Shanghai Lockdown against Pandemic Causes Supply Chain Chaos

Due to the breakdown of the supply chain from Shanghai, Toyota and Nissan are both making difficult decisions to reduce production. Toyota announced that in May, 9 of its 14 factories in Japan would stop production due to “insufficient supply of parts due to the spread of the epidemic.” Mazda’s headquarters plant in Hiroshima has been shut down because of delays in the transportation of parts by sea and air. Mitsubishi Motors also shut down its main factory.

Automobiles are Japan’s largest industry, and the current impact has caused supply chain security issues to be hotly debated. This reminds people of an old topic: will Japanese cars accelerate their escape from China, or Shanghai?

After the new Crown epidemic, the reference to “reducing dependence on China” has repeatedly appeared in Japan in 2020. Then-Japanese Prime Minister Abe said at the “Future Investment Conference“: “Seek the return of production bases to Japan and disperse production bases to Southeast Asia and other places to achieve diversification. ”And gave a relocation cost of 15 billion yuan. Later, the implementation of the subsidy plan was divided into two parts: ”Subsidies for domestic investment“ and ”overseas supply chain diversification support”. These subsidies only make some small businesses tempted. But the effect of this cost does not seem to be great. It’s over.

Earlier, the Japanese government proposed to implement a backup policy for the Chinese market and adopt a “China+1” approach to decompose and melt. The local factories in China are all localized except for the core components; the markets outside of China are all de-sinicized. Encourage suppliers to gradually move factories to markets such as Southeast Asia.

According to statistics from the Consular Bureau of the Ministry of Foreign Affairs of Japan in 2018, 48% of Japanese overseas companies are in China, with a total of 33,800. There are 10,000 companies in Shanghai, which is equal to the total number of Japanese companies in the ten ASEAN countries. It has now reached 11,000, and automobiles are naturally the leader. Because the industrial chain of the automotive industry is too long and China is the world’s largest automotive market, it is naturally difficult for Japanese automobiles to change in a short period of time.

But this time, entrepreneurs in the Japanese automotive industry may be tempted easily. There is a bigger reason behind it.

That is the supply chain iron Curtain.

In the future battle for electrification, chips have become a must-fight. This is a new world that is growing. And Japan has taken the initiative in the field of automotive semiconductor. In the field of autonomous driving, the upward focus is on SoC system chips and sensors, and the downward focus is on MCUs and third-generation power semiconductors. At the same time, the Japanese government successfully persuaded TSMC to build a factory in Japan last year so that it could support Sony, a supplier of image sensors. To this end, the government did not hesitate to subsidize 4 billion U.S. dollars, which accounted for half of the total investment. It is Japan’s intention to do a good job in wafer manufacturing as the basis. Similarly, Chip4, the Chip quartet alliance proposed by the United States to isolate mainland China, is very active.

This means that from semiconductor materials, to chip design, to experience manufacturing, China can already be closed-loop, isolating China. South Korea, which is currently in the Quartet alliance, has the most ambiguous attitude. What makes it difficult to make a decision is the relationship with the Chinese supply chain. Samsung’s Xi’an factory alone contributes nearly 10% of the world’s flash memory production capacity.

In the field of power batteries, Japan is also seeking to get rid of its dependence on China in terms of positive and negative electrode materials, electrolytes, insulating films, etc. Especially in the field of solid-state batteries for the next generation of power batteries, we will make every effort to promote it. Izumo Group, Japan’s second-largest oil company, and Mitsui Metals have already begun to invest in electrolytes to prepare for mass production of all-solid-state batteries in 2024.

The car is moving and pulling the whole body. The reversal effect it causes will be very obvious.

The iron curtain of the supply chain is vaguely visible, or the gap in the supply chain is increasingly revealing its contours.

What happens when the supply chain stagnates?

Among Apple’s 200 major suppliers in the United States, about half are in Shanghai and Suzhou. According to a survey by Nikkei News, among the suppliers of parts and assembly of Apple products, more than 70 are in and near Suzhou and Kunshan, and there are about 30 in Shanghai. These lists cover 98% of Apple’s purchases. It includes Pegatron in Taiwan, China, where the iPhone is assembled, and Compal, which assembles the “iPad”.

Not only facing Apple, they also supply to large American companies such as Google and Microsoft, as well as large Chinese companies such as Huawei and Xiaomi.

Huawei is at a critical time to increase the number of smart cars. At this moment, it is useless to rush, and NIO can’t keep producing. German companies are also anxious, and Japanese cars are helpless to stop production.

The world is hot and cold, and the world is waiting for pain.

The chaos of the supply chain has long been not limited to one company and industry, nor to one city. It is the moment of the supply chain avalanche, and all industries and all people’s livelihood are not immune. The world has been hit like a huge nuclear explosion. China has already begun to take countermeasures and has also released a list of 666 designated key companies such as automobiles and semiconductors.

However, it only takes one instruction to stop an industrial chain; it often takes several months to restart this industrial chain.

It is not easy to resume work, and behind the resumption of production are people and shuttling objects. The supply chain is full of small links that can easily be ignored.

Moreover, these lists are not enough. Of these 666 companies, 250 are related to automobiles. However, the automotive industry chain is very long, and it can be extended upstream to at least five suppliers-the end of the supply chain may be the workshop of small and micro enterprises. Without these endings, the faucet of the car host in front of it would not be able to stand up. What’s more, there are more small and medium-sized enterprises. By the end of 2020, the number of corporate legal persons in Shanghai was 500,000, of which nearly 400,000 were private enterprises, accounting for nearly 80%. Private enterprises are mostly small and medium-sized enterprises. Blood vessels are capillaries and part of the lifeline.

But the deeper survival dilemma is not in the present, but in the future. It would not be terrible if the manufacturing business in Shanghai was only temporarily suppressed or digested by other cities in China.

The most worrying thing is the squeeze effect, which will put pressure on the supply chain and accelerate the trend of industrial migration.

Vietnam and Mexico, as neighbors of the world’s two largest economies, have become the best places to undertake manufacturing in the past few years.

The migration of manufacturing to Mexico has already begun. According to data from Jaggaer, a procurement software company, U.S. companies purchased six times as many chemicals, production and construction materials from Mexican factories in 2021 as in 2020, while the total amount purchased from the Asia-Pacific region fell by 26%. Among the 30 U.S. companies with annual revenue of more than 30 billion U.S. dollars, the number of orders initiated to Chinese manufacturing suppliers fell by 9%.

The Wall Street Journal recently reported on the topic of ”Mexican factories benefit from supply chain reshaping” that North American manufacturers are readjusting their supply chains and are looking for diversified suppliers. This has benefited Mexico a lot. Another survey of 2,000 U.S. and British CEOs conducted by Proxima Group, a London-based procurement and supply chain consulting firm, found that 15% have moved production closer to their home countries or purchased from suppliers in nearby areas, and 26% are considering doing so.

In a sense, the diversification of these supply chains and “near-shore outsourcing” are a kind of quiet corrosion of the Great Wall of steel in China’s supply chain.

Vietnam’s performance is much more eye-catching. In the first quarter of this year, Vietnam’s goods exports totaled US889.1 billion, an increase of 13% year-on-year. In March, Vietnam’s trade in goods exports were US334 billion, an increase of 46%. It has surpassed Shenzhen’s US224 billion and is catching up with Guangdong’s US出口58 billion in exports. Among them, the United States is Vietnam’s largest buyer, with revenue of US225.6 billion, followed by China and the European Union. Foreign trade in Southeast Asia and other countries is recovering rapidly, which has also led to the loss of a large number of Chinese orders.

Figure Vietnam’s exports (unit: one billion U.S. dollars)

This is like a tug-of-war. The food that was pulled back two years ago is being eaten.

Recently, Li Ka-shing began to invest in infrastructure in Vietnam, which will completely change the face of Vietnam’s backward hydropower, thereby greatly strengthening the capabilities of its supply chain nodes.

The current supply chain storm will benefit them again.

He rises and disappears, time is a slow judge.

The fence of the national supply chain

On April 18th, the world’s second-largest supplier of power batteries, a Korean consortium led by LG of South Korea, signed a project worth nearly 60 billion yuan with Indonesia to establish a supply chain for electric vehicle batteries. In terms of reserves and production, Indonesia is the world’s largest producer of nickel: this is the key material for power batteries. The power battery is either ternary or lithium iron phosphate battery. Nickel is one of the core raw materials of ternary batteries.

In 2021, LG New Energy’s installed capacity in the global electric vehicle battery market will be 60GWh, accounting for 20%, ranking second only to Ningde Era, which has a market share of 33%.

The second child has movements, and the boss naturally can’t be idle. Just a week earlier, Ningde Times had announced that it would build a power battery industry chain project in Indonesia, investing RMB 38 billion. It seems that LG’s investment amount is going to pass on Ning Wang’s shoulders. Perhaps in the next step, Ningde Era is estimated to have additional investment.

Embarrassingly, Indonesia has one daughter and two marriages. The partners in the Ningde era, like LG, are also Indonesian state-owned enterprises Antam and IBI. They are all companies controlled by the Indonesian Ministry of Finance.

Indonesia has this base, and it is rich in nickel ore resources. As of 2020, Indonesia ranks first in the world in resource reserves, with about 21 million tons, accounting for about 22% of the world. This has also caused a large number of industrial enterprises to flock here one after another. In March, China Qingshan Group, which was at the center of the “monster Nickel” storm, has actually established a foothold in Indonesia, which is an industrial park.

However, the Indonesian government has a greater appetite. According to Indonesia’s “beautiful” idea, it is best not to flow out of the country for all mineral resources, but to digest them locally.

Last week, the President of Indonesia announced that from tomorrow (April 28), the country’s exports of “all edible oils and edible oil raw materials” will be stopped, and the recovery time is unknown. Indonesia is the world’s largest producer of palm oil, accounting for more than half of the global supply. This news shocked the entire food oil market. However, this is one of the strategies of Indonesia’s entire industrialization.

National-level competition is competing for the supply chain, and they are all seeking to land in the local area. In the rush here, there will always be places “lost”.

Shanghai is an anchor hook manufactured in the global territory

Why did the U.S. not win the aggressive U.S.-China trade war initiated by the last U.S. government, and China did not lose, and even the U.S. is now considering eliminating many taxes on Chinese goods due to growing inflation. One of the big reasons for this lies in the flexibility of China’s supply chain, which protects China. The connection relationship between Chinese manufacturing has established a dense network and has become a deep network node for global manufacturing. The resilient supply chain network makes it difficult for foreign politicians to realize their destructive intentions.

The rise of Shenzhen’s consumer electronics industry is inextricably linked to the rich supply of parts suppliers it has established. But none of this is as important as Shanghai. Shanghai’s GDP is about 4.3 trillion, accounting for 3.7% of China’s 114 trillion, and it is the largest among domestic cities. Shanghai is the most important hub of China’s high-end manufacturing industry and has great influence in many industrial chains. In the automotive industry, which is the most dynamic in the industry and has the most thorough division of labor in the world, not to mention the oems, it is among the top 10 global auto parts, of which 9 are headquartered in Shanghai. The output value of Shanghai Auto parts and components is 800 billion, which has caused many foreign companies that rely on the Shanghai supply chain to stop production. Similarly, Shanghai’s industrial robot and automobile production account for about 10% of the country. At present, Shanghai is the main supplier of the most scarce chips. The chip industry accounts for one-fourth of the country and gathers more than 700 key enterprises in the industry. It can be said that the tip of the pyramid of China’s supply chain is located in Shanghai.

This means that Shanghai is not only a financial center, but also a hub for the global high-end supply chain. This time, people may suddenly realize that Shanghai is a key supply chain node for global manufacturing. The number of factories of high-end key manufacturers in Shanghai is much higher than that of Guangdong and Shenzhen. The lifeblood of industry, from electromechanical to automation to software, Shanghai is a vital threshold. One level is dead, and a hundred levels are not passed.

Suzhou and Kunshan, which are closely related to Shanghai, have also stagnated. These are all densely populated areas of the electronics industry. There are 161 companies in Taiwan, China that have shut down, with the most electronic components reaching 41, while electrical machinery is 16, and computers and peripherals are 15. The electronics foundry is second only to Foxconn’s Pegatron. Its two factories in Shanghai and Kunshan, Jiangsu, have all pressed the shutdown button, which will inevitably lead to delays in the delivery of Apple’s products. And Shanghai Dagong, a subsidiary of Quanta, is almost the only EMS supplier in China. Apple manufacturing will be greatly affected. This will increase Apple’s determination to expand its territory in Vietnam and India.

Although there are ethnic and land conflicts in India, in fact, both Apple and Samsung are repeatedly cultivating the soil here to expand their supply chains. Perhaps it only takes time, and these countries will also erode Chinese manufacturing little by little.

Last week, Foxconn’s two factories in Kunshan began to be closed. But the movement of external stretching has already begun. In fact, as early as early March, Apple was ready to transfer 7%-10% of the iPhone12 to India for production. Previously, India had only been responsible for the production of old-model mobile phones. In mid-April, Apple has officially announced that it will produce its best-selling iPhone 13 smartphone at the Foxconn factory in India. Foxconn is stepping up its expansion of the site, which also means that Apple is further expanding its mobile phone manufacturing in India. At present, 95% of Apple’s iPhone and most of its Mac products are made in China.

Since 2021, Apple has been increasing its share of iPhone production in India, and some models are used for export. According to data from Counterpoint, a market research company, India’s share of Apple’s global production has increased from 1.3% in 2020 to 3.1% in 2021. As Apple further increases, this share will easily rise in the future. What it swallows is the future share of Chinese manufacturing, which can easily become an irreversible stroke.

The actions of the Apple chain are the most eye-catching. It is like the movement of an elephant family. It has always been the behavior of a community. Although it is slow, the pace is solid and firm.

Onsemei, a global automotive chip manufacturer, closed its global distribution center in Shanghai on April 18 and moved it to Singapore. This approach is a bit worrying, but its hidden danger is not in the short term, but that it is a bad start. As one of the top 10 semiconductor suppliers in the automotive industry, Ansenmei provides more than 80% of electronic components in the global automotive sensing field, and its global market share in the automotive imaging market exceeds 60%. Anson Beauty, which was spun off from Motorola, will have annual revenue of US66.7 billion in 2021, and its automotive business will account for nearly one-third of its revenue. It has deep ties with China. As early as 12 years ago, it built a solution engineering center in Shanghai, while the Suzhou factory was severely affected by the epidemic. Now it’s gone.

It needs to be realized that Shanghai is China’s largest export market, accounting for 6% of China’s exports. Whether it is for international companies or domestic suppliers, it is a key node connecting the world. The greatest significance of the supply chain lies in its liquidity. The more connected it is, the more it is, and the more closed it is, the more backward it is. This will directly lead to blockage of blood flow. If the cash flow is interrupted over a long period of time, then many small businesses will fall apart, and the confidence of large companies will also be shattered. This will be an irreversible loss.

Note: The point in time before irreversible

White House economists said in a recent report that the industrial shifts formed by globalization over the past three decades have made many supply chains complex, fragile, inflexible, and almost no alternatives. Trying to change the supply chain that has been established over the years is a complex project. This is the magic weapon on which Chinese manufacturing depends to win.

However, the breakdown of the supply chain is making a crisp sound. There is huge pain that accompanies it, and the pain has a memory. If the determination of the management of foreign companies is once made, this will be difficult to reverse within three to five years. A few days ago, some German companies have also begun to consider the ”China+1" strategy. This is really something to be vigilant about. And Southeast Asia, Japan, the United States, and the European Union all don’t want to move the industrial chain back. The economic benefits of globalization are being questioned. German Chancellor Schulz mentioned in a parliamentary debate at the beginning of the month that “the stage of globalization with low prices is over.” He is obviously not just talking about Russian energy. This is a shocking warning.

The migration of the supply chain is the overall action of an enterprise group, and it is difficult to unify its determination. It’s like an old tree moving its nest, not only does it have to be pulled out by itself, but it also carries a lot of roots. It is not easy to accomplish such a thing. If there is no unconventional external force, the average enterprise will not be moved. Made in Shanghai, it is this old tree that cannot be loosened from its roots.

However, the pain with memory and shortness of breath sometimes change the situation. Once the egg is thrown into the frying pan, the protein denaturation begins to be irreversible. And at the moment of crushing, the previous sense of life was still there.

At a time of great turmoil in the global supply chain, the hilt of the sword cannot be awarded to others. At this moment, it is not entirely lost orders and losses that are worth worrying about, but those supply chains that intend to be free. This may be the biggest risk in the next five years.