China’s ‘Zero Tolerance’ policy jeopardises global supply chains

Export hubs in China are facing large bottlenecks following the government’s ‘zero-covid’ policy that has placed the country’s major production and export hubs into lockdown, forcing companies to revise their factory distribution and logistics strategies with some looking to move operations closer to home, according to experts.

“Forward-thinking companies have been adjusting their distribution of factories, with some readjusting their production cycle and inventory cycle to cope with the change of transportation mode, high prices in peak freight seasons and scarce shipping space,” says Jasmine Wall, commercial manager of Asia Pacific at SEKO Logistics.

The number of vessels waiting at the port of Yantian spiked 44.1% when the lockdown was imposed on March 12, according to data by project44, with the disruptions experienced there creating a ripple effect felt by global supply chains.

At SEKO Logistics, the focus has been on finding alternative solutions for clients’ ocean freight shipments, moving to alternative ports, or using rail services where possible, says Wall.

Whilst the current lockdown of Shanghai is not impacting the airport and ocean terminals, the key challenge for companies is trucking access and staff shortages, she says. Traffic permits, valid for 24 hours, are required for transport entering and leaving Shanghai. However, booked trucks can be commandeered by the government to transport aid supplies.

“Due to the current restrictions and air cargo warehouses in Pudong no longer operational, and with many international airlines suspending their flights, we are working with factories and suppliers to redirect cargo to other cities such as Zhengzhou, Qingdao, or Beijing where possible,” she says.

As supply chain disruptions experienced over the last couple of years persist, some companies are looking to safeguard their supply chains by exploring production lines closer to home. One option being exercised is “friend-shoring” – working with trusted suppliers in nearby friendly countries.

However, this costly transition is a permanent move for businesses and puts global supply chains at risk, says Mikkel Hippe Brun, senior vice president of APAC at Tradeshift.

“These transitions do not happen overnight. It takes years to reconfigure a supply chain, it comes with higher costs, less flexibility and once you have shifted your supply chain, it’s very difficult to shift back.”

Over the last year invoice traffic from Mexican suppliers has risen 4.1 times the global average and Canadian supplier invoices were 3.1 times higher than the average, according to Tradeshift’s recent Index of Global Trade Health.

The recent statistics are showing early indications that nearshoring is starting to manifest in countries like Mexico, Canada and Turkey. This will likely have a negative long-term impact on China as a source for supply chains, says Brun.

“The old principles we had with just in time [supply chains], optimising supply chains and having zero inventory, […] are over because we have seen what the impact can be when operating this way. We’ve been optimising for decades without thinking about the fragility that built up in building supply chains.”

Closed-loop management

China encouraged firms to operate on a closed-loop scheme in an attempt to minimise disruption to the manufacturing and export industries. However, it is only an effective short-term solution in reducing the risk of external infection and ensuring the progress of production, says Wall.

“Closed-loop management can only solve the problem of manufacturers returning to work in the short term, and there still needs to be effective ways to comprehensively restore normal production and life, whilst maintaining dynamic zero Covid in China,” she says.

Last year, factories in Vietnam implemented closed-loop manufacturing which saw many migrant workers return to their hometowns, refusing to return to work, causing manufacturing to slow down in certain industries.

In an attempt to reduce bottleneck disruption, the Shanghai Commission of Economy and Information Technology has created a whitelist which allows a total of 1,854 companies, mainly from the semiconductor, automobile and energy industries, to resume work.

According to early statistics, those on the whitelist have been able to resume their production by over 80%, showing early signs of recovery.

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