Analysis: China's widening COVID curbs threaten global supply chain paralysis

Foxconn Interconnect Technology

13/04/2022 11:05

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    SHANGHAI, April 13 (Reuters) - China's race to stop the
spread of COVID-19 is clogging highways and ports, stranding
workers and shutting countless factories - disruptions that are
rippling through global supply chains for goods ranging from
electric vehicles to iPhones.
    While some factory owners try to tough it out through 
"closed loop" management that keeps workers isolated inside,
some said that is becoming harder to sustain given the extent of
local COVID-19 curbs aimed at heading off the Omicron variant,
complicating efforts to procure materials or ship products.
    Foxconn Interconnect Technology  6088.HK , a unit of
Taiwan-based Foxconn  2317.TW  that makes data transmission
equipment and connectors, has kept a plant open in Kunshan,
which borders Shanghai, in a closed loop but is only able to run
at 60% of capacity, a person familiar with the matter said. 
    Foxconn did not respond to a request for comment.
    On Wednesday, more than 30 Taiwan companies, many making
electronics parts, said that COVID-19 measures in eastern China
had led them to suspend production until at least next week.
 urn:newsml:reuters.com:*:nL2N2WB06M
    A day earlier, German auto parts giant Bosch said it
suspended output at sites in Shanghai and Changchun, while
putting two other plants under "closed-loop" operation. Also on
Tuesday, Taiwan's Pegatron Corp  4938.TW , which assembles Apple
Inc  AAPL.O  iPhones, halted operations in Shanghai and Kunshan.
    Sven Agten, Asia Pacific CEO of Rheinzink, a German maker of
zinc construction materials, said logistical challenges make a
closed-loop unworkable at his Shanghai warehouse and
manufacturing facilities, and expects to have zero sales during
April and possibly May.
    "We need somebody in the warehouse and the manufacturing
facility to do the work, and we need a truck and a driver. These
are the two key components, and both are impossible," he told
Reuters. 
    China's zero-tolerance approach to COVID-19, despite low
case numbers and even as the rest of the world tries to live
with the coronavirus, is proving unwieldy given the extreme
infectiousness of the less-deadly Omicron variant. 
    The zeal to cut-off virus transmission chains means
localised curbs extend far beyond virus hotspots Shanghai and
Jilin province in the northeast. An April 7 study by Gavekal
Dragonomics found that 87 of China's 100 largest cities by GDP
have imposed some form of quarantine curbs. 
    On Saturday, electric vehicle maker Nio  9866.HK  said it
had to suspend production at its Hefei factory - even though
there were no local-level curbs - because suppliers from other
areas had stopped work.
    
    TRUCKERS' BLUES
    Truck transport has been especially hard hit, causing long
queues and delays and driving up prices. The normal rate to book
a truck from Shandong province to Shanghai had more than
quadrupled from 7,000 yuan ($1,100) to 30,000 yuan, said an
executive at a trucking firm who declined to be identified.
    "It has become extremely difficult for our company to find
available trucks near Shanghai in the past two weeks as many
truck drivers were either stuck on the highways or locked down
in the cities," he said, adding that he was subcontracting
orders - at a loss - to keep goods moving.
    The city of Xuzhou, a logistics hub, on April 8 began
requiring truck drivers to produce negative PCR test results
taken within 48 hours to take more tests upon arrival. They
cannot exit their trucks.
    Some drivers have become stuck on highways after visiting
areas like Shanghai, which meant their smartphone health codes
were automatically invalidated. Last week, state media reported
on a truck driver who lived in his truck for seven days after
traveling to Shanghai. 
    
    CLOGGED PORTS, GLOBAL IMPACT
    Foreign business groups have been especially vocal about
their concerns, with the European Chamber of Commerce in China
sending a letter to the government last week noting that about
half of German firms in the country were experiencing supply
chain problems.  urn:newsml:reuters.com:*:nL2N2W90EC
    China has tried to cushion the impact of the curbs by
keeping ports and aiports running and encouraging closed-loop
manufacturing.
    But the number of container vessels waiting off Shanghai –
the world’s busiest container port – and nearby Zhoushan has
more than doubled since the start of April to 118, nearly three
times the number a year ago, Refinitiv data showed.
   Danish shipper Maersk  MAERSKb.CO  on Monday recommended to
clients that they divert from congested Shanghai port to other
Chinese destinations. 
    Economists have cut growth forecasts for China on the back
of such disruptions, with Beijing's official growth target of
around 5.5% this year seen as increasingly difficult to reach. 
    ING last week downgraded its GDP forecast for China to 4.6%
from 4.8% previously.
    On Wednesday its chief economist for China, Iris Pang,
warned that China's COVID crisis could impact growth rates
around the world.
    "A problem in China could be a problem for the global
economy," she said. 
    Chen Xin, who runs a family-owned embroidery and garment
painting factory in Guangdong province, said that since late
March he has been unable able to ship roughly 70-80% of orders
because customers can't receive them.
    "The current situation is, the impact of the policy is
greater than the epidemic," he said. 

($1 = 6.3651 Chinese yuan renminbi)

 (Reporting by Zhang Yan and Josh Horwitz in Shanghai, Martin
Quin Pollard in Beijng and Yimou Lee in Taipei, Additional
reporting by Gavin Maguire in Singapore; Writing by Brenda Goh;
Editing by Tony Munroe and Kim Coghill)
 ((brenda.goh@thomsonreuters.com; +86 (0) 21 2083 0088; Reuters
Messaging: brenda.goh.thomsonreuters.com@reuters.net))