How China's lockdowns are taking a toll on global companies

The crisis is a stark reminder of China’s outsized importance to global companies.

“Like it or not, at this point if you’re a multinational, China is probably your first or second largest consumer market,” said Ben Cavender, managing director of the consultancy China Market Research Group.

“And it’s probably your major base of production, or it’s responsible for some significant amount of your supply chain work,” he said in an interview from Shanghai, which has been under lockdown for six weeks.

The measures have left tens of millions of people confined at home for more than a month, leading to high levels of mental stress. In many cases, residents are unable to leave their apartments without special permission from community leaders, and a large number of businesses remain closed.

No mood to shop

In recent years, China has become the biggest market for a range of industries, from luxury goods to automobiles. But last month, the world’s second-largest economy slowed sharply, hitting not only consumer spending but also employment.

Estée Lauder, which is home to Bobbi Brown and MAC cosmetics, now expects its global sales to grow between 7% and 9% year-on-year, down from a previous range of 13% to 16% outlined in February.

The company said it had taken a hit from suspending all business in Russia and Ukraine following the invasion, leading to a decline in sales. Sales also fell 4% in Asia Pacific over the last quarter, which was “driven entirely by Greater China,” Chief Financial Officer Tracey Travis said on an earnings call.

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Some businesses have declined to make a forecast at all.

Last week, Starbucks (SBUX) suspended financial guidance for the next six months, with CEO Howard Schultz calling it “the only responsible course of action.”

“The situation in China is unprecedented,” he told analysts on an earnings call. “Conditions in China are such that we have virtually no ability to predict our performance in China in the back half of the year.” The country is Starbucks’ second biggest market.

A pedestrian walking by a closed Starbucks outlet in Hangzhou in April.

Kering, the owner of Gucci and Bottega Veneta, said last month that it was also feeling the pain, with “sharp drops in traffic,” store closures and major logistics challenges posed by the lockdowns.

“The situation is hopefully temporary,” Chief Financial Officer Jean-Marc Duplaix said on a corporate sales call.

However, the mood on the ground is gloomier.

“Frankly speaking, consumers right now are not worried about buying lipstick or coffee,” said Cavender. “They’re really much more focused on getting [necessities].”

In Shanghai, for instance, the lockdown initially led to a massive scramble for food and widespread complaints about difficulties receiving deliveries.

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Now, even as access improves, many people concentrate on what’s known as “group buying,” allowing users who live in the same community to place bulk orders together for groceries and other essentials.

Even those who aren’t stuck at home may be affected. Consumers who live in cities without restrictions might also hesitate to go out and hit the mall, for fear of “what has happened in Shanghai,” where people remain in lockdown indefinitely, said Cavender.

“It’s been a very big negative drag on consumption.”

Still the world’s factory

Companies are also facing trouble at the back end.

Over the last few years, many businesses have worked to shift at least some of their manufacturing outside China, thanks to the trade war with the United States. But that hasn’t prevented a large number of household names from getting caught up in the country’s Covid crackdown.

Last month, Apple (AAPL) warned of huge losses related to the Covid-19 outbreak in China, saying that supply chain issues could hit its sales by as much as $4 billion to $8 billion this quarter.

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Apple blamed the expected revenue drop on both restrictions in China and component shortages worldwide. Some of the shutdowns briefly affected about 20% to 30% of all iPhone production, according to Everstream Analytics, a firm that provides supply chain risk analysis.

Apple’s constraints were “primarily centered around the Shanghai corridor,” where it has several factories that were impacted, CEO Tim Cook said in an earnings call.

In some cases, the tension has boiled over. Videos posted on Chinese social media last week showed workers from a factory in Shanghai flooding past barriers and clashing with security guards dressed in hazmat suits, suggesting heightened friction over weeks of lockdowns. It was not immediately clear what exactly sparked the incident.

The factory is owned by Quanta, a Taiwanese Apple supplier. According to Chinese state news outlet Xinhua, the plant had resumed work under a closed loop system, whereby workers live in designated areas and adhere to strict protocols.

Apple referred CNN Business to Quanta when asked about the matter. Quanta did not respond to a request for comment.

An outdoor advertisement for the Apple iPhone 13 Pro, seen in April in Wuhan, China.

Last month, Microsoft (MSFT) also said that shutdowns in Chinese production had hurt its supply for Surface laptops and Xbox consoles, and could potentially “have a big impact” on its quarterly performance. Much of the PC maker’s production is in China, according to its most recent list of top suppliers.

The global auto industry has also been particularly hard hit, with some players temporarily shuttering factories, suffering a slump in sales or having to delay launches of new cars.

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Two of the world’s biggest automakers, Volkswagen (VLKAF) and Toyota (TM), were both forced to suspend production for weeks recently. While both companies have since resumed production, they warned that they would only build up gradually as supply chain snags continued.

Tesla (TSLA), which runs a Gigafactory in Shanghai, also managed to restart production last month after a shutdown of several weeks, but the company may have hit another snag.

On Tuesday, Reuters reported, citing unidentified sources, that Tesla production had halted most production again due to issues with suppliers. The company did not immediately respond to a request for comment.

According to Cavender, many auto suppliers have continued to face difficulties keeping their own factories up and running, or delivering components.

Demand for electric vehicles has stayed strong though: Both Volkswagen and Chinese manufacturer BYD reported a recent surge in Chinese sales.

Chinese ports and other logistics hubs continue to face troubles, however.

Last month, Amazon (AMZN) flagged that “line-haul air and ocean shipping rates continue to be at or above the rates in the second half of last year” in part because of China’s Covid surge.

Those “were already much higher than pre-Covid levels,” Chief Financial Officer Brian Olsavsky told analysts during the company’s results presentation, citing the spread of the Omicron variant in China and labor shortages in various locations.

The aftermath

Many brands have expressed optimism about a recovery for their businesses once the crisis subsides.

In recent weeks, the Chinese government has worked to get more businesses up and running, while also vowing to help curb the economic damage.

But analysts have warned of the adverse effects of the country’s “zero Covid” policy, saying that the economy could slow significantly this year.

The damage can be seen on all sides. Last month, China’s enormous services sector suffered its second steepest drop on record, while manufacturing activities also hit a record low.

Health workers wearing protective clothing at the entrance to a Covid-19 testing site at a shopping complex in Beijing.

Despite that, Chinese President Xi Jinping has doubled down on the country’s pandemic approach, saying Thursday that the government would “resolutely adhere to” its “zero Covid” policy.

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According to CNN’s latest calculation based on government data, at least 31 cities in China are under either full or partial lockdown, potentially affecting about 214 million people across the country.

The ongoing dilemma may ultimately lead some businesses to reconsider their positions, according to trade groups.

As other nations continue to reopen, some foreign companies may consider moving their regional headquarters out of China, according to Jörg Wuttke, president of the European Union Chamber of Commerce in China.

“I definitely see discussions,” he told CNN Business.

Pedestrians along the near-empty Nanjing Road shopping street outside of the impacted areas during a lockdown in Shanghai, China in March.

Cavender said that the recent challenges in Ukraine and China had highlighted “a period of greater risk” more broadly for international firms.

“I do think there are a lot more challenges now to being a multinational than there have been in the past,” he added.

— CNN’s Beijing bureau, Jorge Engels, Lizzy Yee and Nectar Gan contributed to this report.

source: cnn.com