China looks to recover from strict Covid lockdowns

As the current wave of the Covid pandemic appears to be receding in Shanghai after two painful months of strict lockdown, economic activity is picking up again. Under the Chinese government’s zero-covid tolerance policy, business and social activities in the country’s largest city came to a standstill for nearly two full months, with residents unable to leave their homes and most businesses were forced to shut down. This came after equally strict lockdowns were imposed in Shenzhen, Tianjin, Chongqing and other major Chinese cities earlier this year.

It has been widely reported that no vehicle was sold in April in Shanghai, a city of some 25 million, and very little sales activity is expected in May. Disruption to supply chains and vehicle supplies also held back vehicle sales across the country, with consumer confidence inevitably taking a huge hit in recent months.

Shanghai is home to the country’s largest automaker, SAIC Motor, which includes its joint ventures with Volkswagen and General Motors, as well as the largest electric vehicle (EV) manufacturer, Tesla.

Tesla recently reported that it had reintroduced a second shift at its Shanghai factory and that production is slowly rising towards pre-lockdown levels. At last count, the plant was running at 70% of its full capacity – reportedly close to 2,600 vehicles per day. The lockdown has been very costly for the US-based EV maker, which has claimed it lost some 50,000 units in vehicle production in the three weeks from late March. The total loss over the two months will likely be closer to 100,000 units.

SAIC Motor suffered even greater losses in April. Auto sales across the country, including those with foreign joint venture partners, fell 66% to 127,653, from 376,616 units a year earlier. The Shanghai-Volkswagen joint venture saw its sales fall more than 72% to 30,008 units, while Shanghai-GM’s sales fell more than 70% to 23,829 units. Data for May will be released later this month, but isn’t expected to look much better.

Many manufacturers made arrangements at the start of the lockdown for workers to set up camp in their factories so they could remain operational, by providing them with sleeping bags and other facilities. It soon became apparent that the problem was also further upstream, in the supply chains of raw materials and components, as well as in logistics.

The importance of Shanghai as an automotive manufacturing, supply chain and logistics hub is now very clear. The city, with its large seaport, was responsible for about 20% of the country’s international trade in 2021. Toyota blames some of Japan’s extensive production shutdowns in the past two months on supply chain shortages due to the lockdowns in Shanghai, in addition to ongoing global semiconductor shortages.

Manufacturers around the world have been diversifying their global supply chains outside of China for some time now, and these efforts have ramped up over the past two years, not only for commercial and logistical reasons, but also for geopolitical reasons. International companies want to increase their sourcing closer to their home markets and in many cases from countries that are more politically aligned with their own country. The severe shortage of semiconductors has been a major wake-up call and tens of billions of dollars are poured into news factories and chip manufacturing and processing plants worldwide.

Meanwhile, the economic damage to China has been significant, with GDP expected to contract — or close to that — in the second quarter. The Chinese government has announced that it will cut by 50% the sales tax on ICE (internal combustion engine) vehicles costing up to CNY 300,000 (US$45,000) to help the domestic auto market and industry recover from the pandemic. Additional incentives for new energy vehicles are also expected soon, while major local governments had already increased vehicle registration quotas and other restrictions on car buyers.

These are part of a broader economic stimulus package the government has mapped out and of interest rate cuts earlier this year that the government hopes will prevent a second-quarter contraction. But with growing fears that Beijing may face lockdowns, the Chinese economy is not yet out of the woods.

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