The Chinese Communist Party’s (CCP) harsh lockdown of the city of Xi’an has severely interrupted the supply chain.
Beijing’s “Covid Zero” policy has caused misery not only for its people but also for German companies that have always favored the mainland market. They are adjusting their supply chains to leave China.
According to a recent report in the German newspaper, Welt am Sonntag, Maximilian Butek, chief representative of the German Chamber of Commerce (AHK) in Shanghai, said that China’s continuous whole city lockdowns that restrict travel for outbreak prevention has disrupted the supply chain, making German companies operating in mainland China pessimistic about the future.
Butek said they are facing more challenges, with raw material shortages and supply chain problems being the biggest risks. As a result, the public can expect “purchase prices will rise significantly and consumers may have to face higher prices and longer waiting times.”
Butek also said that some German companies are looking for alternative suppliers. A survey by the German Chamber of Commerce shows nearly one fifth of German companies in Shanghai have said they are considering moving out of mainland China this year, or later, if the outbreak continues in order to reduce supply chain risks.
The Chinese Communist Party’s harsh outbreak prevention policies
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Michael Hüther, director of the Instituts der deutschen Wirtschaft in Cologne, said that this is the first time in decades that German companies are rethinking whether they can continue to rely on supplies from remote countries. He believes that in the medium to long term, companies will adjust their procurement models and supply chains.
According to Hüther, the problem stems from the Beijing authorities’ stringent epidemic prevention measures. He said that as long as Beijing continues to believe that the virus can be eradicated and when one person is infected, the entire city will be shut down, the supply chain problem will not be solved.
China’s failed ‘COVID Zero’ policy poses the greatest global risk
On Jan. 3, Eurasia Group, an American research firm that analyzes international political crises, released its predictions for the world’s top 10 risks in 2022. The potential failure of China’s “COVID zero” policy is considered the biggest global risk, as it could aggravate worldwide supply chain disruptions and inflationary pressures.
In an interview with Bloomberg News, Ian Bremmer, president and founder of Eurasia Group, said that the European and American strategy of “living with the virus” is the exact opposite of the Chinese Communist Party’s “COVID zero” policy. China’s approach won’t work, but they’ll stick to it. That will lead to larger outbreaks and more severe lockdowns “and greater economic disruptions in a nation that has long been the world’s primary engine for growth.”
Bremmer and Cliff Kupchan, chairman of the Eurasia Group, wrote in the report that the Communist Party’s “zero tolerance” policy for COVID-19 would not only fail to contain the infections but could lead to larger outbreaks that would require even tougher blockades. That would lead to greater economic disruption and more government intervention.
For the world, that means more supply chain disruptions, the report said.
Big multinational companies fleeing China
The increasing production costs, including labor costs, in mainland China, the U.S.-China trade war, and the COVID-19 outbreak that is still ravaging the world have sped up the pace of multinational companies moving out of mainland China.
A research firm called Gartner revealed in 2020 that one third of multinational companies, leading the supply chain, plan to relocate at least some of their production to other countries and regions by 2023, while a 2020 survey by UBS Evidence Lab found that 76 percent of U.S. companies with factories in mainland China are moving or considering moving out of mainland China.
The Japanese government announced in April 2020 that it was investing $2.2 billion to support Japanese companies moving back to Japan or to other parts of Asia, such as Southeast Asia. The U.S. government has made similar moves to encourage U.S. companies in China to move back to the United States.
Some media outlets have summarized some of the major multinational companies that have moved (partially or completely) out of mainland China in recent years, including Apple, Hasbro, Stanley Black & Decker, Dell, HP, Microsoft, Alphabet, Intel, Steve Madden, Adidas, Puma, Nike, Samsung, LG, Hyundai, Kia, Hyundai Mobis, Sharp, Sony, Nintendo, Quanta Computer, and many more. These multinational companies moved or returned to their home countries, or moved to places including Vietnam, India, Thailand, Cambodia, Indonesia, and Bangladesh, as well as Mexico, Brazil, Taiwan, and other places.