Zero-Covid policy is costing China its role as the world’s workshop

The anti-lockdown unrest gripping China has forced the authorities in Beijing to respond by easing some restrictions in big manufacturing centres, as they map out a “new stage and mission” in the country’s deeply unpopular zero-Covid policy.

There are concerns that more freedom of movement could allow the virus to rip through a population where immunity is lower than in the west. Those health risks mean the “world’s workshop” is heading for a difficult winter, casting a shadow over the prospects for international trade.

Western companies have learned lessons from the first wave of lockdowns, and some may be better prepared, but for others, at a time when supply chains are still recovering from nearly three years of on-off pandemic problems, there is trouble ahead.

Apple has already warned of Christmas shortages. Now analysts say the recent shutdown of Foxconn’s huge iPhone factory in Zhengzhou could have cost Apple a third of its Christmas inventory.

“It is a debacle of epic proportions for Apple,” says Dan Ives of US data research firm Wedbush. “In many Apple stores we are seeing major iPhone 14 Pro shortages of up to 35% or 40% of typical inventory heading into December. The Chinese supply chain is the Grinch that stole Christmas. Shortages are eye-popping.”

Apple is not the only company affected; logistics and transport data indicate a general production slowdown. Last week, road and rail shipments in China dropped by 36%, according to the supply chain data firm FourKites. Chinese shipping to the US has continued to decline and is down 34% compared with earlier in the year.

As a result, car manufacturers are seeing a shortage of supply from China, which could make it even harder to find a new car in the UK. Honda has paused production at its factory in Wuhan, while Volkswagen said this week it had been forced to suspend making vehicles at its facility in Chengdu because of a rising number of Covid cases. The German carmaker has also placed two of the five production lines at its Changchun plant on hold because of a shortage of parts.

Although some factories may reopen now that the Chinese government is easing lockdowns in manufacturing hubs like Guangzhou, Ives says the latest flare-up of problems could be the “straw that breaks the camel’s back” for western companies’ relationship with suppliers in the world’s second largest economy.

For executives in Apple’s Cupertino headquarters, having spent billions of dollars on building a state-of-the-art assembly system in China, the ongoing, unsustainable problems and lack of visibility on policy from Beijing are a “gut punch”, Ives adds.

“This is going to have strategic long-term impact for Apple, Tesla and other companies that rely on China for the chip supply chain. I think there is shock within Apple. Cupertino has been able to navigate the zero-Covid situation better than any other company. But for this to happen to Apple in the Christmas season is a gut punch.”

Ives said Apple was unlikely to “just accept it and move on” and expected the company to accelerate moves to shift some of its operations to other countries such as Vietnam and India.

A wider shift away from reliance on China has already begun, encouraged by the Donald Trump-led trade wars with China and the pandemic disruptions of the past three years.

Mark Swift of Make UK, the UK manufacturers’ lobby group, said those supply chain snarl-ups had already played havoc with British companies, making it difficult to measure the impact the latest difficulties would have.

But he warned that six out of 10 companies surveyed by Make UK thought supply chain problems were the biggest risk to their businesses. As a result, more companies were beginning to move away from the fabled “just in time” system of supply management to one best described as “just in case”.

“That’s a significant change to business models,” he said. “They can’t afford to have their supply chains solely in China. They’d rather have components coming from Manchester or Munich.”

Flavio Romero Macau, associate professor of business at Edith Cowan University in Western Australia and an expert on supply chains, said the final outcome would depend on how well China managed the next few months of Covid outbreaks.

He points to China’s very low rate of cases – currently of 218 per million (0.02% of the population) – which is likely to rise if the zero-Covid policy is eased. Hong Kong, for example, has a rate of 228,415 cases per million (22.8% of the population).

“China will eventually catch up with Hong Kong,” he says, because zero-Covid is “unsustainable” – a view shared by many western experts. “That’s a potential 322 million cases, most of them expected to be mild – 99.8% if it reflects world statistics.”

Much would depend on Beijing’s ability to keep control of any outbreak, or whether Covid spreads more rapidly through China than it has so far.

The former would mean mild supply chain disruption, but the latter scenario could mean “a sharp increase in absenteeism that ceases manufacturing capacity for a time”, says Romero Macau. “The risk of a major disruption is high, with supply chains paralysed for a few weeks.”

The wider impact on China’s own economy, which has already been hit by a slump in its huge property sector and is growing more slowly than at any time for 35 years, could also be important.

Dennis Unkovic, a US corporate lawyer, trade expert and author of Transforming the Global Supply Chain, said it was becoming clear to companies that “China is much more vulnerable overall than most western observers had predicted”.

“The Xi-enforced closures of cities throughout China have severely impacted the Chinese economy,” he said. “This has affected more than just the growth potential of the Chinese economy. The closures have exacerbated the ongoing fracturing of the global supply chain.”