With Beijing facing lockdowns, global supply chain crisis flares up again where it all began
LONDON (BLOOMBERG, NYTIMES) - China's stringent rules to curb Covid-19 are about to unleash another wave of summer chaos on supply chains between Asia, the United States and Europe that is fuelling inflation worldwide.
Beijing on Tuesday (April 26) launched mass coronavirus testing for nearly all its 21 million residents, as fears grew that the Chinese capital may be placed under a strict lockdown. Shanghai, a major port and business centre, has been locked down for roughly a month, part of China's zero-Covid-19 strategy. Other Chinese cities both large and small have announced their own restrictions on the movement of residents in a bid to keep the virus from spreading.
Beijing's zero-tolerance approach amid an escalating Covid-19 outbreak brings the pandemic full circle, more than two years after its emergence in Wuhan upended the global economy. Shipping congestion at Chinese ports, combined with Russia's war in Ukraine, risks a one-two punch that threatens to derail the global recovery, already buffeted by inflation pressures and headwinds to growth.
Even if the virus is reined in, the disruptions will ripple globally - and extend through the year - as bunched-up cargo vessels start sailing again.
"We expect a bigger mess than last year," said Mr Jacques Vandermeiren, the chief executive officer of the Port of Antwerp, Europe's second-busiest for container volume, in an interview. "It will have a negative impact, and a big negative impact, for the whole of 2022."
China accounts for about 12 per cent of global trade and Covid-19 restrictions have idled factories and warehouses, slowed truck deliveries and exacerbated container logjams. US and European ports are already swamped, leaving them vulnerable to additional shocks.
"Once product export activities resume and a large volume of vessels make their way to the US West Coast ports, we expect waiting times to increase significantly," said Ms Julie Gerdeman, CEO of supply chain risk analytics firm Everstream Analytics.
In the short run, the pile-ups will mean more costly headaches in the US$22 trillion (S$30 trillion) arena for global merchandise trade, which slumped in 2020 and rebounded last year. In the longer term, such chaos is redrawing the contours of a global economy tied together by cross-border commerce. For some corporate executives, reeling in far-flung production networks is no longer a patriotic political slogan - it is a business necessity given all the uncertainty.
"This has accelerated the pressing need for supply chains to become more regional," Mr Lorenzo Berho, CEO of Vesta, a Mexican developer of industrial buildings and distribution centres, said on a conference call last week. The shift towards shorter supply chains to places like Mexico is under way to reduce exposure to Asia.
Said Mr Berho: "Globalisation, as we know it, may be coming to its end."
Key policymakers are coming round to the idea that a sea change in the developed world's supply lines is necessary. US Treasury Secretary Janet Yellen calls her idea for more resilient trade linkages "friend-shoring" - a not-so subtle jab at China and Russia. Much of the shift hinges on whether the pandemic has convinced consumers to accept higher prices for products made closer to home, and at least one consultant's analysis says they are.
Companies have weathered the roughest bouts of supply turmoil over the past year partly by raising prices - and consumers have largely absorbed the hit. In the near term, though, supplies from China pose a more menacing cloud than the questions about household demand.
Tesla lost about a month of work during the Shanghai shutdown. Retailer Bed Bath & Beyond earlier this month said an "abnormally high" level of inventory was in transit, unavailable or held at ports throughout the early part of this quarter. Alcoa, the aluminium giant that is a bellwether for the global economy, last week blamed transport snarls for higher inventories. Continental, Europe's second-largest maker of car parts, lowered its growth forecast for global production of passenger cars and light commercial vehicles to a range of 4 per cent to 6 per cent, from 6 per cent to 9 per cent previously.
Ms Wang Xin, head of the Shenzhen Cross-Border E-Commerce Association, an organisation representing some 3,000 exporters, said that even though a lockdown in that Chinese tech hub lasted only a week, "many sellers are suffering about a one-month delivery delay".
It still takes an average of 111 days for goods to reach a warehouse in the US from the moment they are ready to leave an Asian factory, close to the record of 113 set in January and more than double the trip in 2019, according to San Francisco-based Flexport, a freight forwarder. The westbound journey to Europe takes even longer - a near-record 118 days.
Longer queues of vessels seen off China's coast are not helping. The line of cargo carriers has jumped after Shanghai, home to the world's largest container port, initiated a citywide lockdown late last month to combat Covid-19 cases. The total number of container ships in port and off the hub's shared anchorage with nearby Ningbo stood at 230 as at last Wednesday (April 20), a 35 per cent increase from this time last year, according to Bloomberg shipping data.
Imported containers are waiting on average for 12.1 days at Shanghai's port before they are picked up by truck and delivered to destinations inland, according to supply chain data provider project44. The rate for April 18 was almost triple the 4.6 days on March 28. Trucking shortages have crippled efforts to supply key inputs to factories and transport goods such as autos and electronics to the ships.
Air freight is also being affected, with deliveries into Shanghai Pudong International Airport backed up, Taipei-based air and ocean freight forwarder and logistics specialist Dimerco Express said. That congestion has spread to Shenzhen, as the city that borders Hong Kong has seen a sharp increase in shipments rerouted from Shanghai.
To ease congestion around Shanghai, sailings are being diverted to Ningbo and Taicang, according to Mr Donny Yang, Dimerco's director of ocean freight. At the same time, the central government has instructed that highways be kept open and unobstructed.
Businesses from carmakers to electronics manufacturers in China's financial hub have been gradually resuming operations, as the authorities have encouraged the use of closed-loop systems, in which workers live on-site at their factories.
Still, ramping up production from a shutdown is not an instant process. Tesla restarted its Shanghai factory after a three-week closure, though it is uncertain how long the plant can operate with a limited supply of components.
"The change in Covid-19 prevention policies in different cities has imposed an extraordinarily severe impact on logistics," said Mr Cui Dongshu, the secretary-general of the China Passenger Car Association.
The pile-ups in Europe are just as severe or worse, compounded by the proximity to the war in Ukraine. Key ports such as Rotterdam, Hamburg, Antwerp and three in Britain are working at or above capacity, which means they are already struggling to accept more containers because they do not have space to store them.
European Central Bank president Christine Lagarde, in a speech on Friday, said Europe's integration in global value chains was even deeper than that of the US.
She also cited a recent survey that found 46 per cent of German companies get significant inputs from China. Of those, almost half are planning to reduce that dependency. Russia's invasion now means the search for the lowest-cost suppliers must be refocused around geopolitical alliances.
Auto, H. (2022, April 26). With Beijing facing lockdowns, global supply chain crisis flares up again where it all began. The Straits Times. https://www.straitstimes.com/business/economy/with-beijing-facing-lockdowns-global-supply-chain-crisis-flares-up-again-where-it-all-began