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Shanghai’s Plan to Reboot the Supply Chain Will Hit Workers Hardest

The government wants to restart production and shipping to meet global demand, but some people may trade a lockdown at home to being locked inside factories.
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LIKE MANY PEOPLE in Shanghai, Joyce has spent weeks shut at home since the latest Covid-19 lockdown was imposed on March 28. The software industry executive, who asked to be identified only by her first name to avoid attention from the authorities, says she has suffered from food shortages, and the compound where she lives has resorted to “group buying,” where different individuals are responsible for sourcing as much of a certain product as possible for the community.

“A lot of people are struggling with being confined at home, because they have literally no income,” she says. Group purchases “are three to four or five times more expensive than the normal days, and Shanghai is not cheap.”

Faced with this dire situation, the central government in Beijing has made it a priority to restart Shanghai’s industrial sector. Liu He, the Chinese vice premier, announced this week that the government would aim to stabilize the country’s supply chain by helping 666 companies in Covid-ravaged Shanghai reboot their operations. Doing that while the city continues to battle China’s worst Covid outbreak since the pandemic began may prove an enormous challenge—and may not succeed in curbing the disruption that the global supply chain could feel for weeks or months to come.

The government announced the “white list” of Shanghai companies it would help to reopen on April 15, out of the 50,000 or so that operate in the area. The list includes domestic and foreign firms that provide key inputs to the supply chain, such as manufacturers of semiconductor components, automotive parts, and medical supplies. Tesla’s Shanghai factory has reportedly reopened already, with workers shut in a closed loop, but with many component supplies still closed it is unclear how much of the production line is operating.

The government may feel that it has no option but to kickstart industrial activity, even though the situation in Shanghai is not yet fully under control. On Monday, China’s National Bureau of Statistics released economic data showing that although the economy expanded 4.8 percent in the first quarter of 2022 compared to the same period in 2021, in March economic activity slowed in Shanghai and other cities subjected to lockdowns.

“People here have mixed feelings” about the reopenings, because they see them as partly a public relations exercise, says Joyce. “Most companies will ask people to live at the factory, but how are you going to do it? People may not be allowed to go home.”

Some factories have been able to continue operations while minimizing the risk of Covid outbreaks by operating with workers shut inside a “closed loop,” meaning that they have to remain inside a plant, eating there and in some cases reportedly sleeping on the floor, for days or even weeks at a time.

Many workers would need permission to leave the compound where they live, and then risk not being allowed to return. Some factory managers are unsure whether workers will show up. One, at a Shanghai electronics factory, who asked not to be named because of the risk of upsetting the authorities, says his factory has been successfully using the closed-loop approach. But he worries that it may be difficult to find enough workers for each new shift.

Fiona Yu, a partner at the Chinese investment firm Northern Light Venture Capital, who also lives in Shanghai, says the lockdown has been challenging but manageable. She believes that people are able to get enough food, if not exactly what they’d like. “I think most of the people, especially young people, they are willing to go and work,” she says.

But Yu says some of the companies her firm has invested in have faced difficulties. Some have had to halt operations because of shortages of hardware components. A few entrepreneurs have even been forced to sleep at their labs to ensure that important biotech experiments are not disrupted. “They are suffering, but they are doing it,” she says.

Shanghai is a particularly important producer of key components for the automotive and electronics industries, as well as a vital center of shipping. Restarting factories will provide income for some workers, but the biggest benefit will be for global supplies of products. At least 249 of the 666 companies that the government earmarked for reopening are automotive manufacturers, according to Everstream Analytics, a company that provides supply chain data.

China is now experiencing some of the most draconian government-imposed measures in the world, as it struggles to maintain its “zero-Covid” strategy against the contagious Omicron variant of the virus.

Numerous cities and districts in China have been partially or fully locked down in recent weeks, but the situation in Shanghai, where Covid was able to spread before being tackled aggressively, has been particularly severe. Reports emerged of the residents of one of China’s wealthiest and most cosmopolitan cities going hungry and being refused hospital treatment for serious illnesses. The city has seen more than 400,000 Covid infections, a huge number by China’s standards, but only 17 deaths, according to official numbers—a figure that some experts question.

Beyond the hardships suffered by Shanghai residents, the lockdown has closed factories and throttled transportation links. Hundreds of flights have been canceled, roads left deserted with truck drivers required to follow testing and harsh quarantine rules, and shipping containers stranded at sea. Windward, a company that collates and analyzes shipping data, found in early April that one in five of the world’s container vessels were waiting outside congested ports, with nearly 30 percent of them awaiting entry to Chinese ports, from Shenzhen in the south to Beijing in the north. By April 11, there were around 197 ships outside Shanghai and Ningbo, a 17 percent increase over the number a month earlier, according to Bloomberg data.

Shanghai’s struggles may also cause product shortages around the world, further straining a global supply chain already hit hard by a combination of factors, including unprecedented demand for goods triggered by the pandemic, trade disputes between the US and China, and most recently Russia’s invasion of Ukraine.

Even with the government’s efforts, the global electronics industry may be particularly hurt by the situation in Shanghai. “In the most realistic of scenarios, complete normalization of manufacturing operations at key electronics suppliers will only be possible from late April or early May,” says Julie Gerdeman, CEO of Everstream.

“The Kunshan area [of Shanghai] has long been a stronghold for Taiwanese firms operating in China,” says Willy Shih, a professor at Harvard who tracks China’s manufacturing sector. Many electronics manufacturers, including Apple, HP, and Dell, may see shortages in the weeks ahead.

And even if enough workers can be found for factories to get back to full manufacturing capacity, Covid may cause further disruptions. Factories will aim to keep workers inside facilities for long periods, with regular testing and careful hygiene measures, but it may prove impossible to prevent some outbreaks. “Who’s in the loop and who’s not?” says Shih. “Eventually—and probably sooner rather than later—you will need something that is out of the loop.”

“It is a very, very precarious situation,” says Zvi Schreiber, CEO of Frieghtos, a shipping marketplace that deals with Chinese manufacturers. “There is no fully closed loop really; you can’t escape it entirely.”

Restarting factories will also rely on people willing to experience yet more hardship by being locked inside factories and risking exposure to the virus. By law, workers are meant to be paid while their factories are furloughed, but this may not always be the case. “I hope things will get better, especially for the less privileged,” says Joyce. For many people in Shanghai, she says, “the only thing we know is, just stay at home.”

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