The situation along China’s coast is quite tense. Our clients keep asking for updates, so we thought writing this article was a good way of keeping communication flowing.
Here are the numbers of positive cases tested over the past 24 hours:
These numbers seem quite low compared to what other countries now consider normal. But they are absolutely not acceptable to China’s leadership, which maintains a “zero covid” objective.
The situation is particularly concerning in Guangdong since it is still the No. 1 manufacturing base for consumer goods exported out of China.
Shenzhen is totally locked down, and most districts of Dongguan also are. It might spread out to other cities, as I wrote a few days ago.
The situation changes every day. New districts in Dongguan got locked down on Tuesday (e.g. Changping), on Wednesday (e.g. Chang’an, where our facility is located), and we anticipate this will keep going.
What is the impact on supply chains?
Basically, if there is no product to ship, there is no supply chain. That’s what’s happening in Shenzhen and parts of other cities.
Some engineering work and some sourcing work can still be done (when the staff are working from home), but all production and fulfilment activities are stopped.
It does have a strong impact on factories located in areas that are considered ‘low risk’, too. Especially for relatively complex products. The assembly factory may be in Huizhou or another city, but some components are often made in Shenzhen. (Or, in the case of electronic components purchased on the “spot market”, they are in a warehouse in Shenzhen and nobody can ship them out.)
Do assembly factories have enough inventory of ALL the components they will need for the next few weeks? Seldom.
Automotive supply chains are hit first, many other global supply chains to be hit soon
VW, Toyota, Tesla, and others have had to stop production. And all the car assembly plants that source parts made in locked-down areas will be halted within a few days since they rely so heavily on ‘just in time’ (even when shipping parts across continents or oceans… which makes little sense).
One can also predict that many other manufacturers will have to halt production in Europe and North America. Remember early 2020, and realize that this will have a bigger impact!
The largest manufacturers in China may have an advantage
It seems like some large manufacturers are getting organized in self-sufficient campuses. Since they have production workshops, offices, dormitories, and canteens all within their campus, they can be in a “bubble” and work in a “closed-loop management” system, as Reuters reported yesterday.
As long as they have the dorms just next to the factory, it’s feasible. That could be a realistic approach for hundreds of large manufacturing facilities if the companies that deliver food to factory canteens are allowed to get back to work. (I am not sure the Shenzhen government wants many of those drivers to go around the city.)
Will your suppliers survive?
I do worry about the financial ability of many manufacturers to survive such a lockdown. They need to keep paying for the rent and salaries of all the staff while getting no use out of them.
In a way, it’s like having to suffer another Chinese New Year (when everybody goes on holiday and there is no production.)
At least in 2020 some of the downtime was during CNY, and factories were forced to delay the re-opening a bit. This 2022 lockdown is much, much worse for manufacturers. If it lasts for a long time, how will companies short on cash keep paying all their expenses??
How is it impacting visits to factories?
In a word: heavily.
Especially in Guangdong, Zhejiang, and Jiangsu provinces, in low and medium-risk areas.
There are 2 issues here.
- First, certain towns do not allow any visitors in. Even if the visitor comes from the same city and from a low-risk area!
Local governments keep adding new restrictions to the movement of people, in an attempt to prevent the spread of the outbreak. The situation changes every day.
- Second, the testing capacity is clearly insufficient because cities like Shenzhen, Dongguan, Suzhou, and others are testing millions of people every day.
Most factories absolutely require a nucleic acid test done less than 24 hours ago. The problem is, the results often come late (sometimes > 30 hours after specimen collection). In some cases, this week, some of our QA/QC staff waited for hours outside factories and didn’t get the test results on time, which means they had to go back home.
Affected by the Chinese lockdowns?
First, please let us know what is happening to your supply chain? Are some of your suppliers locked down already? Leave a comment. 👍
Second, post-pandemic we developed off-site audits and off-site product inspections in order to continue to provide peace of mind even when access to suppliers’ factories is temporarily unavailable for inspectors and auditors. Some of our customers have already been using these to their benefit during supplier lockdowns.
Third, we have written and spoken about this dynamic situation recently here: