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China’s tech suppliers brace for disruption after COVID protests

Written by Nikkei Asia Published on   4 mins read

Uncertainty over Beijing’s response has companies fearing more lockdowns.

Suppliers in China serving Apple, Google and other global brands are bracing for further disruptions amid uncertainty over how Beijing will respond to calls to end the country’s strict zero-COVID measures.

Demonstrators across China have demanded an end to the mass testing and widespread lockdowns imposed as part of the country’s strategy for battling the pandemic. The central government on Tuesday warned local authorities against “arbitrarily expanding lockdowns” but local governments have so far shown few signs of heeding Beijing’s directives. The emergence of an omicron wave of infections is also worrying suppliers.

Factories in Shenzhen and Tianjin owned by Foxconn—the world’s biggest electronics contract manufacturer—have warned employees that they will begin operating under “closed-loop” management this week in response to tightener local measures introduced to deal with COVID outbreaks, people briefed on the matter said. Under a closed-loop system, factory workers are required to live on-site to reduce the risk of outbreaks.

Confirmed cases at a Foxconn Tianjin facility disrupted production as operations had to be halted while the site was disinfected, according to two sources familiar with the matter. The Tianjin facility mainly makes networking equipment and servers.

Foxconn declined to comment for this story.

The key Apple supplier is still struggling to recruit more employees for its Zhengzhou complex in Henan province. The world’s biggest iPhone assembly base has been hit by worker shortages following unrest at the facility over COVID restrictions and delayed bonus payments.

Foxconn is not alone. Top chipmakers such as Yangtze Memory Technologies in Wuhan and Semiconductor Manufacturing International facilities in Beijing started closed-loop operations last week.

An executive from an electronics component maker in Jiangsu province expressed doubts over whether China will relax its zero-COVID policy. “We still feel China hopes to adopt tough measures on COVID,” the person told Nikkei Asia. “Our factory only has two confirmed cases, but local authorities have demanded we halt production for sanitizing and we are not sure how long that will take.”

Others say the prospect of widespread lockdowns used to contain public unrest is their bigger concern.

“We are very used to closed-loop management. … That may not be a problem for our production,” one Foxconn employee told Nikkei Asia. “Our concern is how long the tightening will be and whether there are consequences from the widespread protests.”

A display maker manager whose plant is in Kunshan, Jiangsu province, agreed.

“Most manufacturers are not worried about the need to operate in close-looped or work from home, as the demand is not that strong anyway for the upcoming holiday season,” the manager said. “We are just worried whether authorities will launch massive lockdowns, as a political measure, should more protests pop up. If that happens, it will definitely hit our operation.”

Tech is not the only sector facing potential disruption. Yuangang village in Guangzhou’s Panyu district is home to several suppliers of fast fashion brand Shein. Village authorities have suggested factories and shops send workers home for the Chinese New Year, which is about two months away.

“The outbreak will not be alleviated in the next one or two months,” local authorities said in an open letter to the village.

Shein did not respond to an inquiry for comment.

The situation shows little sign of easing even after the State Council, China’s cabinet, reiterated in its weekly COVID news conference on Tuesday that lockdowns should not be expanded “arbitrarily.”

State Council officials said the government is always monitoring the situation and would defend people’s interests and the economy—comments viewed by some as acknowledgment of the large weekend protests. Some of those demonstrators have gone as far as demanding the Communist Party step down over its zero-COVID policy.

The State Council criticized local governments’ implementation of certain COVID measures, though it did not announce any corresponding punishments for arbitrary or overzealous lockdowns.

On Wednesday, the Guangzhou municipal government pledged it would “stabilize the economy” and “ensure the stability of the supply chain of key industrial chains.” Arbitrary lockdowns will not be allowed and districts will be prevented from arbitrarily expanding the scale of COVID testing, it said, in the first comments by a local government on Beijing’s directives.

Other cities, however, have continued to impose curbs.

For example, Chongqing has been under a de facto lockdown for at least 10 days, and it is not clear when it will be lifted. Shenzhen is mandating the majority of its residents work from home and has imposed a maximum 50% occupancy rate for indoor venues.

There are also concerns that a shift to piecemeal lockdowns in response to calls to end mass restrictions could backfire.

Ting Lu, chief China economist at Nomura, said full lockdowns may not be imposed in major cities even if cases surge, but partial lockdowns in more cities could be “more costly” as they would potentially affect a greater number of manufacturers.

Chi Him Lee, analyst at the Economist Intelligence Unit, said risks of supply chain disruptions in the coming months are “high” and the zero-COVID policy is expected to remain a stressor for China-based companies for much of 2023.

“The one mitigating factor to all of this might be that global trade demand is set to slow next year, so supply chain disruptions might not be felt as acutely as they did between 2021 and 2022,” he said.

Ivan Lam, analyst with Counterpoint Research, said changes in policy may take time to materialize on the ground.

“It could take quite some time for local governments to adjust their measures according to the central government’s call,” Lam said. “Maybe it will take one to two weeks of [response] time. We are hoping the situation will move toward a better direction with the central government’s softened tone. But there are still a lot of uncertainties.”

This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.


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