The early months of 2020, January and February in particular, saw countries open up their economy. People were looking forward to outdoor activities again after nearly two years of covid-19 and it is multiple variants. Sports venues were filling up, musicians were back on stages, restaurants were bustling with patrons, and colleges and universities welcome students on campus.
Just when Europe, America, Africa, and South America were returning back to normal, China was witnessing a resurgence of covid cases. Cases began to rise in the middle of March 2022, in the province of Jilin. By late March there were increased cases in Suzhou and Hangzhou provinces. Within a month, most of the major Chinese cities had witnessed significant cases that results in full or partial lockdown.
2020 Vs. 2022 Lockdown
China is about 45 days into its lockdown, spurred in part by its zero-covid policy. The extent and longevity of the current lockdown have led many to compare this version to the 2020 lockdown.
China watchers have been quick to point out that this lockdown is already more than a month and involves a significant section of the country. The lockdown has been in effect for 40 days and counting. The 2020 version saw the lockdown of Wuhan and the tech city of Shenzhen. Other cities saw mild shutdowns which didn’t exceed 30 days.
During the 2020 lockdown, there were carve-outs for essential industries to continue operations amid the government quarantine and community shutdowns. This time around there were no carve-outs. Automakers such as Tesla, Nio, and Volkswagen have had to close down. It would have been tough if they wanted to continue operations because most of their workers live in communities that are on total lockdown. The government did not grant any exceptions this time around.
To make matters worse, the cozy relationship between China’s big technology companies and the government are strained. During the 2020 lockdown, these companies with their well-established logistics networks help deliver much-needed food and medicine covid embattled cities and communities. That is not the case this time around because these companies are under attack by the government.
Effect of the Lockdown
The consequence of the lockdown has been far-ranging, with effects on health, China’s economy; and from inflation to manufacturing standing.
China’s zero covid policy comes with strict measures such as mass testing, quarantine, and border closures. In most major cities, transportation is at a standstill. Test-positive patients have been forcibly removed from their homes to facilities where they are often neglected or where the medical care is sub-par. Exposed individuals have been forced to quarantine in facilities with little access to loved ones. As the country focuses on covid other severe illnesses such as transplant patients, cardiac patients, and those who need dialysis have suddenly become non-emergency patients. The results have been untold suffering. And with the government in full control of the media, these cases get little publicity.
There has been significant disruption with the current lockdown. Not only has there been factory closure, but the lockdown affected transit and trucking services bringing transportation to a standstill. Workers in factories and distribution facilities who are in lockdown communities cannot get to work. The port of Shanghai has been under a de facto closure for more than a month with vessels cueing to unload and pick up containers. This was not the case with the 2020 lockdown. The port of Shanghai is the largest and busiest in China. The large-scale work disruption is affecting the Chinese economy as a whole. Cargo volume at the port of Shanghai fell by more than 60% during the month of April. Thanks in no small part to the total closure of the city during the month of April.
The lockdown is already having an effect on the Chinese economy. The premier of China Le Keqiang has called on local authorities to consider the economic effect of community lockdown. This is a shift from the government's zero-covid policy. Unemployment reached a 21-month high at the end of April. The Chinese currency, the Yuan, also weakened in April. The situation is getting so bad that neighbors are protesting in unison from their apartment windows in Shanghai. In some communities, neighbors have resorted to bartering to make up for the delays in food delivery.
Even before the lockdown, companies were considering diversifying away from China. The lockdown will only accelerate this trend. The recent crackdown on “big tech” and the high-handed lockdown measures are making companies rethink China as a welcoming hub for foreign investment. Plus, labor costs are going up in China. Other countries are enticing foreign investments and establishing FTZ. Thailand, Indonesia, and Vietnam and some of the countries actively luring foreign investments.
Over the past 30 years, companies have been extolling the virtues of globalization. Multinational companies have scrambled to set up shop in China where labor costs were low compared to most western countries. The Chinese government encouraged foreign investments. However, after China joined the WTO, its economy improved. Over the past twenty years, it has risen to become the second-largest economy in the world. Labor costs have risen. Foreign companies are complaining of intellectual property theft. The Chinese government has also demanded that foreign companies set up joint ventures with Chinese companies as a condition of operation. The above measures and the government’s ability to unilaterally fine and levy penalties on companies are having a lukewarm effect on foreign investments. Over the past five years, foreign companies have been slowly moving away from China and into Vietnam, Malaysia, and Bangladesh. The covid lockdown of 2022 will only speed up this move.
The lockdown has exacerbated the global supply chain crises and added fuel to rising global inflation. The lockdown has created competition for space with the major ocean carriers spiking ocean and air freight rates. Supercharging an already high freight cost is the spike in bunker fuel. Since China is the world’s largest exporter of consumer discretionary products, export delays are also adding fuel to an already precarious supply-side inflation.
The current 2022 covid lockdown is just one of many triggers causing companies to rethink their China operations. China still has a lot of advantages. It has a world-class infrastructure of ports, skilled workers, and established factories. These advantages are not easy to replicate. It may take years for companies to find alternate factories that can make products with consistent quality. But we are also seeing companies make moves to diversify their operations, and in some cases, reset factories back to their home countries. The trend will likely continue as companies have seen first-hand the effects of a severe supply chain disruption. Expects also belief future pandemics will be more frequent. This makes the call even more urgent for companies to set up factories close to consumers.