Supply chain woes set to worsen in 2022

Companies are bracing for another round of potentially debilitating supply chain disruptions as China, home to about one-third of global manufacturing, imposes sweeping lockdowns in an attempt to keep the Omicron variant at bay.

The measures have already confined tens of millions of people to their homes in several Chinese cities and contributed to a suspension of connecting flights through Hong Kong from much of the world for the next month. At least 20 million people, or about 1.5% of China’s population, are in lockdown, mostly in the city of Xi’an in western China and in Henan province in north-central China.

The country’s zero-tolerance policy has manufacturers — already on edge from spending the past two years dealing with crippling supply chain woes — worried about another round of shutdowns at Chinese factories and ports. Additional disruptions to the global supply chain would come at a particularly fraught moment for companies, which are struggling with rising prices for raw materials and shipping along with extended delivery times and worker shortages.

China used lockdowns, contact tracing and quarantines to halt the spread of the coronavirus nearly two years ago after its initial emergence in Wuhan. These tactics have been highly effective, but the extreme transmissibility of the Omicron variant poses the biggest test yet of China’s system.

So far, the effects of the lockdowns on Chinese factory production and deliveries have been limited. Four of China’s largest port cities — Shanghai, Dalian, Tianjin and Shenzhen — have imposed narrowly targeted lockdowns to try to control small outbreaks of the Omicron variant. As of this past weekend, these cities had not locked down their docks. Still, Volkswagen and Toyota announced last week that they would temporarily suspend operations in Tianjin because of lockdowns.

Analysts warn that many industries could face disruptions in the flow of goods as China tries to stamp out any coronavirus infections before the Winter Olympics, which will be held in Beijing next month. On Saturday, Beijing officials reported the city’s first case of the Omicron variant, prompting authorities to lock down the infected person’s residential compound and workplace.

If extensive lockdowns become more widespread in China, their effects on supply chains could be felt across the United States. Major new disruptions could depress consumer confidence and exacerbate inflation, which is already at a 40-year high, posing challenges for the Biden administration and the Federal Reserve.

“Will the Chinese be able to control it or not I think is a really important question,” said Craig Allen, president of the U.S.-China Business Council. “If they’re going to have to begin closing down port cities, you’re going to have additional supply chain disruptions.”

The potential for setbacks comes just as many companies had hoped they were about to see some easing of the bottlenecks that have clogged global supply chains since the pandemic began.

The combination of intermittent shutdowns at factories, ports and warehouses around the world and American consumers’ surging demand for foreign goods has thrown the global delivery system out of whack. Transportation costs have skyrocketed, and ports and warehouses have experienced pileups of products waiting to be shipped or driven elsewhere while other parts of the supply chain are stymied by shortages.

For the 2021 holiday season, customers largely circumvented those challenges by ordering early. High shipping prices began to ease after the holiday rush, and some analysts speculated that next month’s Lunar New Year, when many Chinese factories will idle, might be a moment for ports, warehouses and trucking companies to catch up on moving backlogged orders and allow global supply chains to return to normal.

But the spread of the Omicron variant is foiling hopes for a fast recovery, highlighting not only how much America depends on Chinese goods, but also how fragile the supply chain remains within the United States.

American trucking companies and warehouses, already short of workers, are losing more of their employees to sickness and quarantines. Weather disruptions are leading to empty shelves in American supermarkets. Delivery times for products shipped from Chinese factories to the West Coast of the United States are as long as ever — stretching to a record high of 113 days in early January, according to Flexport, a logistics firm. That was up from fewer than 50 days at the beginning of 2019.

The Biden administration has undertaken a series of moves to try to alleviate bottlenecks both in the United States and abroad, including devoting $17 billion to improving American ports as part of the new infrastructure law. Major U.S. ports are handling more cargo than ever before and working through their backlog of containers — in part because ports have threatened additional fees for containers that sit too long in their yards.

Yet those greater efficiencies have been undercut by continuing problems at other stages of the supply chain, including a shortage of truckers and warehouse workers to move the goods to their final destination. A push to make the Port of Los Angeles operate 24/7, which was the centrepiece of the Biden administration’s efforts to address supply chain issues this fall, has still seen few trucks showing up for overnight pickups, according to port officials, and cargo ships are still waiting for weeks outside West Coast ports for their turn for a berth to dock in.

Manufacturers are watching carefully to see whether more factories and ports in China might be forced to shutter if Omicron spreads in the coming weeks. Neither Xi’an nor Henan province, the site of China’s most expansive lockdowns, has an economy heavily reliant on exports, although Xi’an does produce some semiconductors, including for Samsung and Micron Technology, as well as commercial aircraft components.

Handel Jones, CEO of International Business Strategies, a chip consultancy, said the impact on Samsung and Micron would be limited, but he expressed worries about the potential for broader lockdowns in cities like Tianjin or Shanghai. “What we’re concerned with now is, is Xi’an a template for other cities in China?” he asked. “If they can’t control it in the next two or three weeks, then I think you could have a significant impact on the supply chain. Right now, it’s kind of the tipping point.”