China imposed widespread lockdowns to deal with its worst Covid-19 outbreak in two years. The impact of the shutdowns could threaten global supply chain recovery as U.S. companies post financial outlooks that bank on recovery across Asia.
Tens of millions of people in China were under lockdown last week, according to CNN. As of Tuesday, residents in five cities — Changchun, Jilin City, Shenzhen, Dongguan and Langfang — were prohibited from leaving their neighborhoods unless deemed essential or emergency workers. However, some restrictions have already started to lift this week. Lockdowns in Dongguan are set to expire at the end of today and Shenzhen lifted its lockdown restrictions on Friday, according to reports.
These measures are part China’s strict “zero-Covid” policy to combat outbreaks of COVID-19, which utilizes lockdowns and quarantining to stamp out any outbreaks in the region. In January, the spread of the Omicron variant in China prompted lockdowns of at least 20 million people, mostly in the city of Xi’an in western China and in north-central China.
Unlike the situation in January, the regions impacted this time, especially Dongguan, represent strong areas of footwear production and sourcing. As such, these disruptions could be cause for alarm for companies that rely on these regions for their supply chains.
“It’s definitely having an impact,” said Matt Priest, president and CEO of the Footwear Distributors and Retailers of America (FDRA), who mentioned that the Chinese government is assuring these lockdowns will be short-lived. “”The question comes down to how long it will last.”
According to supply chain data firm project44, Friday data showed a build-up of shipping vessels surrounding Shenzhen, Ningbo, and Shanghai, representing a slowdown in transportation to and from these crucial ports.
Lockdowns across China and Vietnam previously had serious ramifications on footwear production for U.S. brands. Vietnam and China are key manufacturing hubs for almost all major footwear brands in the U.S. When factories in Vietnam shut down this summer, China footwear production ended up growing at a faster rate than Vietnam throughout 2021 after years of backsliding, Priest noted.
Some analysts were warning last week about how new lockdowns in China could impact American brands.
According to BTIG analyst Camilo Lyon in a recent note, footwear recovery in China has been impeded by renewed COVID-19 related lockdowns in the region, which could prolong the timeline for recovery in that crucial market to as late as the second half of fiscal year 2023.
Nike, which reports third quarter earnings today after markets close, dealt with serious ramifications after months-long factory closures throughout last summer and beyond. Nike had two months of no unit production in Vietnam when two of its footwear suppliers there stopped manufacturing in July.
According to Priest, athletic footwear is more vertically integrated in Vietnam, meaning supply shortages in China would not be a serious threat to those brands. Fashion brands, on the other hand, are largely more reliant of materials from China and will therefore likely feel more of an impact from these lockdowns, should they extend beyond a week or two.
“We’re concerned,” explained Priest. “We have our eye on it.”