After nearly two years of rigorous zero-COVID policies, President Xi Jinping told the country’s ruling Politburo Standing Committee in mid-March to make containment policies more flexible to reduce the impact on people and the economy. The change in policy is being tested by a surge in new infections from the Omicron variant that began at the end of February and has led to the highest incidences of new cases since March 2020.
So far, the results of the lighter-touch policies are mixed from the perspective of global supply chains. Compared to the military-style campaigns that sealed off entire neighborhoods for weeks at a time, local authorities are now using methods like “rolling lockdowns”—in which they confine residents of a single building for a couple days, test everyone, then lift restrictions if all residents test negative.
But even the shorter lockdown periods are having a cascading effect on production and logistics—and a search for “China Covid-19 supply chain” will turn up many ominous headlines warning of another round of massive supply chain disruptions for goods, materials, and components from China.
In Shanghai, a surge in cases prompted a two-stage lockdown March 28. Half the city will be under lockdown for four days while officials conduct a testing blitz before imposing the same measures in the rest of the city, according to the Wall Street Journal. Some corporations, including Tesla, have planned to shut down production in Shanghai, while other large manufacturers—including Semiconductor Manufacturing International Corp.—anticipated no interruptions. One new strategy helping keep Shanghai factories open is “closed-loop production,” in which employees reside at the business campuses where they work for a period of time.
Still the threat of supply chain disruption due to the Shanghai lockdowns looms: Resilinc has mapped over 4,600 suppliers responsible for over 13,000 products (across manufacturing, high-tech, and healthcare) that will be impacted by the lockdown. Average recovery time for these suppliers is 3 weeks. However, for extreme cases it may take 180 weeks to recover to pre-lockdown operations.
An earlier shutdown of nonessential businesses in Shenzhen that followed a surge of infections was lifted for companies that showed they were taking measures to prevent workplace infections. These employers included the Shenzhen campuses of Foxconn, the world’s largest contract electronics manufacturer, which had arranged for some staff to live and work in a bubble while those in the high-risk area of Futian work from home, according to Reuters.
Nationwide, a new health policy enacted in early March lets residents self-test with rapid antigen testing kits bought from pharmacies or online; the previous policy required professionally administered nucleic acid tests (also known as RNA or PCR tests).
In regions where rates of infection are particularly high, old-style containment measures are still being enforced. After Shandong and Jilin registered very high case counts on March 10, measures known as “closed management” were implemented: public transport, non-essential businesses, and recreational facilities were closed, people were ordered to stay home, and only one member of each household could leave home every two days to buy food and other necessities.
In a recent special report tracking Covid-19 outbreaks across Asia, Resilinc analysts report a mosaic of government responses across Asia to Covid-19 surges, as well as a jigsaw puzzle of impacts. Japan, for example, ended all “quasi-emergency measures” on March 22 for 18 prefectures; Vietnam re-opened its borders to visitors on March 16; a surge in South Korea has led to a 10% rise in container shipping rates in one month.
A common theme is renewed financial distress for many of the small- and medium-sized enterprises that are critical for supply chains. In China, more than 200,000 SMEs supply advanced technology parts, components, and materials to a variety of industries. Resilinc recommends a multi-pronged approach, including: robust supplier financial risk monitoring; evaluating the revenue impacts of losing certain suppliers and focusing risk management on those whose loss would hit revenues the hardest; establishing an emergency fund to support struggling suppliers; and considering lifetime buys of key components and materials. And to track and monitor the impact of widely varying pandemic policies across China, there’s no substitute for robust and thorough supply chain mapping.