Lock down in Shanghai

Day 33

The current situation

Here in Shanghai, we are in lock down day 33 (depending on which part of the city you are in, it could be much shorter).

Unlike in 2020, the lock downs in March of 2022 are complete work from home, all offices are closed and transportation is offline. The city itself is cut in half, with major roads, tunnels, bridges, and subways all blocked.

Two years ago, the impact was on the production side.  This time, production is currently on-going, but the impact is largely on the logistics side. Factories cannot ship, customers cannot receive.

Closed loop factories are working, but it is a temporary solution.

The "closed loop system" is where factories keep workers on site, or close-by, and rotate them in and out of the business.

The system is working for some businesses, but it is temporary and not sustainable. Production can continue, but with no one to pick up goods or deliver parts, there is only so much that can be done before production slows down. This would be due to warehouses filling up, staff unable to keep up or getting sick, running out of parts, or lock down regulations shut factories down.

Some factories have seen a large percentage of workers that cannot come back due to mandatory testing requirements, isolation, or quarantine. Others have rented hotel rooms for staff to stay so they do not have to travel between cities or home & work. 

Some businesses have been able to negotiate with local authorities to allow some flexibility for travel and production, especially for critical production in key industries (medical devices as an example). The process is the gov. sends people over to audit the biz process, look at how the company controls the Covid situation such as people entering/close loop bubble, etc. The plan is to rotate people in the closed-loop system on a weekly basis. 

The trucking situation - the primary logisitcs tool

Trucks are on the highway but unable to deliver locally due to covid policies.  Some locations require a PCR test within 48 hours, others an antigen test within 24 hours, still others another regulation.  When a truck exits the highway, they are at the mercy of ever-changing local policies and regulations.  Some drivers have been caught by changing rules and then forced off the roads; others are refusing to drive into certain areas.  With this, the system is so overwhelmed that even if you do get tested results will not be available in the required timeframe.  Many drivers are refusing to leave their home area due to fears of getting locked down or quarantined. 

Add to this highways closers throughout the YRD (Yangtze River Delta) to stop the flow of people, and goods, the situation is becoming more grim.

What other challenges besides logistics are there?

People mobility is a huge challenge. There is a staffing shortage in some businesses because staff do not want to return due to covid fears, or can't because of restrictions. Recruitment is also an issue as that is on hold for the time being, further driving a shortage.  

Invoices are also not being completed for finished foods.  In manufacturing an invoice is sent when goods leave the warehouse/are shipped. So this is not just a logistics issue, it is also a challenge for cash flow, sales, revenue, salary payments, etc.

Salary payments are challenging. Some have complained they are not getting paid, and landlords are demanding rent despite this.

What about when the lock down ends and a recovery?

If this ends in by the end of April, it will take one quarter or so (roughly three months) for the problems to work itself out and get the normal flow back into the system. 

If this goes into May, and there are other shutdowns in major production centers, it will continue to affect the economy, especially retail, logistics, and supply chains. This will have not only an affect on the Chinese economy, but global ramifications as well.

Starting up businesses again to be challenging as material shortages will occur once everything is back online, logsitics backups, challenges getting people where they should be, and continued restrictions in some form. This will lead to a continued impact on production and getting goods to market. Commodity prices will increase more than expected, and that is on top of the significant increases already put in place. Expect the government to push more stimulus and regulatory measures into the system the rest of the year to hit growth targets.