung and Micron Technology, as well as commercial aircraft components.
How the Supply Chain Crisis Deployed
The pandemic caused the problem. The complex and interconnected global supply chains are in turmoil. Much of the crisis can be traced to the outbreak of Covid-19, which triggered an economic slowdown, mass layoffs and a halt to production. Here’s what happened next:
Handel Jones is the chief executive of International Business Strategies. He said that the impact on Micron and Samsung would be minimal, but he expressed concern about the possibility of wider lockdowns in places like Tianjin and Shanghai.
“What we’re concerned with now is, is Xi’an a template for other cities in China?” he asked. “If they can’t control it in the next two or three weeks, then I think you could have a significant impact on the supply chain. Right now, it’s kind of the tipping point.”
Chinese authorities are trying to use more targeted lockdowns. One example is Shanghai which announced that it had identified five Covid cases in a milk tea shop where a student from China had recently returned from the United States. Instead of locking down the entire city or surrounding area, the government placed emergency restrictions at the shop.
Chairman of Mandarin Shipping, a Hong Kong-based container shipping company, Tim Huxley stated that the efficiency of Chinese ports has been slightly affected by social distancing rules, extensive testing, and other precautions.
Despite significant disruptions in lockdowns last summer, Chinese docks have been able more often to continue operating through municipal locksdowns. They have banned ship crews from coming to shore and made some dock workers live in nearby dormitories for weeks to prevent infection.
China will make similar arrangements to keep foreign athletes and others completely apart from its citizens during the Winter Olympics. Beijing traffic authorities advised residents to avoid collisions with Olympic participants to avoid spreading infection.
Last year, terminal shutdowns in and around Ningbo and Shenzhen, respectively the world’s third- and fourth-largest container ports by volume, led to congestion and delays, and caused some ships to reroute to other ports.
The effects of the coronavirus could quickly be felt in the United States if it does manage to get into a major port. “If one of the big container terminals goes into lockdown,” Mr. Huxley said, “it doesn’t take long for a big backlog to develop.”
In the coming weeks, airfreight could become more expensive and difficult to obtain as China has cancelled dozens of flights in an effort to stop another vector of infection. This could be especially problematic for consumer electronics companies that ship high-value goods via air.
American companies are facing new supply chain challenges, meaning there could be another scramble to secure Chinese products before potential closures.
Lisa Williams, chief executive of World of EPI, which makes multicultural dolls for children, stated that supply chain issues are putting pressure on companies such as hers to get products to the shelves faster than ever. Retailers have asked for products for fall shipping as early as May.
Dr. Williams was an academic who was trained in logistics before starting her company. She said that the increase in the price for petroleum and other raw materials has pushed up the costs of the materials her company uses to create dolls. This includes plastic accessories, plastic fibers for hair, fabric for clothing, and plastic for dolls. Her company has turned to far more expensive airfreight to get some shipments to the United States faster, further cutting into the firm’s margins.
“Everything is being moved up because everyone is anticipating the delay with supply chains,” she said. “So that compresses everything. It compresses the creativity, it compresses the amount of time we have to think through innovations we want to do.”
Ana SwansonReport from Washington, D.C. Keith BradsherFrom Beijing
Source: NY Times