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By Alan Tsang
COVID outbreaks in China have the potential to further disrupt global supply chains and growth rates that equity investors are sensitive to.
Given China’s integral role in global supply chains, their ongoing COVID-19 outbreak and lockdown measures in Shenzhen and Shanghai have investors asking about potential negative impacts. The sensitivity is understandable: Affected provinces are vital to about 40% of China’s exports. Moreover, companies including global bellwether Apple (AAPL) derive substantial revenue from China (+15% of the annual revenue for Apple), while we estimate that more than 80% of Apple products flow through China, whether for manufacturing or assembly.
Aided by insights from our research colleagues in Hong Kong, Singapore and across Asia and the U.S., we currently do not anticipate that China’s latest COVID-19 restrictions will cause a marked impact on global supply chain function. Rather, we generally expect manageable disruption to production amid some logistical challenges for deliveries and shipments.
Given this fundamental view, what’s changed?
China has demonstrated an encouraging, improved ability to adapt lockdowns to unfolding outbreak data, adjusting COVID testing and localized restrictions to mitigate disruption. As examples, in Shanghai, our colleagues report that lockdowns were first “localized” at the street level, expanding to the whole city as the situation deteriorated. In Shenzhen, districts with no cases were released from lockdowns promptly. Also, mild cases across China no longer require lengthy hospitalization. This granular approach is critical to mitigating broader supply chain disruption.
Of greater importance, many companies we follow in China have been “modularizing” local and regional manufacturing capabilities, creating more self-sufficient production that sustains manufacturing even when lockdowns affect regional supply chains. Combined with increased local inventory and, often, on-site housing for workers, such modularization, in our view, is helping to blunt the impact of the latest outbreak.
Finally, supply chains are not the only potential victims of COVID-19 spikes and restrictions in China: We are keeping an eye on the negative impact to the demand outlook as we meet with managements and conduct research across our Global Research and Thematic Strategies teams. As Shanghai is a major hub for China, we expect disruptions to in-person services, logistics, travel and consumption in March, April and May. Thankfully, China has a good record of bringing outbreaks under control, while regional economies tend to rebound more quickly. We also expect policymakers to stimulate the economy post-COVID in an effort to fuel a 2H22 rebound. The regional 2022 outlook should remain stable, with today’s outlook reflecting what’s new in 2022 rather than a more concerning 2020 style déjà vu.
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