China’s heatwave could be more devastating to its supply chains than an expert on COVID-19 lockdowns says

COVID-19 lockdowns in China threw a wrench into global supply chains earlier this year, causing shipping and production delays around the world and hampering economic growth.

Today, the country faces another major threat, and this one could be even worse for the economy.

China faced its worst heat wave in 60 years this month, with temperatures in several provinces regularly hitting 40C (104F). But a key province is suffering the worst financial repercussions from the sweltering heat.

In Sichuan, a regional industrial powerhouse home to more than 80 million people, the record heat wave has exacerbated an ongoing drought, halving water levels in hydroelectric reservoirs this month, according to the Provincial Department. of Sichuan Economy and Information Technology.

Sichuan depends on hydroelectricity for about 80% of its energy needs, and with consumers using more energy than usual to stay cool during the heat wave, energy supplies are dwindling.

As a result, officials announced on August 15 that factories in 19 cities and prefectures would be forced to shut down for five days to reserve electricity for “people’s use”.

But an expert said Fortune that the current heat wave is more than just a regional problem and that it could have dramatic repercussions all over the world. Due to the specific challenges of heat, the manufacturing workarounds that became common during the height of COVID will no longer be possible, potentially leading to even more severe economic outcomes.

“These closures have the potential to impact supply chains just as, if not more, than recent COVID lockdowns,” said Mirko Woitzik, global director of intelligence solutions for analytics firm Everstream Analytics. risk and supply chain information.

Everstream Analytics

From Sichuan to the rest of China

Some factories in China were able to stay open during pandemic shutdowns through the use of “closed loop” systems, where workers isolated themselves in factories in order to continue operations.

But these types of mitigation efforts are not possible during a heat wave.

“Everyone depends on the same hydropower, so the whole region is really affected. And there is no whitelist at the time of exemptions. So it’s really the indiscriminate nature versus the targeted COVID lockdowns that makes this much more harmful,” Woitzik said.

So far, China’s heatwave-induced factory closures are limited to Sichuan. But due to the region’s status as a manufacturing powerhouse, the effects are likely to be widespread.

Electronic component makers like Foxconn and Compal, both of which are suppliers to Apple, and automakers like Tesla, Toyota and SAIC Motor Corp. could be the most affected by the deadly heat.

Tesla and SAIC said Thursday they were having trouble maintaining production amid the power crisis, and asked Chinese officials if their production could be prioritized. Toyota also suspended production at its Sichuan plant this week, according to Japanese outlet Kyodo News.

Additionally, BOE Technology Group, an Apple supplier that makes LED displays and other hardware components, said Wednesday it will have to “make adjustments” to its operations in Sichuan due to power rationing in the area. the region. And Contemporary Amperex Technology, the world’s largest battery maker, said it would halt production at its Sichuan plant until August 20 due to power outages, Reuters reported.

“The Sichuan region has become very important over the past 10 years in terms of raw material production,” Woitzik said. “Foxconn has its battery production there, and the list goes on, so it’s still very, very impactful in a supply chain sense.”

Lithium and semiconductors could also be affected, although probably not to the same extent as electronic component makers.

Sichuan is a key lithium supplier, and some experts fear the heatwave in China could send prices for the silver-white metal skyrocketing.

Lithium supplies have already been strained due to growing demand for electric vehicles and production issues. And Woitzik notes that one of China’s top lithium producers, Sichuan Yahua Industrial Group, shut down operations for five days and lithium prices are expected to rise accordingly in the near term.

Still, Woitzik said he’s not too concerned about the lithium supply, at least for now.

“We believe the impact will be felt more in terms of intermediate and final products,” he said. “For lithium, the heat wave would have to last much longer for it to create a significant impact.”

Another key industry that could be affected by the heat wave is semiconductors (also called chips), which are used in everything from smartphones to fighter jets. Over the past two years, there has been a global shortage of semiconductors, and the situation in China is expected to make matters even worse.

Woitzik said semiconductor makers in Sichuan are already being hit by the shutdowns, adding that they “will likely cause more ripple effects on semiconductor supply chains.”

But he also noted that Sichuan is not home to many semiconductor producers, so the impact on the current chip shortage is likely to be limited compared to past pandemic-related disruptions.

“In terms of semiconductor issues, they’ll probably be more contained, but there are a lot of other electrical component makers, especially Taiwanese, that have set up shop there. [in Sichuan],” he said. “So it’s really more electronic components other than semiconductors that are key in Sichuan.”

The repercussions of longer plant shutdowns

At present, factories in Sichuan are only expected to be closed for a short time.

But if the heat persists, they could remain closed much longer, making the situation for Chinese manufacturers even more dire.

“If it’s limited to the five to seven days, that would still be manageable,” Woitzik said.

But Chinese authorities have already extended until Aug. 24 some factory closures in Chongqing, a self-administered municipality in Sichuan province, Woitzik noted.

“Factories can sort through inventory, and shutdowns won’t have much of an impact,” he said of the heat wave. “But if it lasts 10 days, two weeks or anything longer, then we are really talking about severe supply disruptions.”

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