China’s Covid outbreak raises fears of further supply chain disruptions
The global fashion industry is bracing for another wave of painful supply chain disruptions and store closures as China races to contain its worst Covid-19 outbreak since the pandemic began.
Shenzhen city and Jilin province are in lockdown, impacting 31.5 million people as well as shopping malls, manufacturing hubs and ports. Luxury brands including Prada, Coach and Dior have confirmed they have closed stores in Shenzhen and Changchun, the capital of Jilin.
In Shanghai, fashion week has been postponed since its initial launch on April 6, while offices and malls are sporadically locked down if linked to a Covid-19 case. Even though stores remain open, main shopping thoroughfares like Huaihai Lu and Nanjing Xi Lu are quiet, stripped of their usual white-collar crowds, replaced by dog walkers and the occasional pensioner strolling around in masks.
The outbreak is a psychological blow to the fashion industry in addition to a financial blow. China has weathered the pandemic better than almost any other major economy; strict quarantine rules and sanitary measures have kept the number of cases low, and port and factory closures have been relatively rare and short-lived. Now parts of the country are entering lockdowns similar to what much of Europe and North America have experienced for much of 2020 and 2021, even as those regions quickly come back to life. normal.
The fear is that disruptions at Chinese factories and ports will inject further chaos into already struggling supply chains and contribute to inflation that is at its highest level in 40 years in the United States. The store closures will also add further uncertainty to the sales outlook for brands, many of which are still assessing the impact of the Russian invasion of Ukraine last month.
“[China is] such a hub, not only of manufacturing but also of transportation – we’re definitely going to feel it, there’s no doubt about it,” said Alla Valente, senior analyst at Forrester.
The state of play
So far, the worst of the outbreak has been contained in provinces known more as tech and auto manufacturing hubs than for their garment factories. Shenzhen, however, neighbors the Pearl River Delta region, a major center of fashion and footwear production. Some see it as a matter of time before their operations are halted, especially since this is the highly contagious variant of Omicron currently spreading in China.
“In China, once you have a case, they shut you down, and with Omicron it’s nearly impossible to prevent that,” said Gerhard Flatz, general manager of Pearl River Delta-based manufacturer KTC Group, which manufactures high-end sportswear for Europe. brands like Mammut and Helly Hansen. He said his factory is operating normally at the moment.
Even though most global brands have reduced their reliance on China for apparel manufacturing over the past decade, widespread shutdowns of manufacturing hubs like the Pearl River Delta and the Yangtze, which are also neighbors to Shanghai, will have a huge impact on the global fashion supply chain. , he added.
“About 60-70% of the world’s trimmings – buckles, buttons, zippers – all accessories and components are produced here,” he said. “If the components cannot be shipped, the garments cannot be completed, it will mean severe impact.”
Shenzhen is also home to the port of Yantian, the world’s third-largest port, fueling fears that the lockdown could cause additional strain on global supply chains. In a briefing note, Seko Logistics warned customers that while Yantian Port remains open and cargo is currently being loaded there, a bigger concern is a restriction on trucks coming from outside Shenzhen unable to get goods to port during Shenzhen lockdown. remains in place. Last May, a small outbreak of Covid-19 among workers at the Yantian port led to a month-long shutdown, causing a supply chain backlog that took months to clear.
In Shanghai, restrictions on movement in and out of the city have caused similar problems at its port, the world’s busiest, with courier companies halting shipments to Shanghai and trucks having no not allowed to enter the city.
For Rebecca White, a Shanghai-based procurement expert who works at HGR Consulting, it was movement restrictions, rather than factory closures, that delayed sending samples to customers.
“We don’t really know what’s going to happen, [but] I have a feeling our ocean freight rates will go up even further,” she said, noting that the cost of shipping containers across the Pacific was already near last summer’s highs even before the latest surge. of Covid.
Chinese apparel manufacturers are part of a global supply chain that can expect an item to go from concept to delivery in 90 days, leaving little room for delays. Clothing that arrives in stores too late for the expected season can be a tough sell, and brands are quick to cancel factory orders at the first sign of production or shipping issues.
“We’re on a fixed schedule and if we don’t deliver our goods by August…we won’t make deliveries and we’ll face cancellations,” White said. “A lot of the supply chain is out of our control right now and that’s very concerning.”
Brands selling to Chinese consumers face their own challenges. China is an extremely important market for luxury brands in particular. Many were counting on spending there to boost sales as Europe and the United States slowly rebounded from the 2020 shutdowns.
The Chinese economy was already showing signs of slowing down. Last week, Chinese policymakers set their GDP growth target at 5.5% for 2022. Although this is the lowest growth target ever publicly set by the country, economists have warned that it could prove an ambitious goal, given the macroeconomic headwinds facing the country, a protracted battle with Covid-19 may make this impossible. The government’s rush to lock down major cities is an indication that more pain is coming, analysts say.
“China is expected to experience a sharp slowdown in March, given that it faces the worst Covid outbreak since 2020,” Larry Hu, chief China economist at Macquarie, said on Tuesday. “Right now, policymakers are clearly putting Covid-zero ahead of growth.”
Unlike 2020, brands now have two years of experience in pandemic conditions, said Luca Solca, head of luxury goods research at Bernstein. He predicts a “modest headwind” from the epidemic in China.
“I think brands should only be worried up to a point: over the past two years, brands have perfected distance selling and digital distribution,” he said. “It will be a question of coming back to it, this time having accumulated useful experience on how to carry out these operations.”
And the pandemic hasn’t entirely dampened China’s passion for luxury fashion. On Tuesday, when Nanjing Xi Lu was largely deserted, a small line of masked, temperature-controlled shoppers formed outside the Chanel store at Plaza 66.