In September 2021, 10 provinces on China’s East coast forced their manufacturing sector to suffer power cuts. Even our own Dongguan contract manufacturing facility, in South China, was without power during the daytime on Monday and Tuesday this week.
Widespread power rationing is having a profound impact on the manufacturing industry that is gearing up for a busy Q4 period. And, by extension, on their overseas customers.
We try to make sense of it all here and offer some tips for you if your supply chain is affected by the power cuts in China.
First, listen to my thoughts on the ‘power crunch’ in this episode of the Sofeast podcast:
Power-rationing has an impact on manufacturers
The energy-hungry backbone of China’s economy has been under threat recently due to power-rationing making it simply impossible for all manufacturers to carry on as normal, especially those consuming enormous amounts of electricity (aluminium smelting, steel-making, cement manufacturing and fertiliser production, PCB fabrication…)
Reuters reported that some Apple and Tesla suppliers have suspended production and moved shifts from September to October, inconvenient news for tech giant Apple who has just launched its flagship iPhone 13 model in time for Christmas in the West.
The energy crunch is having an impact on Chinese people, too
Aside from the inconvenience of power cuts in China, reports are cropping up of stores being lit by candles some evenings, children eating breakfast by flashlight, and people being trapped in powered-down elevators.
A very real impact on local people was seen in Liaoning province recently when the power was cut to traffic lights on a highway causing massive disruption:
What’s causing the lack of power in some areas?
There are a few reasons for the power crunch and restrictions. We can’t be sure what the main reasons are, but they probably all have a role:
- The enormous demand for Chinese made goods caused by a lockdown online shopping boom and subsequent opening up of Western societies has left manufacturers in China busier than ever, leading to increasingly large energy demands. In August alone, export shipments increased by over 25% more than the year before. This demand has also broken global shipping, by the way.
- Beijing’s December 2020 decree to bring emissions under control and reduce China’s carbon dioxide emissions by more than 65% from 2005 levels by 2030 is also partly responsible. This ambitious target, given that China is the world’s largest single emitter, means that the government is already cracking down on the most polluting industries. These tend to be energy-intensive heavy industries, and one way to limit emissions is to limit their operation.
(This video from SCMP neatly explains China’s plans to tackle climate change)
- The desire to show ‘Olympic Blue skies’ in the upcoming Winter Olympic Games, to be held in February 2022 in and around Beijing is influencing the decision to curb industrial emissions in the North of the country with strategic power cuts.
- High demand for energy with ‘the resurgence of economies such as China and India after Covid-19 slowdowns also forcing up the price of fossil fuels, with thermal coal, used to generate electricity, up 96% this year.’ (The Guardian)
- Shortages of coal and natural gas due to the high demand, causing a boom in costs hitting other regions of the globe.
In addition to these challenges, China is also stockpiling coal to protect the energy supply throughout winter when many people in the frigid North rely on it for heating. No doubt this is inflating wholesale costs even more and exacerbating the global fuel bubble.
What is the Chinese government doing about this?
In China, the government usually pushes restrictions onto industrial and commercial energy users in order to protect residential power supplies and ‘keep the lights on.’
The government has moved to take action to reduce power usage for political (reducing carbon emissions and having blue skies for the Winter Olympics) and practical reasons (there isn’t enough power to go round), and ‘in major manufacturing hubs like Zhejiang, Jiangsu, and Guangdong provinces [they] have asked factories to limit power usage or curb output.
Some power providers have sent notices to heavy users to either halt production during peak power periods that can run from 7 a.m. and 11 p.m., or shut operations entirely for two to three days a week.
Others have been told to shut until further notice or a particular date, including soybean processing plants in Tianjin in eastern China which have been shut since Sept. 22.’ (Yahoo! News)
The local government of Guangdong province, one of China’s heaviest power users, released this statement (page in Chinese) on their situation and plans:
Guangdong is currently facing a tight power supply situation.
Data shows that from January to August this year, the electricity consumption of the whole society in Guangdong was 525.273 billion kWh, a year-on-year increase of 17.33%.
Liu Wensheng, deputy director of the Guangdong Provincial Energy Bureau, said that the main reasons for this round of insufficient power supply are the strong economic recovery in Guangdong Province, and the steady and rapid social and economic development has driven the rapid growth of electricity and electricity.
In response to the current shortage of power supply in the province, the Guangdong Energy Bureau and Guangdong Power Grid jointly issued the “Proposal for Orderly and Conserving Electricity Use of Electricity Users across the Province”…it is recommended that users in the tertiary industry such as party and government agencies, enterprises and institutions, shopping malls, hotels, restaurants, entertainment venues and office buildings consciously reduce electricity load during peak electricity consumption, such as reducing the operating power of air-conditioning equipment and reducing unnecessary lighting projects.
It’s also worth mentioning that in Guangdong specifically, ‘a heatwave began earlier in the month [September 2021]. Temperatures hit an average daily high of 34.4 degrees Celsius, 2.2 degrees more than the same period in previous years’ (Bloomberg Quint) which is attributed as the cause of heavier than usual use of airconditioning by residential users, hence the local government’s plea that they set their devices to the more economical 26-degree setting.
According to the SCMP economists Chang Shu and David Qu in a Bloomberg Intelligence report [stated the following about the power cuts in China]:
“With residential areas given the priority in energy use over industry, the impact will fall hardest on production. The biggest dent is likely to be made in September and October, before the situation improves in the final months of the year, in our view.”
China’s State Grid bullishly said it will “go all out to fight the battle of guaranteeing power supply”,’ but it’s too early to say whether that promise can be followed through on.
Indeed, the shortages aren’t simply because the power generation infrastructure can’t keep up with demand. It may be that fuel costs are simply too high for the generators to swallow. A Chinese thermal power plant executive was quoted as saying:
“Currently, the price of standard coal has exceeded 1,000 yuan (about 155 U.S. dollars) per tonne, a new high in nearly 20 years. With the cost of generation more than double, many power plants are reluctant to generate power.”
How will this affect importers with a Chinese supply chain?
Aside from China’s massive demand for fuels causing inflation and similar fuel crunches around the world that could hit us all in the pocket, importers from China face a triple-whammy in Q4 caused by the power cuts:
- Potential delays
- Higher costs than expected
- Quality issues
Heavy industry and electronics manufacturing are hard-pressed by the power cuts in China in the name of energy rationing. If your manufacturer is having to operate between 11 pm and 7 am or reduce their working days to 2 or 3 per week, you can expect delays.
Even simple assembly operations have been hit hard, so your direct supplier may have problems both with their own suppliers and in their internal operations.
Stronger demand for raw materials and components, and higher energy bills will provide an opportunity for suppliers to raise prices. Combined with soaring shipping costs, all this will lead to higher unit costs per product. It seems there’s no escaping that. To make matters worse, just getting products in time for Christmas is highly uncertain for many importers this year.
Why quality issues?
When operators and inspectors who usually work during the day suddenly have to do a night shift, they are not at their best. They are more likely to take shortcuts, make mistakes, and/or fail to detect issues.
What can YOU do?
Unfortunately, if your supply chain is in China, there is little you can do in the short term. Here are a few tips:
- Don’t push your suppliers hard to ship by a certain date, or they might rush through your production at night… with poor quality. (Unfortunately, with the pressure to get the goods in a container, that’s not always possible.)
- Some components’ prices have risen a lot and will probably continue to rise. You might want to purchase them directly in advance. We wrote about this a few months ago.
- Keep extra inventory, as a buffer against unpredictable incidents in the supply chain.
Experts seem to believe that the tension on electricity will calm down in 1 or 2 months, while the situation with shipping containers and the high prices of some electronic components may last well into 2022. We will see!
Have you been affected by the power cuts in China? Let us know your thoughts by commenting or contact us if you have any questions, we’ll try to help however we can!