Despite a relatively low number of cases, several Chinese cities have enacted strict COVID-19 restrictions in response to increased infections over recent weeks. Authorities have imposed restrictions in Shenzhen, Dongguan, Changchun, and Shanghai, all major manufacturing hubs.
Additionally, Shanghai and Shenzhen are the world's largest and third-largest ports. While measures have been lifted in some cities, their effects are still felt from the backlog of freight and continued localized lockdowns. As case numbers rise nationwide, leaders continue to enact new measures in more cities.
Impacts of COVID-19 Controls on China's Ports
The after-effects of heightened COVID-19 restrictions in Shenzhen and Shanghai are likely to be felt in their ports for weeks, if not months, to come. Shenzhen is experiencing the largest queue of vessels since Typhoon Kompasu in October 2021, and the number of vessels queuing at Shanghai is steadily increasing. Ports further afield are also likely to be affected as shipping companies alter schedules to avoid the two ports.
Chinese authorities in Shenzhen did not specifically exempt port workers from lockdowns, but port facilities remained open because prior directives allowed workers to live and work on-site, albeit with a strict testing regimen in place. Regardless, the closure of warehouse facilities and restrictions on truck drivers operating in the city has caused a significant backlog at the already busy port.
Shenzhen authorities have placed strict restrictions on truck drivers from neighboring Hong Kong, including extensive testing, banning them from picking up consignments from the city, and closing all but three border checkpoints to limit the spread of infections. The effects of these measures, which remain in place, are exacerbated by the already low number of Hong Kong truck drivers available due to large numbers of positive COVID-19 tests, with the sector working at an estimated 30 percent capacity.
After attempting to control case numbers through localized lockdowns and movement restrictions, authorities in Shanghai enacted the largest lockdown in the city since the pandemic began. Officials have ordered factories to close and suspended public transport. While supply chains are yet to feel the repercussion of the lockdown, there will likely be significant implications due to the global importance of the city's port network and its manufacturing and financial industries.
Air Transportation and Freight Disruptions
Strict COVID-19 restrictions governing movement to and from Chinese cities have predictably affected air freight, as airlines reduce the frequency of flights due to a decline in demand. Authorities have rerouted international passenger flights bound for Shanghai to other cities, with at least 106 flights scheduled to be diverted through May 1.
Other airports, such as Shenyang Taoxian International (SHE), have announced the cancellation of domestic and international flights in line with local policy. While these measures certainly limit the capacity of air freight operations, for the most part, cargo-only flights are permitted to continue operating.
Restrictions on ground staff, complicating operations and cargo flow to and from airports, have worsened disruptions. The most significant limitations to operations are access to ground-based logistics in cities affected by restrictions and the willingness of air freight companies to operate under such restrictions.
Increased cases in Hong Kong prompted authorities to lift testing and quarantine exemptions for aircrew, resulting in airlines such as Cathay Pacific canceling hundreds of flights, including cargo flights, while representatives from 11 airlines wrote a joint letter denouncing the measures, which are not in line with mainland China. Other air cargo companies, such as Virgin Atlantic, have postponed resuming operations until summer.
Impacts on Production and Distribution
In addition to complicating logistics, COVID-19 restrictions have affected factory production, particularly in the electronic and car manufacturing industries. Foxconn, one of the world's largest electronics makers and responsible for assembling iPhones (among other things), ceased operations for the duration of Shenzhen's lockdown, resuming "basically normal" operations March 21. While operations may have resumed, production is likely to remain well below normal due to continued logistical issues.
With required raw materials and components remaining difficult to source and most of the world's electronics originating in Shenzhen, the supply of global consumer electronics is likely to be significantly affected over the near to medium term. Similarly, despite production of semiconductors reportedly continuing relatively unhindered in Shanghai's Zhangjiang High-tech Park, deliveries from the factories have been delayed due to quarantine requirements, affecting downstream industries and likely resulting in a short-term global shortage of semiconductors.
Disruptions have also been reported in the automotive industry, with FAW Group halting production at five assembly lines in Changchun following a lockdown in the city March 11. The closure has affected the production of Volkswagen Group and Toyota vehicles, and it remains unclear whether production has resumed. BYD Auto, an important supplier of electric vehicle batteries and electric car manufacturer, also reportedly experienced production issues.
Near-Term Outlook for the Global Supply Chain
Continued supply chain disruptions are likely in China over the near term. Chinese authorities do not appear to be wavering from their zero-COVID policy, with new city-wide lockdowns being announced in Shenyang and Jilin within the last week. Should this policy remain in effect, port congestion is almost certain to worsen, delaying shipments, limiting capacity, affecting factory production, and resulting in higher shipping rates. Continued supply chain disruption in China will also have a global effect, as cargo delays in China disrupt container port schedules worldwide.
As the more infectious but apparently less-lethal Omicron variant propagates through the country, Chinese authorities have yet to change strategy and shift away from a zero-COVID policy. However, even in the case of a strategy change, supply chain disruptions at Chinese ports, and to a lesser extent, Chinese airports, will likely remain over the near term.
Once "basically normal" operations resume in earnest, demand is likely to increase as companies attempt to clear the backlog of containers. Should the decision to ease COVID-19 restrictions be taken in the coming months, a surge in demand would likely coincide with the peak August-October shipping season, further driving up prices and limiting capacity. While there are hopes that the opening up of hospitality and tourism industries worldwide and increased costs of living may lead to a reduction in demand for consumer goods, this is unlikely to be reflected in supply chain logistics until late 2022, at the earliest.
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