Simon Geale recently spoke to CNBC about how China’s strict Covid restrictions are having a ripple effect on global supply chains.
As specialist procurement consultants, we understand much of the world remains determined to move on from the pandemic and the lockdowns that came with it. However, this couldn’t be more different for China, as the country continues to pursue a strict zero-Covid policy through lockdowns, spanning across some of the country’s key port cities.
China is the world’s largest exporting economy, and second largest importer, holding eight of the top twenty ports globally. From technology to retail, there is a high chance that many of the consumer goods to be found in the average household have come from or through a Chinese port. When Chinese manufacturing cities come to a hard stop on short notice, there are serious consequences for global supply chains, with delays spilling over at local ports, nearby alternative outlets, and into destination ports, causing volatility and confusion right across the market.
We have already seen three of the key players in China, Shanghai, Shenzhen, and Ningbo, all grappling with lockdowns over the past year. Together they represent 3 of the 5 largest ports worldwide, but perhaps the most important of these is Shanghai, often dubbed China’s manufacturing hub, handling around 40 percent of the country’s exports. The city’s port lost around 45 percent of its trucking capacity this spring as the city ground to a halt, resulting in around 80 percent of vessels being delayed, in comparison to 20 percent two years previously.
The threat of sudden lockdowns continues to loom over procurement teams. Supply chains thrive on predictability, yet China’s continued zero-Covid policy is causing uncertainty and taking an economic toll at a time when we are learning to cope with other significant challenges, such as the fallout of the Russia – Ukraine conflict. Prices for ocean freight, whilst dropping slightly more recently, have skyrocketed over the last 24 months, at times reaching ten or twenty times the pre-pandemic price in the spot market. The knock-on congestion at ports in the US and Europe has been passed on to the consumer, with the bullwhip effect on businesses and their logistics costs rapidly pushing up the price of goods.
With China’s policy showing no signs of slowing down, some businesses are learning to (or forced to) adapt, viewing the country as ‘predictably unpredictable’ and accepting lockdowns as a condition of trade with a low-cost country. Some businesses are changing their tactics altogether in attempts to absorb the additional costs through nearshoring some or all of their supply chains or, frustratingly, delaying their decarbonization goals. But nearshoring, whilst logical on paper, is not straightforward, not an option to many, or perhaps even a red herring as moving production, may simply embed the complexity into the sourcing and transportation of raw materials; one shipping and forecasting challenge becomes many.
China’s lockdowns have been a contributing factor to us hurtling towards a global recession. Now more than ever, it is vital that business leaders get into the granular detail of spending decisions and have visibility of every corner of the budget, ensuring that it is being well spent, increasing resilience, and helping to weather inflated costs.
Investing in supply chains could be the long-term answer to beating today’s inflation, helping to identify and eliminate waste and strengthening relationships with suppliers to streamline costs. At Proxima, we are uniquely positioned to help your business evaluate opportunities and identify gaps in your supply chain. Be prepared for the oncoming recession and learn how to outperform the competition in our new report; simply click on the image below.
