Partial Resumption of Work in China’s Locked-Down Cities Cannot Break Supply Chain Bottlenecks: Analyst

Partial Resumption of Work in China’s Locked-Down Cities Cannot Break Supply Chain Bottlenecks: Analyst
Tesla's China-made Model 3 vehicles on display during a delivery event at its factory in Shanghai, China, on Jan. 7, 2020. (Aly Song/Reuters)
Kathleen Li

Tesla’s first-quarter 2022 profit hit a record high; but on releasing the results, Tesla also said that the COVID-19 pandemic has brought significant pressure on the company’s supply chain and factory operations. At present, only a fraction of its companies in certain regions in China have resumed work. Experts in China’s industrial economy research admit that any place that resumes work on its own will face bottlenecks in the industrial chain.

On April 21, Beijing time, Tesla’s first-quarter financial report showed that its operating profit was $3.6 billion, a year-on-year increase of 507 percent, and earnings per share attributable to ordinary shareholders was $2.86, a 6.3-fold increase year-on-year. Tesla attributed the surge in revenue to higher vehicle deliveries and higher average vehicle sales prices.

On April 19, Tesla’s Shanghai Gigafactory finally resumed work after 22 consecutive days of shutdown, the longest shutdown since the factory started operating. About 8,000 workers arrived at the Shanghai Gigafactory that day, and it plans to gradually reach full production in a single shift within 3 to 4 days, so that the output can reach half of the original double-shift production. Tesla is the first wholly foreign-owned vehicle manufacturer in China, and its resumption of work and production have led to the resumption of production by more than 100 suppliers.

Although the first “white list” of key enterprises in Shanghai marked Tesla’s Shanghai Gigafactory as a “suspended enterprise that must resume work,” and the Shanghai Municipal Commission of Economy and Information Technology released the “Guidelines for Epidemic Prevention and Control of Shanghai Industrial Enterprises Resuming Work and Production (First Edition)” on the evening of April 16, in order to promote the resumption of work and production, under the CCP’s Zero-Covid policy there are still many unstable factors in China’s auto industry supply chain.

On April 24, when reporting on the reopening of the key enterprises on the white list, CCTV admitted that the logistics between different provinces and cities is still not smooth. For example, they don’t accept each other’s nucleic acid test results, the phenomenon of forcing truck drivers to find test points between expressways for repeated tests still exists, and enterprises that have resumed production are also facing many pressures, such as the Zero-Covid policy, personnel shortages, and logistics obstructions.

The report cites the situation of truck drivers in Ningde City, Fujian Province. Since the epidemic, more than 200 truck drivers in Ningde have been quarantined in other locations, and many people have been persuaded to turn around and go back at expressway intersections without unloading their trucks. The drivers are not only stranded, but are not allowed to get out of their trucks, get food, or use a public restroom. Therefore, many truck drivers are scared to try to deliver goods during the epidemic.

Battery maker Contemporary Amperex Technology Co. Limited (CATL) (300750.SZ), headquartered in Ningde City, supplies lithium-ion batteries to Tesla. In June 2021, CATL and Tesla signed a four-year supply framework agreement (January 2022 to December 2025).

Although CATL’s battery module base in Shanghai has begun distribution, the battery modules are only one stage in battery production. The new factory planned by CATL in Lingang District of Shanghai is still under construction, and its groundbreaking ceremony was just held on Feb. 19.

Liu Zhibiao, chief expert and dean of the Changjiang Institute of Industrial Economics at Nanjing University, said on April 24 that the industry is a system that requires upstream and downstream cooperation. Therefore, the resumption of work must occur in the whole industry chain. Any place that resumes work in isolation will face the problem of bottlenecks. He also said that the escalated pandemic prevention policies in various places have divided the market, so it will seriously affect the operation of the economy.

Tesla’s Shanghai Gigafactory cuts costs by using parts made in China. According to a report by China’s Securities Times in mid-January, the proportion of  components the Shanghai-made Tesla vehicles use exceeds 80 percent.

Tesla’s 2021 Annual Report has projected the impact of the broken supply chain on Tesla’s production. Suppliers may not be able to deliver parts using the schedule, price, quality and quantity they need, the report said.

The Beijing News reported on April 21, two days after Tesla resumed work, that many of Tesla’s Jiangsu suppliers are still in a state of shutdown, and transportation is difficult. At present, some vehicles in Jiangsu are unloaded after arriving at a place near Shanghai, and then rely on Shanghai freight vehicles to take the goods into Shanghai. As a result, freight costs have also increased.

Kathleen Li has contributed to The Epoch Times since 2009 and focuses on China-related topics. She is an engineer, chartered in civil and structural engineering in Australia.
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