Lengthy lockdowns in China’s commercial hub will deal a heavy blow to business and consumer confidence in an already-slackening economy
Under Shanghai’s lockdowns, few manufacturers have been able to carry on operations as normal. Even though some factories have adopted a “closed loop” model by asking workers to sleep on floors to keep assembly lines going, disruptions to shipping and logistics mean that inflows of parts and outflows of finished goods are still getting clogged up, plunging operational plans into disarray. What’s worse is that there is little MNCs can do to rectify this. They must abide by the lockdown rules, absorbing all extra costs and bearing all income losses. B2B MNCs that have not already done so should revisit their 2022 China plans and revise their revenue and profitability targets.
The picture is similarly gloomy for B2C MNCs. Lengthy lockdowns will lead to an increasing number of business closures, which will cause unemployment to rise. Demand will thus be weak, with consumers saving more and spending less in preparation for difficult days ahead. As the total addressable market inevitably comes under pressure, B2C MNCs will struggle to hit the targets that were set before lockdowns came into effect. Just like their industrial peers, consumer companies that have not already done so need to look at their targets again and reset their goals for 2022.
Three weeks of lockdowns have done severe damage to Shanghai’s economy. Unfortunately, the end is not yet in sight, and Shanghai will not be the last Chinese city to experience such disruption. The whole country will suffer as a result. It is time for MNCs to rethink their assumptions for doing business in and with China this year.
Shanghai’s COVID-19 cases quickly rose in mid-March and soared to tens of thousands of cases a day in the past week. After failing to quell the outbreak early, local officials had no other choice but to apply very strict city-wide lockdowns, confining Shanghai’s 26 million residents to their homes. Nearly all economic and business activities have come to a halt; factories have been shut down, bars and restaurants have been closed, and nonessential businesses have been shuttered.
MNCs with huge operations in Shanghai and its surrounding areas have been badly hit. Industrial giants like Tesla and Volkswagen, often viewed as bellwethers of China’s welcoming and accommodative business environment, had to suspend their factories in Shanghai for more than a week. Supply chains and logistics have been plunged into chaos, as workers and truck drivers were forced into self-isolation, leaving goods piled up in warehouses and ports. Numerous manufacturers have faced difficulties getting raw materials and components into their factories. More than half of US MNCs in China have reduced their annual revenue projections due to the lockdowns in Shanghai, according to the American Chambers of Commerce in China. The European Union Chamber of Commerce in China wrote directly to the country’s top leadership, outlining the damages lockdowns have done to foreign businesses and pleading for a more relaxed COVID containment regime.
As China’s economic, business, and commercial center, which accounts for about 4% of the country’s GDP, Shanghai has long been the natural choice for MNCs setting up their China (and, in some cases, APAC) headquarters. The fact that Beijing is willing to sacrifice such a huge part of the economy to maintain its zero-COVID approach indicates that its political agenda clearly trumps economic considerations, and there is little room for the top leadership to reverse course before the party congress scheduled in autumn this year. Consequently, China’s economy will continue to operate under huge pressure, with unpredictable but frequent industrial production disruptions, supply chain chaos, and a considerably weakened consumption outlook. The chances of China hitting its official GDP growth target of 5.5% this year are extremely slim. In addition, Shanghai’s harsh lockdowns have damaged its global reputation as one of China’s most business-friendly cities. It would not be surprising to see a growing number of MNCs put further investment in China on hold this year.
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