Shanghai Opening Might Spell the End for Tech Supply Chain Issues

Image of the Shanghai city skyline.
Shanghai, China was the source of the global tech supply chain issue.

On Sunday, China Central Television, CCTV, reported that the country will significantly decrease COVID-19 lockdowns. In Shanghai, the largest Chinese city, these lockdowns have been ongoing for two and a half months. Yet, China will not completely remove the restrictions.  This might mark the end of a supply shortage and tech supply chain issues compounded by the already existing issues on the market.

Not many final assembly plants are based in the 26 million-strong city. Yet, the lockdowns are affecting a lot of global tech operators. That’s because their suppliers or parts of their distribution are in Shanghai. Some of the companies affected by the lockdowns are:

  • Cisco
  • Alibaba
  • JD

Companies like Alibaba with their unique technology do not focus on tech specifically. Rather, they are the biggest distributor of materials, tools, and other necessities. In turn, these supplies go either into tech products or tech manufacturing. Their system slowdown has caused a ripple effect in many industries. The tech supply chain is suffering.

Additionally, this effect is hitting China’s biggest trading partners such as the United States. As a result, the existing tech supply chain issues and fuel shortages in these countries are worsening these effects.

Due to the insular nature of the Chinese market, consumer prices in the country have not risen to the level seen in the US and Europe. Despite that, Chinese manufacturers and producers are feeling the effects. For those who produce items for large global tech brands, this slowdown in the economy can have devastating effects further down the line.

Production Is Resumed

Local city authorities in Shanghai announced that they have passed two weeks without a single positive COVID-19 case. As a result, they will be reducing lockdown rules, putting an end to the two-and-a-half month-long lockdown period in the city.

The reduction in lockdown rules will primarily focus on the 1700 production-oriented businesses in Shanghai. These should be able to resume operations. Additionally, 450 financial institutions and 580 foreign trade companies will get back to business.

Local stores will also reopen sporadically as capacities allow. They will likely be restored completely, provided that no new cases appear in the city. This will also allow the authorities to react proportionally if something changes.

Reportedly, 88% of the e-commerce businesses are already operational. They have been slowly returning via remote working even before these rules came in place. Full operational capacities should resume by the end of the week.

Image of a little pilot boat helping the big ships around.
Global supply is dependent on manufacturing and shipping mostly made in China.

The City Is Still Under Quarantine

The easing up of lockdowns has come as a breath of fresh air in the largest Chinese city. Before this, 26 million residents in the city had to be confined to their living quarters during that time. Consequently, these lockdowns caused public protests and negative sentiments all around. 

Yet, the reduction in quarantine measures will only affect those who are in low-risk areas. These include parts of the city that are home to roughly 22 million residents. This leaves the rest of the population still confined to their homes.

Additionally, many of the city amenities such as museums, restaurants, and theaters will stay under stricter measures. If reopened, they will allow only a limited number of patrons at a time. 

We do not know if that partial lockdown will further affect the city’s manufacturing, production, and retail. In fact, these have already been suffering under the rules. 

Li Qiang, the leader of the Shanghai Communist Party, welcomed the reopenings. Li also assured the public that the city has passed the test, and that “life will slowly go back to normal.”

Tech Supply Chain Domino Effect

The tech industry is highly interdependent. As a result, the tech supply chain shocks have been felt worldwide. This is generally affecting how companies are doing business. It has also pushed consumer prices for electronics and services provided by these companies.

Only last week, Nvidia announced that their stock levels when it comes to consumer GPUs have almost returned to normal. The prices of these electronics are still considerably higher than what they were a year ago, even for the same models.

Personal computing is not the only problem. Companies like Cisco, a major player in networking, have already seen multiple issues last year. They are also severely affected by the Shanghai lockdowns. The rise in their production cost has driven up the cost of server maintenance and on-site cybersecurity globally. In turn, this further affects the companies that use these services and their customers.

Tech was one of the few industries that were not as directly affected by COVID-19 lockdowns. Most companies have managed to switch their models to working remotely. However, the rising amortization and modernization costs will increase the cost of online services. These may even follow US inflation levels, at the very least.

Image of a daily newspaper economy stock market chart.
The economy might need a lot more to recover from the effects of the pandemic, even in China.

Ripple Effects on the Chinese Economy

The insular nature of the Chinese market protects the country from global tech supply chain impacts. However, that only includes the domestic retail market, not service and maintenance. In fact, these need parts and expertise imported from abroad.

Additionally, much of the Chinese economy relies on manufacturing for foreign markets. That means any reduction in production will negatively affect employment and domestic wages. If production does not resume in the country soon, the effects on the Chinese economy might be long-lasting, even worse than the effects on China’s trading partners, the US and Europe.

Finally, due to the rising costs, foreign companies will likely move manufacturing out of China to Eastern Europe or Africa. This will also be a major hit for the country. Experts say that this move, at least when it comes to tech, may be necessary to create redundancies and multiple sources of manufacturing goods in the future.

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