Covid outbreak throws Chinese factories and supply chains into chaos

The coronavirus sweeping across China is causing widespread business disruption as staffing shortages threaten to close down factory production lines and truck drivers fall ill, bringing chaos to supply chains.

The Omicron variant of the virus has begun to run rampant through several big cities since the sudden U-turn on president Xi Jinping’s former zero-Covid policy of containment earlier this month. The surge in infections is largest in the capital Beijing, where more than half the 22mn population is infected, according to some estimates.

Many office workers have begun to working from home but some factories are becoming thinly staffed as workers call in sick. Business owners and executives said this was causing increasing disruption to production and supply chains.

The boss of a printed circuit board factory in the eastern province of Shandong said only 20 per cent of staff came to work on Friday, the rest calling in sick with Covid. “One after another tested positive. I’m worried that I will have to shut the factory down,” they said.

Companies have been left with no direction on how to handle the sudden surge in cases, after previously operating under strict guidelines handed down by local governments. Factory bosses are now either loosening all controls or isolating workforces to keep production lines functioning.

A manager at a car assembly plant in the northern province of Hebei said his group plans to reinstate the “closed loop” system, whereby staff live and work on-site during Covid outbreaks, in order to keep production going while avoiding catching the virus.

“We will have no workers left otherwise,” he said.

Elsewhere, factory bosses have dropped restrictions such as PCR testing and fencing off workers from the wider population.

Jörg Wuttke, the president of the EU Chamber of Commerce in China, said it would be increasingly untenable for manufacturers to rely on the closed loop model. He said the huge scale of the exit wave and the lack of measures to suppress its spread meant these strategies would not work anymore.

There is some evidence that the disruption will be shortlived. Apple contract manufacturer Foxconn’s Zhengzhou campus — the world’s largest iPhone factory — is among those shedding its notorious restrictions, and production is rebounding according to one employee.

In October, workers at the Zhengzhou plant staged a walkout after a Covid outbreak resulted in them being locked in dormitories, with food and medical supplies running low.

By this month Foxconn had scrapped daily PCR testing mandates and dismantled metal barriers that had kept its staff confined to the Zhengzhou campus, according to a worker who asked to remain anonymous. “We’re free now. There are no longer metal fences erected or any other form of restrictions in effect,” they said.

They said Covid-positive workers could continue to work or isolate in the dormitory. The Foxconn employee added that “production is returning to normal” after the company recruited new workers and others who had “fled the factory” returned to work.

Foxconn did not respond to a request for comment.

Experts said factories would face worker shortages until February, after the lunar new year. The Omicron outbreak has brought forward the annual movement of more than 290mn migrant workers from the coastal provinces back to poorer regions in the west, which occurs ahead of the festive period.

“Sectors that rely on migrant workers are struggling because many people have gone home already for the Chinese new year holiday, which is only five weeks away,” said Chen Long, a partner at the Beijing-based research provider Plenum. “Things will be pretty quiet until the end of January.”

Factory bosses are also tackling supply chain problems. The EU Chamber of Commerce’s Wuttke said the rising number of Covid-positive truck drivers would be disruptive. Under the zero-Covid regime, drivers were subject to strict testing, which hampered supply chains but kept sick motorists off the roads.

Some plants would be forced to slow production due to a lack of components from suppliers forced to close their operations. “This is all about stocks and inventory,” he said.

Jacob Cooke, chief executive of WPIC Marketing + Technologies, which operates several warehouses across China, said he had experienced delivery delays as drivers fell ill.

“The delivery routes between major cities have multiple stops where the drivers exchange cargo. It only takes one driver to call in sick, and then things are held up for another day,” he said.

One cosmetics retailer in the southern city of Shenzhen said she was facing delays in sending packages to customers after many delivery drivers had tested positive. “The delivery system is very slow at the moment,” she said.

However investors are hoping that the period of short-term disruption will accelerate China’s opening up, after three years of being isolated from the rest of the world.

“If the virus continues to spread at its current pace, most cities will have passed the peak by mid-January. The resumption of activity will be pretty fast in February,” said Chen. “Investors will look through this period of short-term mess. The crucial question is how quickly things will normalise after this wave, and it looks like it could be much faster than expected.”

Shaun Rein, managing director of the China Market Research Group, warned that there would be no “revenge spending” from Chinese consumers after the initial wave of infections starts to ease.

“Many workers have had salary cuts in 2022 with all the lockdowns. Consumer confidence is very low. A lot of small and medium-sized enterprises have already gone out of business,” he said.

There are early signs of a rebound in domestic and international travel.

“We expect the ‘go home’ demand during Chinese new year could be better than our previous expectation,” Citi analysts wrote in a research note. They cited travel service provider Qunar’s data showing a more than eight-fold increase in bookings for airline tickets for the holiday period, made in the week after Covid restrictions were loosened on December 7.

There is also huge pent-up demand for international travel. Flight searches for the new year’s Eve period surged to the highest level in three years on the travel site Ctrip after restrictions were eased.

Hua Yifan, a manager at Shanhui Dress, a clothing manufacturer based in the eastern city of Jiaxing, is part of the first wave of Chinese exporters to benefit from more freedom to travel. Hua joined a 100-party delegation of exporters who travelled to Japan at the start of December for a week-long trip organised by the city’s commerce department.

“This is the first time I’ve attended the semi-annual Asia Fashion Fair in person since the pandemic began in 2020,” said Hua. “I was so excited about meeting clients I hadn’t seen for a long time.”

During the trip, Hua secured $5mn worth of orders from seven Japanese companies. The Japanese market usually contributes 50 per cent of Shanhui’s annual revenue, Hua added.

Cooke predicts that any further loosening of inbound quarantine restrictions will lead to an influx of foreign executives who have been unable to travel to China and meet local employees and business partners. “People with businesses here have not been able to come for three years. A lot of investments haven’t happened as a result,” he said.

Additional reporting by Sun Yu in Shanghai and Nian Liu in Beijing