Chinese shutdown continues to leave a difficult situation hard to navigate

Supply chain concerns stemming from the ongoing Omicron variant-driven issues in China continue to raise questions and concerns for the global supply chain.

As previously reported, these issues are having a significant downstream impact on United States-bound import patterns, at a time when the ongoing supply chain congestion issues appeared to be showing signs of improvement. And since then, China’s largest city, Shanghai, is under a full lockdown, which has been extended indefinitely, due to the ongoing increases in positive cases that have been reported.

Various sources continue to identify how the situation in China is impacting the supply chain, both, at the present time, and also with an eye on the future, too.

Spencer Shute, a senior consultant for Proxima, a Chicago-based strategic team of procurement specialists with more than 25 years of consultation and supply chain experience, noted that West Coast ports will be impacted most dramatically by the Shanghai lockdowns, with the caveat that all ports will be affected at some level.

“Some shippers will try to ship to the East Coast to avoid the bottlenecks in LA/Long Beach,” said Shute. “With the limited air freight options in Shanghai throughout the lockdown, all air freight ports will expect to be inundated with increased volume in an attempt to fulfill backlogged demand. The downstream effects of this lockdown are shaping up to have an even larger impact on U.S. ports than anything else experienced during the pandemic.”

What’s more, Shute observed that because of the volume shipped through Shanghai, a whole host of vertical sectors are likely to bear the brunt of this current situation, including  everything from manufactured goods in transit to final assembly, to fully finished goods ranging across all categories of electronics, automotive, furniture, pharmaceuticals, and textiles.

And from a consumer perspective and what they could be in stand for, Shute explained that while consumers have already been experiencing delays related to myriad supply chain-related challenges over the last two-plus years, the current situation in China is going to present many other challenges, including significant delays and shortages early-summer through fall, which is prime peak shipping season.  

“The later onset of delays is caused by: 1-reduced manufacturing/shipping capacities over the last month, which has reduced product availability, and 2- once the ports are up and running at full capacity it will create bottlenecks at US ports,” said Shute. This would be similar to what we saw with the LA/Long Beach ports last fall/winter.”

While the Shanghai lockdown remains in effect, coupled with steps being taken by Chinese authorities to reopen some manufacturing operations and restore trucking capacity, there has been a significant drop-off in export volumes, noted Judah Levine, Head of Research for Freightos, a SaaS-enabled logistics technology provider focused on instant freight quotes for freight forwarders and shippers.

Those steps being taken in China are comprised of few different components, which were outlined by Ben Gordon, Managing Partner of Cambridge Capital, an investor in niche supply chain leaders, and also Managing Partner of BGSA Holdings, a leading mergers and acquisitions advisory firm focused on the transportation, logistics, and supply chain technology sector, in a recent Tweet, including: the Chines government’s whitelist of 666 companies located in Shanghai that will receive government assistance, but people in China that leave their residences may not be allowed back in, due to the lockdown.

“So, the situation to the lockdown is to operate factories with workers locked in, as part of a ‘closed loop,’” wrote Gordon. “They may have to eat, sleep, and live inside the plant. Will China’s draconian COVID policy backfire?”

Freightos’ Levine added that as ocean carriers have yet to remove capacity, ocean rates have eased somewhat since the start of the shutdowns, down 5% from Asia to the U.S. West Coast, and 14% to North Europe. 

“Congestion at destination ports like LA/Long Beach has improved somewhat as arrival volumes fall, but a surge of container imports is expected once Shanghai reopens,” commented Levine. “The influx—just as this year’s early peak season gets underway—is likely to make congestion worse and put upward pressure on rates once again.” 

Glenn Koepke, GM, Network Collaboration, for Chicago-based FourKites, a provider of real-time tracking and visibility solutions across transportation modes and digital platforms, said that the current situation in China is creating the need for shippers to build in extra transit days before they can allocate product.

“The downside to that is that it can have a major financial impact to these shippers and manufacturers,” he said. “When you think about the inventory carrying costs, once they buy their goods and once it ships, they own that,” he said. “And if they cannot use that product to manufacture, they are outlaying cash well in advance. Unfortunately, with a lot of disruptions in the ocean market—whether it is port strikes of pandemic-driven shutdowns in China [or other things—we have seen companies build in extra transit time. That way there is an element of a buffer, but it does impact storage costs when product hits a port, as well as where to put it. We do see this impacting many verticals, not just a few particular ones. It is food and beverage, CPG, automotive, and medical, and others.”

As this situation moves on, there continue to be more questions than answers, to be sure. There is never a really opportune time for a crisis to emerge. That has never wrung more truly in logistics and supply chain than it has going back to March 2020, to be sure. Here is to hoping China’s operations get back to full-strength sooner than later. While we all hope it happens quickly, it is really hard to say if that will be the case.