March 29, 2022
Chips, Drives and Stitches - Shanghai’s New COVID Lockdown
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The Chinese authorities have started a phased lockdown in Shanghai, cutting manufacturing capacity and local logistics as well as raising questions for global supply chains. Major export industries in the municipality include computer technology, automotive parts and medical supplies.
The city authorities in Shanghai have announced a two-stage lockdown from March 28, 2022. The two halves of the city will each shut for sequential five day periods. The situation is dynamic, with detailed updates available from Flexport’s blog. As an initial assessment the impacts could include:
- Reduced manufacturing capacity in the region, particularly given that integrated supply chains bridging the two halves of the city may end up effectively having to close for the whole 10 day period.
- Restricted availability of regional freight handling, principally trucking, particularly given the importance of Shanghai’s airport and seaport.
- Disruptions to global supply chains should the main port or airport close, which so far has not occured.
The situation regarding the opening of Shanghai’s seaport is particularly important. Official data indicates that Shanghai handled 47.7 million TEUs of containerized freight in the 12 months to February 28, 2022.
As shown by the red bars in Figure 1, that was equivalent to 19% of all Chinese seaport container handling. By comparison, Shenzhen, which avoided a port closure during its own recent lockdown, discussed in recent Flexport research, accounted for 11.3% of handling.
Shanghai’s handling remains elevated above historic norms, having increased by 10% in the past 12 months compared to calendar 2019 as shown in the green bars above.
Electronics Lead, Medical Supplies Heavily Exposed
Manufacturers in the Shanghai Municipality and surrounding region have rapidly closed or phased production at their facilities, including two of the largest automakers.
Exports by air from the Municipality are led by electronics, including PCs and semiconductors, while ocean freight is led by autoparts, electrical components and consumer durables including furniture.
The largest exports by value, based on China General Customs Administration data and parsed at the HS-4 tariff code level, include computers and microchips. Exports of computers were worth $26.8 billion in 2021, shown by the green bar in Figure 2, and accounted for 13% of China’s total computer exports. In the case of microchips and circuit boards there were $26.2 billion of exports representing 17% of Chinese exports.
Among smaller product groups with higher levels of exposure are medical supplies (HS 3006). Exports from Shanghai of the group were worth around $1 billion but accounted for 75% of all Chinese exports of such products which range from contraceptives to first aid kits.
Alternative Sourcing is a Challenge
Sourcing alternatives in a short time frame for the key products exported from Shanghai may prove impractical:
- In the case of medical products, licensing conditions in the country of use are typically very strict and difficult to change in a short period of time;
- Automotive components are typically produced for a specific vehicle or set of vehicles rather than being readily interchangeable;
- Technology supply chains, particularly for complex products such as computers, tend to be regionally integrated, reducing the potential for switching between locations at short notice.
With all that said, the lockdown rules may be flexible enough and corporate inventories sufficient to ride out a short disruption - again, the situation is dynamic.
Conclusion: The situation surrounding Shanghai’s COVID-19 related lockdown remains dynamic, but could have an impact on computer, automotive and medical supply chains.
Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.