If you do business in China, it’s time to change your strategy

Hello from Colorado, Peter Zion here. I thought it would be a good time to talk about a couple of China supply chain, COVID-related things. 

We’ve had quite a bit of evolution in the way that manufacturing has been dealing with COVID. And most of the United States and Mexico and east Asia have had some sort of lockdown policy. 

Whenever an outbreak happens now in east Asia, they’ve gone through a series of protracted lockdowns, like what we did in North America in March, April, and May of 2020, which means that in a lot of east Asia we’ve had severe economic outcomes as the entire system shuts down. Now that is letting up, people have decided for various reasons because vaccination rates are rising or because they can’t afford to do more lockdowns. I mean, some of these countries have locked down six times that they have to open up again.

And what that means is instead of getting large scale lockdowns that lockdown the entire country, you get limited lockdowns that only lockdown individual  facilities. This is actually worse from a supply chain point of view because if you have a national lockdown, then you can carve out exemptions for this or that class of work or a facility. But then if you get COVID now in a facility, you have no choice but to lock it down. So we’re actually seeing more disruption in the next few months than we have seen in the past year and a half. That’s obviously bad.

But what is really going on that is really going to challenge the system at large is what’s going on in the people’s Republic of China. Now the Chinese have a zero-tolerance COVID policy. So when a case pops up, the whole province locks down, the province of Zhejiang is the one that’s going into lockdown right now. This is kind of the most industrialist part of China. It is just across the bay from Shanghai. It involves the port of Ningbo, which is the world’s largest. And in order to get the outbreak under control, the Chinese have already closed a whole fleet of factories across pretty much every manufacturing sector that you can imagine from medical equipment to petrochemicals, to automotive, to toys. They have heavily restricted truck traffic, and they now have a quarantine policy for the port itself so the truck drivers have to quarantine on their way in and on their way out, which means that no truck drivers want to go in.

So in effect, the port of Ningbo, while not technically closed down is certainly operating at a small fraction of its potential capacity. 

Now, the issue here is twofold. Now, number one, China’s vaccine doesn’t work, which means that they have to maintain their zero tolerance policy.

If they open up, they get rapid province and countrywide outbreaks that would absolutely crush their health system and destroy whatever political legitimacy the communist party thinks it still has.

It’s only going to get worse in the months to come because COVID, the original strain out of Wuhan, was triple the communicability of the flu. The Delta strain that we’ve been struggling with for the last several months is triple the communicability of the original Wuhan strain. And now Omicron is twice to triple the communicability of Delta, which means that we’re dealing with the pathogen that is the highest communicability of any disease out there right now. 

And the Chinese are discovering in bits and pieces that they can’t keep everything out. So we’re gonna see more and more lockdowns throughout the Chinese system. 

The second big problem is legitimacy between a financial breakdown, a demographic implosion, a housing implosion, populist issues challenging the trade industry, and the United States under first Trump and now Biden having a more and more and more aggressive position versus China on economic issues. 

We have a China that is becoming decoupled from the global system, not so much out of choice, but because out of circumstance. The most, the easiest, the most effective way to counter that would be to do away with the zero COVID policy, but they cannot do that and maintain domestic legitimacy.

So American manufacturers and porters, beware. The Chinese communist party no longer sees mass employment in general or participating in global manufacturing supply chains in specific as primary sources of legitimacy. 

They see health as their last chance, and because their vaccine doesn’t work, their only option to maintain that one last read of legitimacy is lockdowns that destroy their manufacturing sector. 

It’s not gonna be much longer before the Chinese are no longer participating in global manufacturing supply chains in a very big way. One, they’re not very reliable anymore. And two, they don’t see it as something that is any longer core to their system.  

And so if you are involved in the world of manufacturing or consumption or imports or transfers or whatever it happens to be that’s China-centric, you’re gonna have to find a new way of operating very soon. Okay. That’s it for me. I hope everybody’s having a great December until next time.