How Demand For Blue Skies During China's Olympics Hurts Global Supply Chain

The Chinese government has shut down factories in 64 cities in order to reduce Beijing's typical winter smog so that the 2022 Winter Olympics, starting in that city in two weeks will appear more pleasant. 

The result will be supply chain snarls as those cities produce components in products for global consumption. But anything for a good wide angle shot and lots of cooing from TV commentators. JL 

David Dayen reports in The American Prospect, Image by Kim Kyung-Hoon and Jason Lee, Reuters:

The Winter Olympics kick off in Beijing on February 4, and China is keen to put on its best face during the spectacle. This means reducing the smog that hangs over the capital city almost perpetually. The city has registered “very unhealthy” air quality levels, with low-visibility highways closed and outdoor activities canceled. Since October, 64 cities in five provinces have seen dozens of factories close, in an attempt to tamp down on the smog and enable a blue sky as camera crews descend on Beijing. The cities include major producers of steel, aluminum, and cement, raw materials used in the production of finished goods.

From almost the beginning of the pandemic, China has been willing to lock down entire cities to prevent outbreaks of COVID-19. At times, this has exacerbated supply chain issues, like when the Ningbo port, the third-busiest in the world, was mostly shut for two weeks because of one COVID case.

But the zero-COVID policy is now running into new challenges from the more transmissible omicron variant. The New York Times reports that 20 million Chinese are currently under lockdown, mostly in the western city of Xi’an. Were China to keep the policy in place, and were it to spread to major manufacturing and port hubs, the disruptions we’ve seen for nearly two years could proliferate.

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Of course, a “let ’er rip” policy like we’ve seen in the United States would also unquestionably lead to labor shortages and even shutdowns at Chinese factories and logistics centers, as millions of people got sick and were hospitalized. Clearly an aggressive contact-tracing and quarantine policy is preferable to that, on a moral level. The cities under lockdown right now are not major exporters, and Xi’an, the largest, is actually reducing restrictions after three weeks. And China has shown some flexibility with lockdowns in other areas more critical to global trade, with targeted measures in cities like Shanghai, Dalian, Tianjin, and Shenzhen.

So while significant cuts to air travel, which China sees as a vulnerability bringing omicron into the country, could affect cargo in the consumer electronics space, it does seem like zero-COVID may not affect Chinese factories’ keeping on production schedules. The policy is more of a problem for China’s domestic consumer spending than for its manufacturing output.

Since October, 64 cities in five provinces have seen dozens of factories close, in an attempt to tamp down on the smog and enable a blue sky to peek through.

But of course, COVID does not represent the actual threat to global supply chains from China at the moment. The actual threat is that China wants the world to see blue skies over Beijing.

The Winter Olympics kick off in Beijing on February 4, and the Chinese Communist Party is keen to put on its best face during the spectacle. As the South China Morning Post reported a month ago, this means reducing the smog that hangs over the capital city almost perpetually. The sea of gray has grown worse this fall and winter, as China ramped up coal output amid an energy crunch. The city has repeatedly registered “very unhealthy” air quality levels, with low-visibility highways closed and outdoor activities canceled.

Since October, 64 cities in five provinces have seen dozens of factories close, in an attempt to tamp down on the smog and enable a blue sky to peek through as camera crews descend on Beijing. The cities include major producers of steel, aluminum, and cement, raw materials used in the production of finished goods in other regions of the country. Chinese steel output was expected to drop 13 percent in the second half of 2021 compared to the first half, because of these curbs. Global output isn’t affected by this, of course, but Chinese factories often make use of these local suppliers.

Beijing has taken this kind of action before to ensure blue skies; it’s often referred to as “APEC blue” because it’s frequently done for local meetings of the Asia-Pacific Economic Cooperation forum. But the Olympics and Paralympics last through mid-March, meaning that this reduced output will be in place for close to half a year. And that means months of reduced output at a time when domestic demand for goods remains high. That’s a recipe for more shortages and inflation.

 

It’s obviously good news for the world that China is paying attention to its legacy of environmental degradation. It would be much better news if the triggering event for its attention was the health and security of the planet, not what a wide shot on NBC will look like during Olympic coverage.

The larger takeaway, however, is that we have to seriously rethink the design of our global supply chains. If goods production is too reliant on a particular company or a particular geographical region, then at any time that risk could manifest and cause a wider disruption. If it’s not zero-COVID and omicron, it’s a pollution-cutting rollback of manufacturing. And if it’s not that, it could be any one of a dozen other circumstances.

The primary component in shortage across the world right now, the humble semiconductor chip, finds itself in short supply in large measure because of a fire in a fabrication plant in Japan last March, which removed a chunk of production when supply was already scarce, adding more pressure to the unquestioned leader in chip manufacturing, Taiwan Semiconductor Manufacturing Company (TSMC), whose ability to ramp up production is not unlimited. A second fire in Berlin just after New Year’s hit a plant run by ASML, a Dutch firm that makes the machines that make most semiconductors. This will also hamper efforts to increase capacity.

Meanwhile, TSMC sits uncomfortably on an island that China claims is part of its homeland, and that conflagration could spark at any moment. Between extreme weather, natural disasters like earthquakes, freak accidents, political unrest, or President Xi Jinping deciding on a better backdrop for the Olympic flame, there is virtually no end to the possibilities that fracture supply chains.

That is survivable if the world builds in redundancy and reserve capacity. But for 40 years, that’s not how supply chains have been run; instead, they have relied on cheap labor for components and finished products concentrated mostly in East Asia, and just-in-time logistics that demanded inventories stay lean, increasing pressure on the global system to deliver precisely when needed. When just-in-time can’t execute, for whatever reason, the supply shock multiplies.

What we’re seeing right now with shortages and high inflation is partly a short-term labor issue with omicron, partly a shift in spending patterns from services to goods, and partly profiteering from companies with pricing power. But largely we’re seeing a broken supply chain system staggering from crisis to crisis, because it was in many ways designed to fail. We shouldn’t have to care that China wants Beijing’s sky blue on a particular Friday in February. We must re-engineer our system of commerce so we no longer do.