China lockdowns create latest supply chain shock to global tech

China’s latest attempt to suppress an outbreak of Covid-19 with lockdowns in several cities has disrupted global supply chains, which is likely to lead to lower growth and profitability across the technology industry.

Apple supplier Foxconn said on Wednesday its revenue could contract by up to 3 per cent this year and it might struggle to raise its operating profit margin as component costs rise and the pandemic persists.

“2022 is a very challenging year,” Liu Young-way, Foxconn chair, told investors on an earnings call, adding that the continued spread of the coronavirus imposed “very big uncertainty”.

The warning follows a local government order in Shenzhen on Monday for all but essential factories in the technology manufacturing hub to stop production for a week. After the new restrictions were announced, more than 70 Taiwanese companies operating in the city and dozens of local Chinese manufacturers said they had suspended production.

“China is digging itself into a deep hole with its zero Covid policy,” said Olaf Schatteman, a supply chain expert at Bain, the consultancy. “As the restrictions are hurting suppliers and logistics operations, companies are moving beyond containing the current crisis and towards diversifying production locations, undermining China as the supply chain hub of the world.”

Analysts said the impact on Apple remained limited because the main iPhone production site at Foxconn, its largest supplier, was in Zhengzhou, a central Chinese city not affected at this time. “We think this is a manageable issue especially if it’s limited to one week, the challenges could be more supply chain problems for the tech ecosystem and further pressure on supply / logistics overall,” Evercore ISI said in a research note.

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But while many companies said in statements they did not expect this week’s factory closures to have a significant financial impact, internal communications indicated the restrictions had already begun to cripple supply chains in southern China.

An internal report from a technology company in Shenzhen obtained by the Financial Times called the domestic epidemic control situation “very serious” and said it had a cascading effect on shipments. As a result of traffic controls and personnel access restrictions in Shenzhen districts, “factories cannot ship, freight forwarders warehouses are also mostly shut down”, it said.

It added that transport between Hong Kong and the mainland was in “semi-meltdown status” and the ports of Yantian and Shekou were hampered by limited container access. About 6,000 of Hong Kong’s 8,000 cross-border truck drivers had been unable to work as a result of new health requirements instituted in wake of Shenzhen’s lockdown, an industry group said.

About 25 per cent of US-bound sea freight from China and half of Shenzhen’s exports go through Yantian, according to transport consultancy Freightos.

A suspension of parcel services from Hong Kong leading courier company Shunfeng announced last week, and disruption of other nearby ports, would lead to shipment delays between three and five days, industry executives said.

This could exacerbate capacity strains and cost increases in ocean freight brought on by the Ukraine war. “The pause in manufacturing will probably cause a surge in freight demand once factories reopen,” Freightos said.

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Foxconn said on Wednesday it had restarted some operations at its Shenzhen plants under a “closed-loop” management that “can only be done on campuses that include both employee housing and production facilities”, the company said.

A factory owner surnamed Lu in nearby Dongguan, whose company supplies smartphone casings to Huawei, also said production was continuing.

Analysts cautioned companies such as Huawei and their suppliers or Foxconn, the world’s largest contract electronics manufacturer, are exceptions because of their scale and vast factory network.

“Unless they are of the size of Foxconn, who can house their workers and campus and have learned to compartmentalise some cases and having A and B teams in place, factories are still forced to stop production, and that in effect means that the government is shutting down the whole city, ”Schatteman said.

Phelix Lee, a technology analyst at Morningstar in Hong Kong, said the migration of many technology manufacturing plants from Shenzhen to several other hubs in China and elsewhere meant the widespread factory closures in the city were less catastrophic than they would have been a few years ago .

Still, Lee warned of significant impact. “A week-long factory shutdown would amount to just 2 per cent of annual capacity which most manufacturers could likely compensate, but if you factor in the ripple effects caused by transportation backlogs, we are more likely looking at 5 per cent of annual revenue, “He said.

Luxshare, a Chinese contract electronics manufacturer with a rapidly growing share of Apple orders, makes some cables and interconnectors in its Shenzhen plants. “They are being disrupted because they could not ship to Foxconn,” Lee said. “It could be quite significant.”

Additional reporting by Gloria Li in Hong Kong, Eleanor Olcott in London and Maiqi Ding in Beijing, Chan Ho-Him in Hong Kong

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