Shenzhen Shutdown Is a ‘Shock’ to an Already Stressed Supply Chain

A COVID-19 lockdown in Shenzhen, China’s most famous electronics manufacturing hub, could throw the already struggling global supply chain into further chaos, experts told Motherboard.

Manufacturers are already reporting shipment delays of tech products and parts—flash drives, glass iPhone screens, and more—after factories were forced to shut down to comply with the lockdown order the country announced Sunday. At the time, China was reporting 3,400 cases nationwide, the highest in two years, driven by the “stealth Omicron” variant, a new lineage of the Omicron variant.

Those numbers have since climbed, and most are clustered in the northeastern Jilin province, with smaller outbreaks in Beijing, Shanghai, and Shenzhen. Jilin and Shenzhen are both under lockdown until March 20. In the meantime, major manufacturers like Foxconn, a key assembler of Apple iPhones and other electronics, were forced to halt operations. 

“In some ways, the shocks couldn't have come at a worse time,” Andrew “Bunnie” Huang, hardware designer and author of The Essential Guide to Electronics in Shenzhen, told Motherboard in an email. “I personally have been scrambling to make sure my suppliers can stay afloat through this latest lockdown; a lot of the smaller businesses were running at <50% capacity because they are lacking access to critical components and subassemblies that were already scarce.” 

Foxconn told CNBC on Monday that it had “adjusted the production line to minimize the potential impact” using its other sites in China. J.P. Morgan analysts also told Reuters they aren’t anticipating huge supply chain disruptions, noting that the Shenzhen region only comprises around 20 percent of Foxconn’s overall production. Ports also continue to operate even as warehouses remain closed, and portions of Foxconn’s factories reopened Wednesday. Foxconn, of course, isn’t the only major manufacturer in Shenzhen, however. There are hundreds of notable tech companies in the city, many of which focus on manufacturing.

Across the rest of the electronics world, suppliers of parts fear future ripple effects of a halt in materials production. Toyota, Volkswagen, and Chinese automaker BYD have all warned that the lockdown is impacting business.

Beyond major retailers, smaller factories are also feeling pinched by lockdowns.  

"It's not critical yet, but it's getting more difficult every day," Fabien Gaussorgues, a manufacturer in Dongguan, a city north of Shenzhen, told Reuters. "Suppliers in Shenzhen cannot produce, so they're not delivering goods. So next week we don't have material for production.” 

Daniel Stanton, marketing instructor at Bradley University and author of Supply Chain for Dummies, said he fears a bullwhip effect that could see shortages of electronic parts affect industries well beyond it, like housing. This probably wouldn’t be evident for at least 30 days, he warns. 

“Think about home appliances, for example, that rely on components that are probably coming out of there,” he said. “If you can't get the components that you need to make a stove or a dishwasher, that means now we have a shortage of stoves and dishwashers, and homebuilders, for example, could have a whole home built and ready to go, but you can't get an occupancy permit without the appliance.” 

“That starts to have these cascading effects where somebody is trying to move into a new house but they can't move into the house because they don't have the appliance that was waiting on a part,” he said. 

Huang noted in an email to Motherboard that any length of a stall in production could lead to wasted parts, notably in production processes that follow strict assembly timelines.

“Some materials will spoil if they aren't used immediately,” he said. “Adhesives go bad, solvents evaporate, tools rust, parts oxidize, furnaces cool down, etc. So there will also be an additional cost due to work in progress material that's potentially lost as a result of this.” 

“It's hard to say how big the wave will be,” Huang added. “But it's pretty inconceivable that this won't cause any ripples.”