- BofA: "Asia hasn't seen a major wave of Omicron yet; the worst is yet to come"
- China will implement whatever restrictions are necessary to ensure the Games go ahead
- If factories and ports come to a standstill, the supply chain bottleneck will be unprecedented
The outbreak of the Omicron variant of COVID-19 in China is causing great concern among supply chains and manufacturers. The sweeping measures being orchestrated by Beijing to contain the virus could lead to unprecedented disruptions in the supply chain. Manufacturers and carriers are bracing for a disruption within the “world’s factory” should efforts to contain the spread of this new COVID variant fail.
In 2020 and 2021,China's "zero-COVID" strategyallowed factories to remain open during the pandemic to produce everything from medical equipment to laptops, which consumers around the world "snapped up" at a record pace. This time may be different, and there are several reasons to believe so, according to the financial news agencyBloomberg.
Thomas O'Connor: "If there are closures in Chinese industry, there will be a massive impact on the economy"
This variant is highly contagious, and Beijing does not want to risk widespread transmission among the population. So far, there have been confirmed cases of local transmission every day since mid-October, andeven stricter restrictions willlikelybe neededto curb the spread of Omicron—with dire consequences for the supply chain, ports, and factories as more cities shut down.
So far, China has not experienced the problems seen elsewhere, such as the food shortages currently affecting Australia and Japan. But with the Winter Olympics approaching, Beijing will want to maintain its “zero-COVID” strategy at all costs, which means the country’s politicians may be forced to tighten restrictions even if the economy suffers and supply chains grind to a halt.
"The reality is that China remains the center of global manufacturing," says Thomas O'Connor, a supply chain expert at Gartner in Sydney. "If there are significant shutdowns at factories and in logistics in China due to COVID-related challenges, that would havea massive impacton the global economy."
In recent weeks, sporadic outbreaks of the Delta and Omicron variants scattered across the country have already led to the closure of garment factories and reduced gas deliveries around one of China’s largest seaports in Ningbo, while disruptions are also occurring at computer chip manufacturers in the locked-down city of Xi’an, and a second citywide lockdown in a different province on Tuesday.
There are other nearby cities facing certain restrictions, and authorities in the southern Shenzhen technology and industrial hub have tightened restrictions on vehicles entering the city as of Tuesday. This is raising concerns aboutdelays at the nearby port of Yantian (similar to what was experienced at other ports in 2021), which is one of Asia’s largest container ports and was partially closed for a month last year following an outbreak.
Trapped Toys
One manufacturer currently in a very precarious position due to the ongoing delays is Sidney Yu, whose Hong Kong-based company, Prime Success Enterprises, manufactures educational and recreational products such as children's tents and pet bath tubs.
Yu has five containers “stuck” due to the outbreak in Ningbo, where part of his production is based. He is concerned that if he does not ship his products before the upcoming Chinese New Year holidays—when factories shut down for weeks—he will miss the window to bring his spring and summer product line to market on time. Last Christmas, retailers in Europe and the Americas faced a similar situation, although in the end things didn’t come to a head thanks to the foresight of all the companies involved.
Today, the problem is that Omicron has emerged unexpectedly, and its rapid spread is preventing the implementation of preventive measures to avoida massive bottleneck in the global supply chain.Now, the world is at the mercy of the spread of this variant and the Beijing government’s tolerance of its spread—something that is truly unpredictable.
"A Critical Moment"
"This is a critical time leading up to the Chinese New Year," Yu says. "We have a lot of shipments as we try to make the most of the last few weeks before the holidays begin."
The grumbling in China comes just as the global economy, overwhelmed by the Omicron variant, faces a shortage of truck drivers, pilots, supermarket staff, and other frontline workers, prolonging a supply crisis that has plagued the world for much of 2021 and has already sent prices soaring.
Shipping container costs remain very high compared to levels seen at the start of the crisis, raw material prices are near their highest levels in recent years, and disruptions are likely to last until the end of 2022, according to an analysis by Oxford Economics.
Production in Southeast Asia was disrupted last year when heavily industrialized economies such as Vietnam and Malaysia imposed strict lockdowns, causing lengthy delays in the production of semiconductors, clothing, and other goods. It also led some companies to move production back to China, which was able to export record amounts of goods despite occasional domestic outbreaks, shipping congestion, and problems at U.S. ports and elsewhere.
However, further spread of the Omicron variant in China and the rest of Asia could trigger"the mother of all supply chain disruptions"this year, according to Frederic Neumann, co-head of Asian economic research at HSBC. Economists at Bank of America warned that Asia has not yet seen a major wave of Omicron, which means the worst impact is yet to come.
If China manages to contain the virus again, it will ease global supply pressures, but for manufacturers like Yu, the short term offers no respite from the persistent problems. “I don’t see any major improvements over the next six months,” Yu says.
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