Potential 2023 Supply Chain Disruptions in China

The Chinese government lifted its stringent zero-Covid restrictions following protests across the country but is the country ready for this shift? 

Although the government has pledged to do more to increase the vaccination rate, the new rules have left many vulnerable to infection according to Dr. Siddharth Sridhar, a virologist at the University of Hong Kong. He states that the Chinese government has left many unanswered questions about how officials will try to contain the inevitable wave of infections. He further states, “If they are considering a pivot, they need to bolster their defenses because a storm is coming.”   

Covid infections and the zero-Covid policy have already caused various supply chain disruptions in the Shenzhen “tech hub” causing companies to put pressure on the government to ease their restrictions but is that the answer?  

Changes to the Chinese “Zero Covid” Policy 

China is facing a "very tough" time as it dismantles its rigid "zero-Covid" policy and allows people to live with the virus, posing challenges to ensure people are sufficiently protected. 

Some of the changes in the policy include:  

• P.C.R. tests and health codes will no longer be checked for travel between regions in China.  
• Mass testing will no longer be conducted in areas that are not considered “high risk,” a designation for regions that have positive cases. 
• Mandatory hospitalization is removed and those who are infected with mild symptoms and their close contacts are now free to isolate at home. They can be released from self-quarantine with a negative test on the fifth day. 
• Local authorities may lock down buildings in the event that a positive case is detected, but they cannot restrict movement and suspend business operations in regions outside a specified “high risk” designation.  

The Chinese Manufacturing Model  

One of the reasons Chinese manufacturing has been so efficient is the preponderance of “factory cities” which are self-contained campuses that include factories, warehouses, office spaces, and housing within a fenced perimeter. These campuses were created in the 1990s in coastal provinces like Guangdong, Zhejiang, and Jiangsu, with workers recruited from inland provinces like Shanxi, Henan, Hubei, and others with the purpose to make China the workshop of the world. 

A typical campus might have over 10,000 workers living in apartment towers, often referred to as dormitories, along with separate management quarters. Large campuses like Foxconn’s Longhua Science and Technology Park in Shenzhen at times have had 270,000 workers on a one square mile campus.  

When Covid-19 first hit Wuhan, China, at the end of 2019, every factory was impacted by the highly contagious infection, and they become the host of a super-spreader event.  

The zero-Covid policy and lockdowns that limited travel and movement worked at that time, creating some supply chain disruptions but they were quickly averted. China was the reliable exporter at the time while other countries like Vietnam, Malaysia, and India suffered through waves of Covid infections.  

But as Covid eased in other parts of the world China was hit by clusters of infections and their zero-Covid policy began to cause huge supply chain disruptions in the tech sector. Between Shanghai, Kunshan, and Suzhou many technology manufacturers and subassemblies were impacted causing businesses to put pressure on the government to ease their strict Covid measures and eventually the ease of restrictions.  

Potential Disruption in 2023 Supply Chains 

Looking ahead at the calendar with the Lunar New year starting in January of 2023 and the ease of restrictions of travel, many workers will be traveling home and celebrating with their loved ones especially since they have not had that opportunity in several years.  

Over 100 million people would be traveling and then coming back to their jobs at the “factory cities” and if workers are sick, there won’t be enough space to quarantine them making another Covid super spreader event and further supply chain disruptions highly likely in China.  

Companies should look at diversifying their supply chain to reduce geographical dependencies and build resiliency.