How Covid lockdowns in China are affecting global companies

The crisis is a stark reminder of China’s great importance to global companies.

“Whether you like it or not, at this point, if you are a multinational company, China is probably your first or second largest consumer market,” said Ben Cavender, managing director of consulting group China Market Research Group.

“And it’s probably your main production base or it’s responsible for a significant portion of your supply chain work,” he said in an interview from Shanghai that was blocked for six weeks.

These measures have left tens of millions of people incarcerated. Houses for more than a month, leading to high levels of mental stress. In many cases, residents cannot leave their apartments without special permission from community leaders, and a large number of businesses remain closed.

Not in the mood to go shopping

In recent years, China has become the largest market for a range of industries, from luxury goods to automobiles. But Last month, the world’s second-largest economy slowed sharply, hitting not only consumer spending but also employment.

este Loder, which is home to Bobbi Brown and MAC cosmetics, now expects its global sales to grow 7-9% year-on-year from the previous range of 13% to 16% hit in February.

The company said it was affected by the suspension of all operations in Russia and Ukraine following the invasion, resulting in lower sales. Sales also fell 4% in the Asia-Pacific region for the latest quarter, which was “entirely driven by Greater China,” chief financial officer Tracey Travis said during an earnings call.

Some enterprises refused to make forecasts at all.

Last week, Starbucks (SBUX) suspended financial projections for the next six months, with CEO Howard Schultz calling it “the only responsible course of action.”
“The situation in China is unprecedented,” he told analysts during an earnings call. “Conditions in China are such that it is almost impossible for us to predict our results in China in the next half of the year.” The country is Starbucks. second largest market.
A pedestrian walks past a closed Starbucks store in Hangzhou in April.

Kering, owner of Gucci and Bottega Veneta, said last month that this is also in pain, with “traffic plummets”, store closures and severe logistical problems caused by the lockdowns.

“We hope the situation is temporary,” CFO Jean-Marc Dupleix said during a corporate sales call.

However, the mood on the ground is more gloomy.

“Honestly, consumers are not worried about buying lipstick or coffee right now,” Cavender said. “They are really much more focused on getting [necessities].”

In Shanghai, for example, the lockdown first led to massive food fights and numerous complaints about difficulty receiving parcels.
Meituan calls for reinforcements as Shanghai lockdown leads to scramble for food
Now, even as access has improved, many people are concentrating on so-called “group shopping,” allowing users who live in the same community to place bulk orders for groceries and other essentials together.

Even those who are not at home can suffer. Consumers who live in cities without restrictions may also be hesitant to go out and visit a mall for fear of “what happened in Shanghai” where people remain locked up indefinitely, Cavender said.

“It has had a very big impact on consumption.”

Still the world’s factory

Companies are also facing problems in the back.

Over the past few years, many companies have worked on shift at least some of their production is outside of China, thanks to a trade war with the US. But that hasn’t stopped a lot of high-profile people from being drawn into the fight against Covid in the country.
Last month, Apple (AAPL) warned of huge losses related to the Covid-19 outbreak in China, saying supply chain issues could affect its $4 billion to $8 billion sales this quarter.
Apple warns of serious supply problems in China

Apple blamed the expected drop in revenue on both restrictions in China and component shortages around the world. Some shutdowns briefly affected 20% to 30% of all iPhone production, according to Everstream Analytics, a supply chain risk analysis firm.

Apple’s restrictions were “mostly centered around the Shanghai Corridor” where several factories were affected, CEO Tim Cook said in an earnings call.

In some cases, the tension skyrocketed. Videos posted to Chinese social media last week show workers from a Shanghai factory flooding barriers and clashing with guards wearing hazmat suits, signaling increased friction during the weeks of lockdown. It was not immediately clear what exactly triggered the incident.

The plant is owned by Quanta, Apple’s Taiwanese supplier. According to Chinese state news agency Xinhua, the plant has resumed work under a closed-loop system in which workers live in designated areas and adhere to strict protocols.

Apple referred CNN Business to Quanta when asked about it. Quanta did not respond to a request for comment.

An outdoor advertisement for the Apple iPhone 13 Pro in April in Wuhan, China.
Last month, Microsoft (ISFT) also said production shutdowns in China hurt its shipments of Surface laptops and Xbox consoles and could potentially “make a big impact” on its quarterly numbers. According to the latest top supplier list, most of the PC manufacturer’s products are located in China.
The global automotive industry has also been particularly hard hit, with some players temporarily closing factories, facing falling sales or being forced to delay new vehicle launches.
Toyota, Volkswagen and Tesla reopen factories in China
Two of the world’s largest automakers, Volkswagen (VLCAF) and Toyota (TM), were recently forced to suspend production for several weeks. While both companies have since resumed production, they have warned they will ramp it up gradually as supply chain problems continue.
Tesla (TSLA)which operates the Gigafactory in Shanghai, also managed to resume production last month after being shut down for several weeks, but the company may have hit another snag.
Tuesday, Reuters reported, citing unnamed sources, that Tesla production has once again halted much of its production due to supplier issues. The company did not immediately respond to a request for comment.

Cavender says many car suppliers continue to struggle with keeping their own factories running or supplying components.

However, demand for electric vehicles remains high: both Volkswagen and Chinese manufacturer BYD informed recent surge in sales in China.

However, Chinese ports and other logistics hubs continue to face challenges.

Last month, Amazon (AMZN) noted that “the cost of liner air and sea transportation continues to be at or above the levels of the second half of last year” due in part to the surge in Covid in China.

They were “already much higher than pre-Covid levels,” CFO Brian Olsawski told analysts during the presentation of the company’s results, citing the spread of the Omicron variant in China and labor shortages in various places.

Effects

Many brands have expressed optimism about the recovery of their business after the crisis subsides.

In recent weeks, the Chinese government has been working to get more businesses up and running and has also pledged to help contain the economic damage.

But analysts have warned of the adverse effects of a “zero Covid” policy, saying the economy could slow significantly this year.

Damage is visible from all sides. China’s huge services sector suffered last month second steepest fall on the record, while production activity also reached an all-time low.
Medical workers in protective clothing at the entrance to a Covid-19 testing site at a shopping mall in Beijing.
Despite this, Chinese President Xi Jinping doubled down on the country’s approach to the pandemic. speaking On Thursday, the government said it would “strongly adhere” to its “zero Covid” policy.
China faces 'difficult and serious' labor market, Premier Lee warns

In accordance with CNN’s latest estimate, based on government data, is that at least 31 cities in China are either fully or partially on lockdown, which could affect some 214 million people across the country.

According to trade groups, the ongoing dilemma may eventually lead some businesses to rethink their positions.

As other countries continue to reopen, some foreign companies may consider moving their regional headquarters out of China, according to Jörg Wuttke, president of the European Union Chamber of Commerce in China.

“I definitely see discussions,” he told CNN Business.

Pedestrians walk on the nearly empty Nanjing Road shopping street outside the affected areas during the lockdown in Shanghai, China, in March.

Cavender said the recent troubles in Ukraine and China have highlighted a “period of heightened risk” more broadly for international companies.

“I really think there are a lot more challenges facing a multinational company now than there have been in the past,” he added.

– CNN Beijing Bureau, Jorge Engels, Lizzy Yee and Nectar Gan contributed to this report.

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