The Shenzhen Lockdown and its Impact on The Supply Chain

Tuesday 15/03/22

Shenzhen, a Chinese city and a major tech hub, was placed in lockdown on Sunday after an outbreak of COVID cases.

The lockdown is scheduled to last a week while health authorities administer COVID tests to the city’s 17.5 million residents and try to limit the virus’ spread. 

But apart from affecting the people of Shenzhen, who are dealing with more COVID cases and lost wages, supply chain experts say the impact of the lockdown will devastate global imports and exports of crucial goods for the foreseeable future.

Whether its iPhones, cars or electronics, locking down Shenzhen, and the subsequent effect on the Yantian port—the fourth largest in the world—will cause shipping delays across a wide range of products and continue to harm supply chains that have experienced issues since the pandemic began.

“It’s going to be really bad,” Daniel Stanton, a professor of marketing at Bradley University and the author of Supply Chain Management For Dummies, said “When we’re talking about goods coming out of China, it’s not just the finished products we buy directly, but it’s also a lot of parts that are crucial to manufacturing other things that we buy, too.”

Electronics across all sectors

Shenzhen is the heart of electronics manufacturing in China. Tech giants Tencent and Huawei Technologies are both based there. 

“For a manufacturer to make a product the right way, they need all of the components that the product is comprised of, so if even just one of those components doesn’t show up because of the lockdown, then it shuts down the supply chain for the whole product,” Stanton said. “That’s what could happen in Shenzhen.”

This applies to phones, computers, semiconductor chips, tablets, headphones and many other electronic devices that are reliant on Chinese manufacturing.

The delays from the Shenzhen shut down are the latest in the two-plus year pandemic that has put constant strain on global supply chains. Companies will need to come up with alternative strategies to try to make up for problems caused by the supply chain issues, but those strategies might be exhausted by this point.

“When things don’t go according to plan, companies fall back on alternative options and pull on those fallback levers,” Stanton said. “The challenge that we’re facing now is for over two years now, we’ve been pulling on all of those levers constantly.” 

Cars

Shenzhen’s lockdown has the potential to halt exports of car components that could subsequently fracture the whole manufacturing process.

“For so many products these days, components come from all over the world, like components that go into automobiles,” Stanton said.

Chinese electric vehicle and battery cell maker BYD is reportedly experiencing production issues at its Shenzhen factory as a result of lockdowns, according to Bloomberg.

In January, when the Chinese city of Tianjin was placed on semi-lockdown, Toyota and Volkswagen factories within the city suspended operations, causing delays.

Car manufacturing is one of the most vulnerable industries to supply chain issues caused by lockdowns because “car components are quite time sensitive and of high value,” Bo Zhuang, an economist at Loomis Sayles, an investment management firm said.

The Critical Yantian port 

The Yantian International Container Terminal, which processes roughly 90% of China’s electronics shipments, remained open Monday, according to Bloomberg. But even if it continues operating, factory shutdowns in the city will limit the port’s ability to process shipments, The Wall Street Journal reported.

And it’s still possible that the port will close as a result of the lockdown. When the Yantian port was closed after a COVID outbreak last June, it caused a shipping backlog that took months to recover. 

On Monday, a spokesperson from the shipping giant Maersk said the company was still “in the process of figuring out the impact” of the city closing down.

Because of the lockdown, trucks holding manufactured goods or components are unable to enter the city this week, which could further produce delays. 

“No cargo will be able to load in Yantian from next week and vessels most likely will omit the port,” a freight forwarder, wrote in a note Sunday night. “[T]rucks from outside Shenzhen are unable to enter the city.” 

Consumers should expect delays in electronics that are produced from Shenzhen-based factories, or that depend on the Yantian port to export, according to Stanton. Even if Shenzhen is locked down for just one week, the impacts could be widespread.

“We live in an age where one of the ships that pulls into these ports can hold 20,000 containers,” Stanton said. “So when you talk about potentially closing the port as a whole, that’s hundreds of thousands, if not millions, of containers filled with goods that factories and distribution centers around the world are waiting for. Shutting it down even for a week is tremendous.” 

Information sourced from here.