The China Supply Chain Nightmare: It Is Time to Panic

Fortune Magazine just came out with an article entitled: “Companies are beginning to panic: Experts say China’s lockdowns will make inflation and the supply chain nightmare even worse.” To which my immediate thought was, “beginning”? Smart companies were panicking months ago; today is just the realization of so much of that panic.

It is right now looking like Beijing will soon be in a lockdown and there is every reason to believe more cities and factories and ports will follow.

And do NOT say we did not warn you of all this. But before I turn to proving how our supply chain predictions have become reality, I will extensively summarize and quote from this Fortune article to get you up to speed with the disaster that is today’s China supply chain.

Per the Fortune article (and real life), “China’s strict COVID-19 lockdowns will exacerbate global supply chain woes and add to inflation in the coming months.” The article then discusses how China’s COVID lockdowns are increasing and all signs point to them continuing to increase. It then talks about how previous lockdowns are impacting China’s economy — fuel demand in China has dropped 20% this month “in the biggest decline since the first wave of COVID-19 lockdowns more than two years ago.” It then talks about the existing “supply chain nightmare” and why it will get worse

1. The China Supply Chain Nightmare

Per the Fortune Magazine article, one in five container ships is now stuck at ports worldwide, with 30% of this backlog “coming from China.” And here’s the kicker: we have not seen the half of it yet, as “the full impact of China’s policies will only begin to reveal itself over the coming weeks.” The article then notes that even if China lifts its strict lockdowns (which has about a 2 percent chance of actually happening, pent-up cargo created by reopened Chinese factories and will cause “higher freight rates . . . and worsen congestion at ports worldwide. The next effect will likely be felt in the U.S. West Coast’s ports of Los Angeles and Long Beach as the pent-up demand reaches them”:

“Companies are beginning to panic. The downstream impact is coming, and it’ll be heavy.” John Bree, the chief risk officer at Supply Wisdom, said. “The latest China lockdowns combined with the Russia-Ukraine war is too heavy a burden. The global chaos is going to further exacerbate disruption and take inflation to a new level.”

Bree’s statement is backed up by recent reports from investment banks, which are also warning of the economic impacts of China’s lockdowns. Bank of America analysts led by Ethan Harris said in a note to clients on Friday that it’s yet “another adverse supply shock for the global economy” that will weaken growth and extend the period of high inflation.

And Dylan Alperin, head of professional services at the supply chain software firm Keelvar, noted that transportation costs make up 7.7% of global GDP, which means delays at ports typically lead to rising inflation.

“The freight cost for a single container from China to the U.S. went from $5,900 last year to $15,764 today,” Alperin said. The impact of those price increases alone could significantly drive inflation up globally, he added.

Dawn Tiura, CEO of the Sourcing Industry Group (SIG), an association of sourcing and procurement professionals, said that she also suspects that China’s lockdowns will lead to higher inflation.

“Our supply chains are so interconnected and they’ve become fragile that a single issue in one place will affect consumers around the globe,” Tiura said.

And Jim Bureau, the CEO of Jaggaer, a global commerce and procurement technology company, noted that many U.S. manufacturers source raw materials and components from Chinese suppliers, which could lead to shortages of critical electronics and machinery components.

In other words, it is already bad out there and it will only get worse.

2. COVID is Crushing China Supply Chains and This Should Be No Surprise  

In a December 31 post, we wrote on this blog that Omicron, coupled with China’s lack of preparedness for it and its Zero-COVID policy would crush China supply chains. That article delved into the science of COVID/Omicron to explain why the facts compelled this conclusion:

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.

We then combined the above facts with China’s past performance (from which China almost 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. 

And this is exactly what is happening today.