Covid forcing brands and value added companies to close operations in China

The Coronavirus sweeping across China is causing widespread business disruption as staffing shortages threaten to close down factory production lines and truck drivers fall ill, bringing chaos to supply chains. The Omicron variant of the virus has begun to run rampant through several big cities since the sudden U-turn on president Xi Jinping’s former zero-Covid policy of containment earlier this month. The surge in infections is largest in the capital Beijing, where more than half the 22mn population is infected, according to some estimates.

Many office workers have begun to work from home but some factories are becoming thinly staffed as workers call in sick. Business owners and executives said this was causing increasing disruption to production and supply chains. The boss of a printed circuit board factory in the eastern province of Shandong said only 20 per cent of staff came to work on Friday, the rest calling in sick with Covid. “One after another tested positive. I’m worried that I will have to shut the factory down,” they said.

Companies have been left with no direction on how to handle the sudden surge in cases, after previously operating under strict guidelines handed down by local governments. Factory bosses are now either loosening all controls or isolating workforces to keep production lines functioning.

A manager at a car assembly plant in the northern province of Hebei said his group plans to reinstate the “closed loop” system, whereby staff live and work on-site during Covid outbreaks, in order to keep production going while avoiding catching the virus.

“We will have no workers left otherwise,” he said.

Elsewhere, factory bosses have dropped restrictions such as PCR testing and fencing off workers from the wider population. Jörg Wuttke, the president of the EU Chamber of Commerce in China, said it would be increasingly untenable for manufacturers to rely on the closed loop model. He said the huge scale of the exit wave and the lack of measures to suppress its spread meant these strategies would not work anymore.

There is some evidence that the disruption will be short-lived. Apple contract manufacturer Foxconn’s Zhengzhou campus — the world’s largest iPhone factory — is among those shedding its notorious restrictions and production is rebounding, according to one employee.

In October, workers at the Zhengzhou plant staged a walkout after a Covid outbreak resulted in them being locked into dormitories, with food and medical supplies running low. But this month, Foxconn scrapped daily PCR testing mandates and dismantled metal barriers that had kept its staff confined to the Zhengzhou campus, according to a worker who asked to remain anonymous. “We’re free now. There are no longer metal fences erected or any other form of restrictions in effect,” they said.

They said Covid-positive workers could continue to work or isolate in the dormitory. The Foxconn employee added that “production is returning to normal” after the company recruited new workers and others who had “fled the factory” returned to work.

Experts said factories would face worker shortages until February, after the lunar New Year. The Omicron outbreak has brought forward the annual movement of more than 290mn migrant workers from the coastal provinces back to poorer regions in the west, which occurs ahead of the festive period.

“Sectors that rely on migrant workers are struggling because many people have gone home already for the Chinese New Year holiday, which is only five weeks away,” said Chen Long, a partner at the Beijing-based research provider Plenum. “Things will be pretty quiet until the end of January.”

Factory bosses are also tackling supply chain problems. The EU Chamber of Commerce’s Wuttke said the rising number of Covid-positive truck drivers would be disruptive. Under the zero-Covid regime, drivers were subject to strict testing, which hampered supply chains but kept sick motorists off the roads.

Some plants would be forced to slow production due to a lack of components from suppliers forced to close their operations. “This is all about stocks and inventory,” he said.

Jacob Cooke, chief executive of WPIC Marketing + Technologies, which operates several warehouses across China, said he had experienced delivery delays as drivers fell ill.

“The delivery routes between major cities have multiple stops where the drivers exchange cargo. It only takes one driver to call in sick, and then things are held up for another day,” he said.

One cosmetics retailer in the southern city of Shenzhen said she was facing delays in sending packages to customers after many delivery drivers had tested positive. “The delivery system is very slow at the moment,” she said.

However investors are hoping that the period of short-term disruption will accelerate China’s opening up, after three years of being isolated from the rest of the world.

“If the virus continues to spread at its current pace, most cities will have passed the peak by mid-January. The resumption of activity will be pretty fast in February,” said Chen. “Investors will look through this period of short-term mess. The crucial question is how quickly things will normalize after this wave, and it looks like it could be much faster than expected.”

There is also huge pent-up demand for international travel. Flight searches for the new year’s Eve period surged to the highest level in three years on the travel site Ctrip after restrictions were eased.