Despite authorities in Shanghai talking to major manufacturers and granting special concessions, this is not available to SME’s and the impacts are wide ranging and add to over two years of global supply chain challenges. Meaning that lockdowns risk stalling supply chains.
Lockdowns Risk Stalling Supply Chains: Whilst Shanghai is getting the headlines on lockdown, there are an estimated 45 cities in lockdown across China leaving 380 million people confined to their homes due to the ‘zero tolerance’ on covid. China makes more than a quarter of the world’s products, and whilst there is a natural on-shoring sentiment to bring production back, is there really the capability, capacity and competence to do so? Our view is it might work in some industries, but Chinese manufacturers and infrastructure are far superior to other LCC options in south east Asia, and looking at the situation from a macro position fails to appreciate the incredible benefits of working with manufacturers in China.
All of the recent supply chain issues are essentially down to global government intervention, not only in China and those suffering now are the suppliers who have done nothing but followed the rules imposed on them.
According to Cameron Johnson, head of Asia Pacific at FAO Global, told Sky News that the knock-on effect would go through the whole supply chain.
“What you will see, if this continues, is at some point it will affect business in the UK. It may be just that delivery is delayed by a month or two, or it could be costs going up,” he said.
Five Ways to avoid the chaotic supply chain disruption in China
1. Communication has never been more important than now – understanding the challenges that your suppliers are facing and ensuring that you receive open and honest responses. Constructive dialogue will guide you on the best course of action.
2. Scheduling – China’s policy has been clear for some time, and our advice to customers has been schedule production well in advance and hold additional stock – and whilst this has been largely successful – there are additional challenges in getting goods shipped due to port closures and significant increases in haulage costs to try and ship from alternative ports.
3. Quality – Supply chains are stretched everywhere – it is crucial to understand the impact of small changes in the supply chain on your products. Ensure you know what changes have been made in production and how you can ensure there is no impact on the quality of your product.
4. Time – the time to move goods between subcontractors and to ports has increased significantly, or is simply not possible. Order early, and ensure your relationships are good – priority will go to the customers they value.
5. Money – because of lockdown, it’s taking much longer to process international transfers and this has an impact on company cash flow. Unlike companies in the UK, companies in China have no financial support from the government, and are having to finance salaries, rent, and all other costs without income. Think about whether you are able to offer improved credit terms to support your supplier, and what are the consequences if they are unable to remain in business.
Shanghai Supply Chain Manufacturing – Facts & Figures – Lockdowns Risk Stalling Supply Chains
- Shanghai accounted for 7.3% of China’s exports and 14.4% of imports in 2021, according to CIT
- Shanghai is a major centre and regional headquarters for multinational corporations: Apple, P&G, LVMH, Philips, and GE, amongst others.
- Shanghai’s Pudong airport is the world’s 3rd busiest cargo airport
- Shanghai is home to the world’s largest container port
Covid impact on China & Shanghai
- China accounts for about 12% of global trade. Although its economy slowed rapidly in March and April, 2022, as the costs of both the Covid outbreak and stringent lock-down measures played out.
- Restrictions have further slowed down manufacturers and warehouses, as well as truck deliveries.
- Auto makers’ factories located in Shanghai, such as VW, GM and Ford and Jilin (VW & Toyota) have been shut for weeks because of the impact on supplier operations.
- Tesler that produces 65,000 – 70,000 Model Y and Model 3 monthly combined have just started to ramp up production after a 3-week closure
- There are over 10,000 auto component manufacturers including big players such as ZF, BOSCH, Continental, BorgWarner, etc. that have been impacted by the restrictions, in Yangzi River Delta region (including Shanghai, Jiangsu, Zhejiang, Anhui)
Covid impact on China’s Shipping
- The queue of cargo carriers is increasing as Shanghai enters its sixth week of lockdown.
- The total number of container ships in port and off the hub’s shared anchorage with nearby Ningbo stands at 230, a 35% increase from this time last year
- Imported containers are waiting on average 12.1 days at Shanghai’s port before they are picked up by truck and delivered to destinations inland.
- With the ports Shanghai and Ningbo piled up with containers for sailing, trucking cost has spiked.
- Drivers have to queue up for 3 days waiting to unload goods. Hauling for alternative ports costs 3 times higher than before.
Obstacles for Reopening Factories
- Authorities would like to kick-start production, but hurdles still remain; without rent exemptions or tax reductions some businesses are struggling.
- Many companies still face problems getting supplies and food. Dealing with neighbourhood lock-down measures mean that some workers can’t get into their homes after finishing a stint at work
- Stringent government rules mean that some factories may struggle to reopen.
- Trucking shortages and supply-chain back-logs mean it will take some time for production to truly get back to normal
Watch out for a bumpy ride ahead with supply chain woes!
– Lockdowns Risk Stalling Supply Chains
China’s policy has been clear for some time, our view is the impact of the lockdowns has not yet been truly felt, and there will be a multitude of single source supply chain components that will have a massive impact in the coming weeks – and the lack of supply will likely drive up costs further.
Whilst the news headlines are creating concern, our focus remains on real people and real factories, and our focus has been on updating our customers with both good news and bad and dealing with them. The challenges will pass and China remains a great place for SME to do business.
How have we been supporting customers
- Our staff in Shanghai have been working from home since the beginning of the lockdown, but they have been communicating with suppliers seamlessly as usual
- We have a conference call with each supplier on a regular basis to check if everything is on track, either on quality or production progress
- Without being able to visit suppliers conducting on-site inspection, we have introduced a system to make sure quality control is being undertaken by them via video and photo
- We put together all the information we gather from source and send regular updates to customers so they have a clear understanding of what’s going on in China.
- We always try and work out the best solution among various options to overcome any problems linked to supply and shipping under the current circumstance