Alicia García Herrero (Natixis) | When the Chinese economy sneezes, the global supply chain catches a cold. After the successful containment at the initial stage, China has decided to maintain its dynamic zero-covid strategy against a more contagious albeit milder variant of the virus, namely Omicron. The approach has initiated the lockdown in Shanghai. Given its economic size, trading role, and the contagion risk of lockdowns in the surrounding provinces, the trend is worrisome. This note explains why car and chip-makers will suffer more than other sectors.
Mobility is one of the timeliest indicators to measure activity in the Covid-19 era. GPS data shows that China is already halfway to the mobility lost during the first Covid outbreak in Hubei. As of 12th April, monthly mobility in China fell by 29% versus 2019, with 24 provinces seeing a decline. In February 2020, the reduction in mobility was 66%, collapsing in 29 provinces. The situation is particularly alarming for manufacturers in Shanghai, Jiangsu, and Jilin, the key hubs for cars, electronics and semiconductors.
The risks of supply chain disruptions can grow if the Yangtze River Delta follows Shanghai in stricter lockdowns, including Anhui, Jiangsu, and Zhejiang. As of 2021, the region forms 24% of GDP and 37% of exports in China. Mobility has already declined by 92% and 74% in Shanghai and Jiangsu in the first half of April 2021.
So far, auto production and sales dropped 9% and 12% YoY in March 2022. In terms of supply, Guangdong, Jilin, and Shanghai are the top automobile producers in China, contributing 13%, 11%, and 9%, respectively. And the Yangtze River Delta and Jilin, which account for at least 25% of car production in China, are facing disruptions now. For example, Tesla and Nio have closed their production lines temporarily.
Car production is also highly dependent on electronics and chip supply with the emergence of electric vehicles (EVs). The Yangtze River Delta is home to half of China’s chip production with 33% in Jiangsu and 10% in Shanghai. In the past episodes of lockdowns and electricity shortages, local governments usually prioritized chip production and aimed to reduce disruption as much as possible. However, more firms are announcing a halt in production amid the recent lockdowns.
All in all, Shanghai and the surrounding provinces, namely the Yangtze River Delta, form an important cluster for cars, electronics and chip-makers in China. If the government extends lockdowns, the risk of supply chain disruptions will increase, and firms may use up their inventories. Finally, if Guangdong, which contributes 13% and 15% of car and chip production in China, also moves into lockdown, the supply shock will only worsen.
Lockdowns Around Shanghai Are Especially Painful For Cars, Electronics And Chip-makers
