Supply chain issues could escalate as China grapples with omicron

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About 20 million people in China are in lockdown as the country tries to contain the omicron variant of the coronavirus before it spreads out of control. Most of them are in the city of Xi’an in the west and in the province of Henan in the east of China. Several port cities, including Shanghai and Shenzhen, have imposed limited closures.

As China attempts to enforce zero-COVID measures, supply chain watchers are increasingly concerned about the flow of goods from factories across the country.

“What’s happening in China right now is the most severe outbreak of COVID-19 since the initial outbreak in Wuhan,” said Sam Scarpino, director general of pathogen surveillance at China’s Institute for Pandemic Prevention. the Rockefeller Foundation.

The aggressive policy has worked well so far, according to Rhodium Group China Projects Team Director Nargiza Salidjanova.

“When an infection is detected, there is a mass lockdown, which disrupts huge cities, massive population. It affects factory production,” Salidjanova said.

This is now happening in several areas.

“And cities and provinces happen to be a major supplier of computer chips, technology products. There are a lot of ports that are disrupted,” said Brendan McKenna, international economist for Wells Fargo Securities.

China’s options are complicated for several reasons.

Lunar New Year and the Olympics are approaching, making controlling omicron a priority. And the Chinese population can be relatively vulnerable.

Some evidence suggests that the local vaccine Sinovac is less effective than other vaccines at producing antibodies that neutralize the omicron, according to Scarpino. All of these factors create a very complex situation.

“What makes it more difficult to predict is what kind of measures are coming tomorrow to try to control the spread and how many people will be affected by them,” Scarpino said.

There is a feeling that disruptions are coming – delayed products, upset deliveries, continued inflation – but they can take a while to arrive.

“I think it will probably take at least a month, maybe two, for the disruptions and how China is handling the COVID outbreaks to actually show up in the economic data and for the financial markets to actually react to that.” , McKenna said.

On the other hand, companies have some experience dealing with disruptions. Chad Fleeger leads the supply chain practice at accounting and advisory firm BDO.

“This time around, being proactive and addressing the issue will reduce the time it could last,” Fleeger said.

Either way, the supply chain issues that we thought were coming to an end may well last a bit longer.

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