From sneakers to Teslas, lockdowns in China upend global supply chains

The economic consequences of the Covid-19 shutdowns in China are beginning to be felt by businesses and consumers around the world, and the repercussions are expected to only grow stronger.

Supplies of Adidas sneakers and Bang & Olufsen speakers were affected. Automakers from Toyota to Tesla are facing “unprecedented” production costs and hurdles. Sony is struggling to make enough PlayStations.

While “supply chain disruption” once again emerges as the most repeated expression of the corporate earnings season, the impact goes beyond multinational profits. Hospitals from the United States to Australia are grappling with a shortage of chemicals used in X-rays, while building projects are held up by delayed materials.

Jake Phipps, whose US company supplies luxury bathroom fixtures and kitchen countertops to high-rise projects, is experiencing months of delays in shipping faucets from Shanghai. “All construction projects here are backed up awaiting raw materials,” he said. “The supply chain has been a mess before, and it’s only making it worse.”

Beijing’s zero-tolerance approach to Covid has slowed factories and warehouses, slowed truck deliveries and worsened container gridlocks. As the country accounts for around 12% of global trade, it was only a matter of time before the upheaval began to ripple through economies, threatening to further fuel rising inflation.

Although the impact doesn’t seem severe so far, it’s probably just the beginning. The full significance of China’s Covid restrictions has yet to be seen as lockdowns continue in Shanghai and other cities that have been locked down to contain smaller outbreaks, adding to supply chain congestion that is already reeling from the war in Ukraine.

“Once Shanghai reopens and everything is in rotation again, and you see all the ships heading to the United States, it may pose additional challenges with additional congestion,” said Jonathan Gold, vice president. supply chain and customs policy for National Retail. Federation in Washington.

Here’s how the situation in China is escalating global supply chain chaos:

Construction projects

Phipps, founder of Phipps International, is growing increasingly frustrated as his faucet deliveries have been delayed for two to three months, with no certainty when they will be able to leave Shanghai. Suppliers repeatedly told him “five more days”, and that now stretches to 40 days.

A factory making the molds for casting taps managed to start up last week after more than a month of inactivity. But the faucets, once manufactured, still have to be moved to other factories to be chromed and polished, and some of these factories are still closed. Then there is the shortage of truckers.

“That’s one of the biggest problems – truckers aren’t hauling goods because the government doesn’t want them spreading Covid from city to city,” Phipps said in an interview from Miami.

Waiting for bathroom faucets and other furniture to arrive from China will further delay construction projects in the United States, some of which are already a year behind schedule, Phipps said. It transfers part of the production from China to Vietnam and buys marble, quartz and granite from Italy, Brazil and Turkey instead of China.

Sneakers and clothes

Garment and shoe factories in Vietnam are struggling to keep up with orders as supplies of Chinese materials used to make everything from sneakers to pants dry up.

The Southeast Asian nation is the second-largest supplier of clothing and footwear to the United States, according to the American Apparel & Footwear Association, which represents more than 1,000 brands.

China’s Covid Zero strategy “significantly” reduces key materials at shoe factories, which get about 60% of their supplies from China, said Phan Thi Thanh Xuan, vice president of the Vietnam Shoes and Handbags Association. in leather. Adidas SE cut profit targets this month, saying supply bottlenecks in Vietnam have reduced product availability, eroding sales.

Technology and games

The eastern Chinese region around Shanghai is a key hub for technology production, and component shortages are hitting businesses across the board.

Giants from Microsoft Corp. at Texas Instruments Inc. said the lockdowns would reduce sales and make it harder to produce products like the Xbox. Apple Inc. said last month that the restrictions would weigh on its June results, with supply constraints costing between $4 billion and $8 billion in revenue.

Leading iPhone vendor Pegatron Corp. this week cut its forecast for second-quarter laptop shipments. Semiconductor Manufacturing International Corp., China’s biggest chipmaker, said the lockdowns could wipe out about 5% of its output in the last quarter.

Sony Group Corp., meanwhile, lowered its sales target for the flagship PlayStation 5, citing supply chain complications due to the Covid-19 pandemic, including lockdowns in China. Nintendo Co. also said there was some impact on sales due to the situation in Shanghai.

Medical supplies

Shanghai’s Covid-19 restrictions are even impacting health care, as the shutdowns have triggered a global shortage of chemicals used in imaging tests.

Healthcare facilities have experienced shortages of an iodinated contrast medium known as Omnipaque, produced at a GE Healthcare factory in Shanghai, the Greater New York Hospital Association said earlier this month. The chemical agent is widely used in X-rays, X-rays and CT scans. The hospital body has warned that supplies could be cut by up to 80% over the next two months, even though the factory has now resumed production.

A spokeswoman for the Australian Society of Medical Imaging and Radiation Therapy said the contrast dye shortage could continue for weeks and it may take until late June for orders to arrive in the country. The society told its 9,000 members, including radiographers, to prioritize urgent scans and try to find other suppliers.

A GE Healthcare representative said the company was “working around the clock to increase capacity” for the imaging chemical.

Luxury stereos

Bang & Olufsen, the maker of luxury stereos and TVs, cut its financial outlook this week due to developments in China. The Danish company, which sells speakers costing up to $110,000 a pair, said the shutdowns were not only hurting local sales, but also spreading to markets outside of China, as access restricted to warehouses resulted in a series of logistical problems.

“The lockdowns have been more extensive than expected, and it’s not just affecting sales in China, but also global product availability,” chief executive Kristian Tear said.

Car manufacturers

A slew of automakers, from Volkswagen AG to Toyota Motor Corp., have started to resume production at factories in Shanghai and the industrial province of Jilin, although logistical problems persist.

Tesla Inc.’s factory in Shanghai was plagued by disruptions and closed for three weeks last month. It restarted in late April under a so-called closed-loop system in which workers live on site and are tested regularly. But as Shanghai remains largely in lockdown, challenges remain for the delivery of supplies and materials.

The plant, which typically ships around 60,000 cars a month, delivered just 1,512 vehicles from Shanghai last month.

Toyota, meanwhile, is grappling with an “unprecedented” rise in logistics and raw material costs, leading it to forecast a 20% decline in operating profit for the current fiscal year.

Automakers on the other side of the world are also struggling to keep up with production as parts produced in China are not arriving. In Brazil, semiconductor shortages have led factories to cut production by at least 100,000 vehicles so far this year, according to the National Association of Motor Vehicle Manufacturers.

In March, IHS Markit lowered its forecast for global auto production in 2022 to take into account the impact of the Russian invasion of Ukraine, then lowered them further last month in response to the fallout from the blockages in China, as well than at other increasing risks.

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