Much of the news coverage of COVID lockdowns in China focuses on its effects on the international supply chain and the scarcity of certain goods, especially electronics. While that is understandable, it is only a part of the larger story. The more important consideration is how the lockdowns have affected businesses within China, not just with workers unable to go to work, but the trucking industry unable to move materials between locations. One of China’s great strengths is its vast and interconnected supply chain. The selective lockdowns in various cities and municipalities create a difficult and unpredictable situation for any company working in China.
What is the Current Situation?
The overall situation is difficult and fluid since what happens very much depends on the city, and even on the city district. Many highway exits are closed in and around Shanghai. The efforts to prevent the movement of people (especially from medium/high-risk areas, going into other medium/high-risk areas, and also within medium/high-risk areas) are affecting the drivers, who are seen as potential vectors for the disease. In some cases, the requirements change at the last moment, meaning that a truck can’t get to its final destination, or meaning that the driver is forced to stay in quarantine (usually for 3 or 7 days, sometimes longer). Those last-minute changes make sticking to a schedule very challenging.
The Impact of the Lockdowns on LogisticsThis has a direct impact on factories, like automotive, that have large and complex supply networks. It means no production and high fixed costs. The situation is relatively similar for all types of manufacturing taking place in China, but it is more painful for the automotive industry for several reasons:
- 4,000 to 6,000 parts go into a typical car. If one of those parts is not available, no car is made. (They are careful not to make any “cripples”, i.e. full cars missing a few components, since that leads to many other risks.) Qualifying a new part from a new supplier can be prohibitively expensive and could prove unnecessary if the lockdowns end quickly. The uncertainty makes the situation much worse.
- In an effort to contain costs and make quality issues easier to prevent, they often work in “just in time” fashion, without much inventory. When materials don’t arrive, production very quickly has to stop.
While the problem is often local, its unpredictable nature and the severity of the lockdown creates a countrywide knock-on effect. The effect is not only on the area, but also on the whole country and across continents. Many car parts are made in China and shipped to car assembly plants located in other countries, including in Europe and in North America. As I wrote above, if 1 part that goes into 1 model is missing, it leads to stoppage of production of that 1 model. (Refer to what has happened with semiconductors over the past year – it has had that exact effect, postponing deliveries of many car models.)
Is There a Solution?
There is no immediate solution to this problem. The past 3 years have shown that no one can predict the end of COVID. However, there are long-term solutions your company could implement.
First, have a plan to “de-risk” China. If China is the only source of your product, then you are left open to COVID lockdowns and other possible challenges in the future. This is not to say that you should, necessarily, leave China. Instead, it is valuable to diversify your locations for these situations. It is a good idea to de-risk all of your production if possible. We at CMC have helped clients de-risk their operations and it has left them more agile.
Second, it is a good time to create contingency plans. It is expensive to qualify new suppliers but identifying them and at least having a foot in the door with other potential suppliers so they can be qualified quickly.
The Bottom Line
There are no easy answers to the COVID situation in China. The best option is to prepare as best you can for when it is over and be ready to take advantage of the opening.
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