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Since the COVID scare of 2020, most of the world has rebounded economically. But China’s Zero COVID policy has created lasting problems for the country’s productive output and economic outlook. Many European and American companies are reconsidering their investment there. Draconian health measures are becoming a routine part of life now, and the endless cycle of lockdowns and shutdowns are making economic growth virtually impossible to achieve in the world’s largest manufacturing nation.
China’s Zero COVID Policy
In spite of mounting negative economic signals and discontent among its citizens, China is doubling down on its goal of achieving zero cases of COVID in the country of 1.4 billion people. Whereas proclamations and speeches out of Beijing once spoke of balancing health goals with economic growth, in recent months the national government has pivoted to strongly condemning any form of dissent or grumbling. As wave after wave of crackdowns crush the once mighty economy, the government is now calling on unswerving commitment and absolute unity in enforcing these measures regardless of the cost.
Entire neighborhoods are routinely sealed off across the country. Mass testing is enforced. Citizens are often forced to surrender the keys to their homes to government for disinfecting, even if they have tested negative for the Coronavirus. Lockdowns are targeted and very strict. Last March, Shanghai locked down all 25 million of its residents, banning them from leaving their homes except for medical emergencies.
Some neighborhoods or individual residents often receive notice that they are not allowed to leave their homes or even receive deliveries until further notice. Essential medical treatments are delayed. Families are separated over positive tests. And work-from-home is mandatory in many regions of the country at varying times.
The seemingly random and unpredictable nature of these measures has left the public increasingly frustrated that they will never end. There is growing sentiment that the country will never be allowed to return to work or some form of normalcy. Videos continue to pop up in Western social media after being banned from the Chinese internet of citizens arguing with health officials, banging pots and pans together in displays of discontent, and begging for basic medical necessities.
Economic Growth Outlook
As a result of these repeated lockdowns and disruptions, the economic outlook for Chinese industry is quite bleak. In spite of a formerly robust manufacturing sector, the productive output of China is on the decline. In addition to rising wages, materials costs in China are rapidly rising, leading some to theorize that China’s Zero COVID policy is significantly jeopardizing their manufacturing industry.
In spite of a mild recovery after the recession of 2020, China is entering a new period of contraction that may prove much worse. And this time, the manufacturing giant seems ill prepared to dig itself out. Nearly all numbers coming out of China’s economy are negative:
A Manufacturing Exodus Coming?
China’s Zero COVID measures have no doubt created growing interest in relocating manufacturing operations in other countries. News recently broke that one of China’s largest manufacturing partners, Apple, is considering expansion outside China.
The tech giant manufacturers approximately 90% of its products in China via contract manufacturing. However, Apple cited China’s Zero COVID policies as a critical motivation in considering other manufacturing locations. Apple suppliers like Foxconn and Quanta Computer have been repeatedly shut down for COVID cases and minor outbreaks. In spite of aggressive preventative systems to combat the spread of the virus, these factories frequently grind to a halt due to government restrictions. Apple CEO, Tim Cook, recently estimated COVID-related supply chain restraints in the country between $4 billion and 8 billion USD for the current quarter.
In combination with dramatically rising labor and transportation costs for Chinese manufacturers in recent years, these new obstacles make relocation highly desirable. However, relocating entire manufacturing operations and supply-chain networks is no small feat. There are considerable challenges to relocating a supply chain from China. China offers extensive vendor networks, very high scales of volume, and highly integrated supply chains. But these advantages come at a cost. For example, Chinese companies typically claim ownership to proprietary schematics, design specifications, drawings, and even tooling. Transfer of capital must navigate complicated and difficult rules.
Nevertheless, companies like Apple and other manufacturing leaders are considering a future beyond Chinese manufacturing. While other Southeast Asian locations are popular alternatives, one alternative growing in popularity is Mexico. In addition to considerably lower costs than China, Mexico also has much lighter COVID restrictions.
And in the midst of global disruptions and shortages, competitive manufacturers will seek out safe havens for consistency and predictable cost savings. In spite of the government doubling down on it, China’s Zero COVID policy may play a leading role in handicapping future growth for the country.