COVID in China Will Get Worse and Supply Chain Problems WILL Increase

On December 31, 2021, in Omicron and Supply Chains: Buckle Up, I wrote how China would not be able to achieve Zero-COVID and that supply chains would be devastated by that failure. Which is exactly what is happening in China right now and it is going to get far, far worse.

I then published my blog post on LinkedIn (here), with the following summary:

Omicron will lead to China factory and port shutdowns and convince more product buyers to diversify out of China. Omicron is incredibly contagious and China is not well-equipped to slow it down to the same extent it has done with previous COVID variants.

Anyway, a month after my LinkedIn post, I doubled down with the following comment predicting that things would only get worse (here):

I got a lot of heat when I wrote this post, but today the Wall Street Journal indirectly said that I was right to have done so. I now expect things to just keep getting worse.

If your supply chain depends at all on China, it is long past time for you to do whatever you can to move your production out of China. See How to Move Your Manufacturing Out of China Safely.

1. Omicron Is Crushing China Supply Chains and You Should Have Seen This Coming

In my December 31 post, I wrote that the nature of Omicron, coupled with China’s lack of preparedness for it and its Zero-COVID policy would crush China supply chains. This has now come true.

The below are what I listed as the facts compelling my conclusion regarding China’s supply chains:

Omicron is incredibly contagious and China is not well-equipped to slow it down to the same extent it has done with previous COVID variants. Omicron will likely lead to massive shutdowns of China’s factories and, in turn, convince more foreign product buying companies to diversify out of China.

Unlike the Pfizer and Moderna vaccines, China’s vaccines do not prevent the spread of Omicron. I repeat, China’s vaccines do not prevent Omicron infection, though they do appear to work fairly well at moderating the impact of any infection. When I tell this to clients and friends in China, their initial response is that China has never relied much on vaccines to slow COVID’s spread; it has relied mostly on testing, quarantining, and shutdowns/lockdowns. They are right and this is why I am so worried about China factory production.

Atlantic Magazine science reporter Katherine Wu (one of my go-to sources on everything COVID) yesterday came out with How Long Does Omicron Take to Make You Sick? Ms. Wu’s article was subtitled “The new variant seems to be our quickest one yet. That makes it harder to catch with the tests we have.”

The article discusses how testing will be less effective at preventing Omicron’s spread because Omicron becomes contagious much faster than previous COVID variants. By the time people test positive for Omicron, they likely will have already spread the virus to many. Ms. Wu uses a wedding in Oslo, Norway, at which 80 guests caught Omicron, as an example:

In a research paper describing the Oslo outbreak, scientists noted that, after the event, symptoms seemed to come on quickly—typically in about three days. More troubling, nearly every person who reported catching Omicron said that they were vaccinated, and had received a negative antigen-test result sometime in the two days prior to the party. It was a clue that perhaps the microbe had multiplied inside of people so briskly that rapid-test results had rapidly been rendered obsolete.

Ms. Wu then explains in considerable detail why Omicron will render tests so much less effective in slowing its spread:

The picture on Omicron is coalescing both microscopically within us and broadly in communities—steep, steep, steep slopes in growth. The two phenomena are linked: A shorter incubation period means there’s less time to pinpoint an infection before it becomes infectious. With Omicron, people who think they’ve been exposed may need to test themselves sooner, and more often, to catch a virus on the upswing. And the negative results they get might have even less longevity than they did with other variants, Melissa Miller, a clinical microbiologist at UNC, told me. Tests offer just a snapshot of the past, not a forecast of the future; a fast-replicating virus can go from not detectable to very, very detectable in a matter of hours—morning to evening, negatives may not hold.

This, especially, could be bad news for PCR tests, which have been the gold standard throughout the pandemic and essential for diagnosing the very sick. (Thankfully, most PCR tests do seem to be detecting Omicron well.) These tests have to be processed in a laboratory before they can ping back results—a process that usually takes at least a few hours but, when resources are stretched thin as they are now, can balloon to many days. In that time, Omicron could have hopped out of one person’s body and into the next, and into the next.

I then combined the above facts with China’s past performance (from which China virtually never deviates) and concluded the following:

China’s vaccines will not slow the spread of Omicron and its tests will be rendered relatively ineffective as well. This essentially means one of two things will happen. Omicron will spread through China much as it is already doing in Africa, Europe, and the United States, or China will require lockdowns, shutdowns and quarantines to prevent that. Based on how China has reacted to COVID so far, I expect it will mandate lockdowns, shutdowns, and quarantines to try to slow Omicron’s spread. These lockdowns, shutdowns, and quarantines will close China factories and ports and lead to another massive supply chain crunch. 

2. Omicron Will Only Get Way Worse and its Impacts on China Supply Chains Will Worsen 

Vladimir Putin’s war against Ukraine is an obvious failure for Russia. It has led to the deaths of tens of thousands of Russians. It has devastated Russia’s economy and it has destroyed Russia’s future. Yet Putin has not recalibrated because to do so would be to admit a mistake and to admit a mistake would be to lose power and control and that would put him at great risk of being overthrown and/or killed. To better understand the position in which President Xi finds himself with respect to COVID, what we see happening with Putin and Ukraine is a perfect template. See also Why China Is Sticking With Its ‘Covid Zero’ Strategy (Washington Post), Why Xi can’t quit zero-Covid (CNN), What Keeps China’s Zero-COVID Policy Going (The Diplomat), all written within the last two weeks.

Human lives and a strong economy are fine, but when balanced against a dictator’s need for power, control, and subjugation, the latter three virtually always win out, and that is exactly what we are seeing with Russia/Ukraine and with China/COVID. Look at what is happening in Shanghai for concrete and up-to-the-minute proof of this.

So stop engaging in wishful thinking. Things are only going to get far worse in China and your supply chain and your company will pay the price for this. The massive supply chain disruptions befalling Apple and Volkswagen in China have been in the news, but what my law firm’s international manufacturing lawyers are seeing is that smaller companies that get the same components from China as Apple and Volkswagen are hurting far more. Our law firm has clients that are not getting anything at all from China and their shelves are literally empty. If I could direct you to their websites you would starkly see what this means, but the attorney-client privilege prohibits this. These websites show “sold out” of every single product, due to ZERO supplies. As one client sadly put it, “Zero-COVID has for us meant zero supplies.”

3. Move or Diversify Out of China Now and Reap Bigger Benefits Later

For years we have been extolling the virtues of moving manufacturing out of China, but not nearly enough have done so. Very roughly I divide the non-movers into the following four categories:

a. Those who simply cannot. These companies make a product in China that they all but literally cannot have made anywhere else. For these companies, I suggest these companies keep checking to see if the situation has changed. And if you are big enough, you should contemplate setting up your own factory somewhere outside China, perhaps in Mexico or in Poland, or in your home country. Of course, this does not work if setting up your own factory will lead to little more than assembling China-made components.

b. Those for whom anywhere else is prohibitively expensive. Companies that sell widgets for $20 and cannot find a manufacturer outside China for less than $25 and cannot raise their prices due to competition fit into this category. My advice for these companies is essentially the same as for those who “simply cannot”.

c. Those who make in China to sell in China. My advice for these companies is to keep doing a cost-benefit analysis to see if things change.

d. Those for whom moving out is “too” difficult and/or “too” expensive. My sense is that this is the largest category and these companies should (for the most part) start moving out of China now before it is too late. Every week a client emphatically tells us that they wish they had left China long ago, but not a single client that has left China has told us anything but that they are glad to have left. In fact, most of our clients that have left China and were paying a higher price for their products because of this, have now gained market share because they are now able to undercut those still in China and dealing with COVID, tariffs, soaring shipping costs, and all the other things that have soured so many on China.

The companies that have left China are also benefiting from the rising number of people who will do or pay just about anything to try to avoid products Made in China. Some of our clients who moved their production to Vietnam or Thailand years ago are gloating about how glad they are to have done so before these countries “filled up.” Go to Mexico or Colombia or Poland or India before those countries “fill up” too.

Now is the time for you to think outside the box and consider places like Mexico, Colombia, Brazil, Spain, Portugal, Poland, Nigeria, India, Peru, Pakistan, or just about anywhere other than China for your manufacturing. Two years from now do you want to be the one doing the gloating or do you want to be the one shutting down your company because no more products are coming from China due to China having invaded Taiwan? See this Wall Street Journal article as to why China invading Taiwan has become more likely and how China is upping its preparations to do so. See also Leaderless, Cut Off, and Alone: The Risks to Taiwan in the Wake of Ukraine, which (rightly) posits that “Russian failures and Ukrainian successes to date might incentivize China to issue threats and use force earlier to make U.S. military intervention less likely and Taiwanese capitulation more so.”

In early November 2019, in How to Conduct Business with Chinese Companies That See a Dark Future, we outlined China’s many risks and we called for companies to — if possible — lessen their China exposure:

For some companies, China’s increasing risks now exceed its rewards, but for others this is not at all true. Do you really need a legal entity in China with Chinese employees or might your company be better off with no operations in China beyond a third party distributer or reseller? Our China lawyers have been doing a lot of work in the last six months helping our clients reduce their China footprint and thereby reduce their China risks. No matter what you are doing in or with China, now is a good time to look at how you too can reduce your risks.

What are you seeing out there?