The expansion of omicron in China threatens to cause the mother of all bottlenecks in the supply chain

The outbreak of the covid omicron variant in China is causing great nervousness in supply chains and manufacturers. The forceful measures that are orchestrated from Beijing to contain the virus can generate disruptions not seen until now in the supply chain. Manufacturers and carriers are bracing for an outage within the ‘world factory’ in case it cannot contain the expansion of this new variant of covid.

In 2020 and 2021, China’s ‘covid-zero’ strategy It allowed factories to stay open during the pandemic to produce everything from healthcare kits to laptops that the world’s consumers ‘snatched up’ at a record rate. This time it may be different and there are several reasons to believe it, according to the financial agency Bloomberg.

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 general transmission among the population. For now there have been confirmed cases of local infection every day since mid-October and it is likely that even stricter restrictions are needed to curb the spread of omicron, with fatal consequences for the supply chain, ports and factories as more cities are closed.

So far, China is not suffering from the problems seen elsewhere, such as some food shortages in Australia or Japan. But with the arrival of the Winter Olympics, Pejín will want to maintain the ‘covid-zero’ strategy at all costs, so that the country’s politicians could be forced to increase restrictions even if the economy suffers and supply chains are paralyzed. .

“The reality is that China is still the center of global manufacturing,” said Thomas O’Connor, a supply chain expert at Gartner in Sydney. “If there are significant factory and logistics closures in China associated with covid-related challenges, that would have a massive impact in the global economic environment “.

In recent weeks, sporadic outbreaks scattered across the country of the delta and omicron variants have already led to the closure of clothing factories and reduced gas deliveries around one of China’s largest seaports in Ningbo, in tandem. disruptions occur at computer chipmakers in the closed city of Xi’an, and a second city-wide shutdown in a different province on Tuesday.

Other cities nearby are facing some restrictions, and authorities in Shenzhen’s southern technology and industry hub have tightened restrictions on vehicles entering the city since Tuesday. That is generating concern for delays at the nearby port of Yantian (somewhat similar if you lived in 2021 at other ports), which is one of the largest container ports in Asia and was partially closed for a month last year after an outbreak.

Trapped toys

One manufacturer in a very delicate position due to the current delays is Sidney Yu, whose Hong Kong-based Prime Success Enterprises makes educational and recreational products such as children’s tents and pet toilets.

Yu Has Five Containers ‘Trapped’ Due to Ningbo Outbreak, where part of its production is established. You are concerned that if you don’t ship your products before the upcoming Chinese New Year holidays, when factories are closed for weeks, you will lose the window to get your spring and summer product range to market on time. Last Christmas, merchants in Europe and America faced a similar situation, although finally the blood did not reach the river thanks to the foresight of all the companies involved.

Today, the problem is that omicron has emerged by surprise and its rapid expansion is preventing preventive measures from being taken to avoid a monumental bottleneck in the global supply chain. Now, the world is at the mercy of the expansion of this variant and of the tolerance shown by the government of Beijing to its expansion, something really unpredictable.

“A critical moment”

“This is a critical time before the Chinese New Year,” Yu says. “We have a lot of shipments as we try to take advantage of the last few weeks before the holidays start.”

The growls in China come just as the global economy, overwhelmed by the omicron variant, is faced with a shortage of truckers, pilots, supermarket personnel and other front-line workers, spreading a supply crisis that has haunted the world for a long time. part of 2021 and has already skyrocketed prices.

Shipping container costs remain very high compared to those seen at the beginning of the crisis, raw material prices are near their highs in recent years and disruptions are likely to last until the end of 2022 according to a report. Oxford Economics analysis.

Production in Southeast Asia took a hit last year when highly industry-intensive economies such as Vietnam and Malaysia imposed strict lockdowns, leading to long delays in the production of semiconductors, clothing and more. It also led some companies to bring production back to China, which was able to export record amounts of goods despite the occasional internal outbreak, shipping congestion and problems at ports in the US and elsewhere.

However, further omicron expansion in China and the rest of Asia could trigger “the mother of all stumbling blocks in the supply chain” this year, according to Frederic Neumann, HSBC co-director of Asian economic research. Bank of America economists cautioned that Asia has yet to see a major omicron wave, meaning the worst shock 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 lingering problems. “Over the next six months I don’t see any big improvements,” Yu says.