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A semiconductor CEO explains how Shanghai’s 7-week lockdown is crippling his supply chain and fueling inflation

May 14, 2022, 10:00 AM UTC

The chip business was already stretched to the breaking point. A shortage in semiconductors—the small chips that are the foundation for most advanced technology, from iPhones to the computer-enabled systems in Ford F-150s—created shipping delays and led to higher prices for electronics last year. Then, in early April, came the Shanghai COVID lockdown.

“A lot of our product is not available because it is not being manufactured or is not readily shipped from Shanghai,” says Ganesh Moorthy, CEO of Microchip Technology, a firm that makes a range of semiconductor chips used in cars, industrial machines, and computers. Microchip has a complex, global supply chain, but many of Microchip’s key suppliers are in the Shanghai area, Moorthy says. “It’s all happening at a time when the industry is fully stretched and has no buffer to deal with these things,” he notes.

Firms ranging from tech giant Apple to clothing company Columbia Sportswear report that Shanghai’s COVID lockdown has disrupted the manufacture and sale of goods. Companies’ problems may be far from over. China’s Shanghai lockdown remains stricter than ever, and similar measures may be in store for Beijing and other major economic centers in China. Ultimately, experts say Shanghai’s COVID lockdown may prove damaging not just to those confined in Shanghai or struggling multinational companies. U.S. and other global consumers may soon feel the pain—first in their ports and then in their pocketbooks.

“Anybody who gets caught in the [Shanghai] region is impacted,” says Moorthy. “I don’t think this is an industry-specific or end-market specific issue…A lot of this is interconnected.”

Earnings season

The lockdown that is now crippling the global supply chains of chips and other goods was not supposed to happen. When COVID cases first started popping up in Shanghai in March, authorities said the city would take a more restrained approach than other Chinese cities to contain the outbreak. Officials vowed that Shanghai, home to 26 million people and China’s largest port, would not enter a citywide lockdown. But Shanghai’s planned response crumbled as Omicron cases soared. In late March, the city announced a four-day lockdown that, for much of the city, has dragged on to today.

The 47-day lockdown that has trapped residents in their apartments or sent them to quarantine centers halted manufacturing in the city. Authorities reopened some factories in mid-April, but experts and companies like Microchip say manufacturing has only partially recovered.

On recent earnings calls, CEOs like Moorthy expressed alarm at the chaos caused by the lockdown. Executives mentioned China and Shanghai at a higher rate than when COVID first emerged in the spring of 2020 and China instituted months of lockdowns in manufacturing hub Wuhan. In April, 291 earnings calls contained language related to the China lockdown, up from 33 the previous month, according to research firm Sentieo. In the first 10 days of May, another 271 calls contained “China lockdown” wording.

American conglomerate Honeywell said in its earnings call in late April that half of its 20 factories in China are closed or operating at reduced capacity. Consumer goods manufacturer Procter & Gamble said two of its own plants and one of its suppliers in Shanghai were temporarily shuttered. Cosmetics giant Estée Lauder said that its Shanghai distribution center had been forced to close.

Chipmakers Intel and Texas Instruments, tech giants Apple and Microsoft, the shoe brand Crocs, and Columbia Sportswear were also among the firms that mentioned supply-chain disruptions in China in recent earnings calls. Fortune contacted 14 multinationals that discussed Chinese supply-chain disruptions on recent earnings calls for updates on whether their supply chains had returned to normal. Only Microchip agreed to an interview.

Moorthy says that some of Microchip’s partner factories have reopened, but Shanghai authorities’ strategy for resuming production—so-called closed-loop systems that require factory employees to sleep on-site—has not been entirely successful.

“They are using closed-loop workforce[s] to try and keep some manufacturing alive. But I think some of [the closed-loop factories] are shut down…[The factories] have not been consistently running,” Moorthy says.

Now, Microchip’s customers across the globe are struggling to make their products without the critical semiconductors.

“We have many, many customers who are in different markets who are affected by the shortage of [our] products,” says Moorthy. “I’m sure in the short term, [the lockdowns will] have an inflationary effect to the extent that the price adjustments get made because of supply and demand.”

Experts say that while some factories are humming again, there are still snarls in China’s supply chain.

“Manufacturing has resumed for many companies,” says Julie Gerdeman, CEO of Everstream Analytics, a provider of supply chain risk analytics. “But ground transportation remains a pain point in logistics operations as many national highways are closed as part of lockdown measures, and mobility restrictions have decreased the supply of available truckers.”

On Thursday, the German Chamber of Commerce in China published a flash survey that found that only 19% of German firms in lockdown in Shanghai or Beijing have been granted permits to resume production. And the firms that are open say that they are only operating at 46% capacity. The firms cited the lack of logistics, shortages of raw materials, and workers confined to their homes as the top reasons they cannot fully resume production.

The survey was conducted between May 6 and May 8, weeks after Shanghai introduced closed-loop plans.

Chinese policymakers are expressing concern that production is still so disrupted nearly seven weeks into the Shanghai’s lockdown, which is costing China’s economy $46 billion per month, according to Chinese University of Hong Kong estimates. Li Keqiang, China’s premier, is urging Shanghai to normalize manufacturing despite the city’s COVID-zero policy, which aims to eradicate every case of the virus.  

“Efforts should be made to smooth logistics, especially in key areas, and maintain the stability of industrial and supply chains,” Li said at a meeting on Wednesday.

Future trouble

With fewer goods being produced at Shanghai factories, fewer goods are traveling through Shanghai’s port, a main artery in the world’s supply network. As of May 2, the Shanghai port was handling 23% less volume than it was on March 12, before the lockdown, according to supply-chain visibility platform FourKites. During the same period, “ocean dwell” times for ships in the port, a measure of how long ships wait to pick up and drop off goods, were up 156%, says FourKites.

Even if Shanghai’s supply-chain issues are resolved soon, clearing the Shanghai backlog could lead to pileups elsewhere, like Los Angeles.

“When the lockdown is lifted in Shanghai and there’s a surge of export shipments out of the Shanghai-Ningbo container gateway, it could significantly increase port congestion at U.S. West Coast ports,” says Gerdeman.

The potential congestion could clog U.S. ports that are just now returning to normal after massive backups in 2021. Last year, U.S. consumer demand boomed as the country emerged from the worst days of the COVID-19 pandemic. Shipments overwhelmed Los Angeles and other U.S. ports, leading to weeks or months of delays and adding to rising inflation. New port traffic jams resulting from the disruption in Shanghai could “intensify” manufacturing shortages, “adding to existing global inflationary pressures,” credit rating agency Fitch Ratings wrote in an update this week.

“[Shanghai’s lockdown] is adding more fuel to that fire,” notes Moorthy. He says he hopes that the Shanghai lockdowns ease in the next one or two weeks. For now, Microchip is in “wait and see” mode, he adds.

“If there continue to be repetitive, consistent, and unpredictable shutdowns then we will need to take more permanent action in some way [regarding our Chinese supply chains],” he says. “We’re going to play it out and see where it goes.”

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