We are all familiar with the saying, “don’t put all your eggs in one basket”, which figuratively means one should not concentrate all efforts or resources in one area as one could lose everything, or don’t risk everything on the success of one venture. Easy to say and understand, but in practice not always easy to implement, and what if you don’t even know where all your “eggs” come from in the context of your operations and supply chain?

For years, many business leaders and consumers have somewhat ignored the supply chain; the back-office functions that include the transportation, warehousing and distribution of goods that turn orders to invoices, and sales into revenue and profit. When supply and demand are relatively in balance it is easy to take for granted, like we do with the cellular network or the electricity grid, until something goes wrong, and we realize how dependent we are on it.

Broken supply chains have become part of the consciousness and conversation in the corporate and public domain in the past two years due to the Covid-19 pandemic and subsequent public health containment actions taken by many countries, cities, industries and businesses. The effect of supply and demand imbalances due to these broken supply chains are felt at the source of supply, through the transportation and distribution networks, by the retailers and consumers with uncertain supply, long lead times and rising prices, which in turn fuel inflation and inject risk to financial forecasts and results.

While many countries have unwound their Covid-19 restrictions and brought a sense of normalcy to life again, one country continues to enforce its “zero Covid policy” and that country is China. China is that big “basket” where many companies have placed their “eggs” in the sense of global manufacturing and sourcing of goods, contributing almost 30 percent to global manufacturing output¹, where the US by comparison represents approximately 17 percent, and Canada approximately 11 percent.

Since Covid-19 first appeared in Wuhan in late 2019, many governments have instituted a series of lockdowns that impacted people’s ability to conduct business or simply go about their day-to-day life. Over this year alone in China, 74 cities with a combined population over 300 million have been in lockdown including megacities Shanghai, tech-heavy Shenzhen, Tianjin and Chengdu². Being the economic center of China and the world’s busiest port, Shanghai and its 25 million residents faced over 60 days of lockdown in April and May. It still hasn’t fully recovered and maintains some restrictions for neighborhood movement and mass transit. Tianjin and its 13 million residents are in lockdown after discovering 51 Covid-19 cases. Chengdu and its 21 million residents are in lockdown now despite an earthquake of 6.8 magnitude on September 5^th southwest of the city.

What are the impacts to global manufacturing and supply chains in 2022-23 due to this policy? Will the policy ease to a more western world view, learning to live with Covid-19 and managing the risk? It would be unlikely as China’s central government can’t risk a health care crisis among its massive population. Undoubtedly, as the lockdown persists, both domestic and international manufacturing outputs that rely on China continue to be impacted. While the International Monetary Fund (IMF) expects China’s GDP to grow around 4 percent in 2022, it had just 0.4 percent growth in Q2 due in large part to the impact of lockdowns³. According to the American Chamber of Commerce with respect to Shanghai itself, 3 out of 5 foreign companies there have adjusted sales forecasts for 2022 because of the disruption caused by lockdowns and 1 out of 3 of 120 companies surveyed have delayed investments.

While it feels somewhat normal in the West again with businesses going back to “the way things were” and the increase in supply chain resilience, this is not the case in the world’s largest manufacturing center. The ongoing impact to our supply of goods is inevitable; the number of businesses impacted is truly staggering when one compares the population and supply chain economy in China to any city you are familiar with in North America. Do you know how much your business relies on China for its goods and services to make your revenue forecast in 2022-23? What about the second tier; those that supply your primary suppliers? Working with a strategic advisor like Clariti can help determine your risk, help forecast any impact, and most importantly evaluate options to diversify and reduce the risk whether that be re-shoring, near-shoring, or a “China+1” sourcing model in Asia itself. Clariti can support your business to ensure your eggs and baskets are properly diversified and protected.

¹ United Nations Statistics Division

²  ForeignPolicy.com – China Brief

³ China’s National Bureau of Statistics