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China dealt with a record heat spell that could have done significant damage to their supply chains

Supply chains are impacted by the recent COVID lockdowns.



Early this year, COVID-19 lockdowns in China disrupted international supply lines, slowing down manufacturing and shipping globally and stifling economic growth.

Another significant threat is currently looming over the nation, and this one could be even worse for the economy.

This month, China has experienced its worst heat wave in 60 years, with regular highs above 40°C (104°F) in various provinces. But one significant province is suffering the most financially as a result of the oppressive heat.

According to the Sichuan Provincial Department of Economics and Information Technology, the record heat wave has exacerbated an ongoing drought in Sichuan, a region known for its manufacturing prowess and home to more than 80 million people. As a result, water levels at hydropower reservoirs have been cut in half this month.

About 80% of Sichuan’s energy requirements are met by hydropower, and as a result of people using more energy than usual to stay cool during the heat wave, energy supplies are running low.

The outcome was that on August 15, authorities said that factories in 19 cities and prefectures would have to shut down for five days in order to save electricity for “usage by the people.”

However, a specialist warned Fortune that the recent heat wave is more than simply a local issue and might have significant global effects. Manufacturing workarounds that were widely used during the peak of COVID will no longer be available due to the unique difficulties that heat presents, which could have even more negative economic effects.

The recent COVID lockdowns may not have as much of an impact on supply chains as these shutdowns, according to Mirko Woitzik, global director of intelligence solutions for Everstream Analytics, a provider of supply-chain insights and risk analytics.

To the rest of China from Sichuan

Through the implementation of “closed loop” systems, wherein employees would isolate themselves at facilities in order to continue operations, certain factories in China were able to stay operational during pandemic lockdowns.

However, during a heat wave, these kinds of mitigating measures are impossible.

“Since everyone relies on the same hydropower, the entire region is seriously impacted. Additionally, there is currently no white list of exemptions. Therefore, this is actually considerably more destructive than the targeted COVID lockdowns due to its indiscriminate character, according to Woitzik.

The heat wave in China is now only causing factory closures in Sichuan. But since the area is a manufacturing powerhouse, the repercussions will probably be felt far and wide.

The fatal heat may have the greatest impact on auto makers like Tesla, Toyota, and SAIC Motor Corp. as well as electronic component producers like Foxconn and Compal, both of which are suppliers to Apple.

As a result of the power shortage, Tesla and SAIC claimed on Thursday that they are struggling to continue production. They subsequently asked Chinese officials if their production could be given priority. This week, Toyota also stopped operations at its plant in Sichuan, according to the Japanese news source Kyodo News.

Furthermore, due to power restriction in the area, BOE Technology Group, an Apple supplier that manufactures LED screens and other hardware components, stated on Wednesday that it will need to “make modifications” at its operations in Sichuan. In addition, Contemporary Amperex Technology, the biggest battery manufacturer in the world, announced it will halt operations at its Sichuan plant until August 20, according to Reuters.

The last ten years have seen a significant increase in the output of raw materials in the Sichuan region, according to Woitzik. Foxconn produces batteries there, and the list goes on, so it has a significant impact on the supply chain.

Lithium and semiconductors might potentially be impacted, albeit probably not to the same degree as producers of electrical components.

Lithium is mostly supplied by Sichuan, and some experts are worried that the heat wave in China would drive up the price of the silvery-white metal.

Due to production problems and the growing demand for EVs, lithium supplies are already under pressure. Woitzik further points out that Sichuan Yahua Industrial Group, one of China’s top lithium producers, has suspended production for five days, and as a result, lithium prices are anticipated to climb in the near future.

Woitzik claimed that, for the time being at least, he isn’t overly concerned about the lithium supply.

In terms of intermediate and finished items, “we think the impact will be more felt,” he said. For lithium, the heat wave would need to stay a lot longer in order to have a noticeable effect.

Semiconductors, often known as chips, are a significant industry that could be impacted by the heat wave because they are used in everything from cellphones to fighter jets. There has been a global scarcity of semiconductors for the past two years, and the situation in China is likely to make matters even worse.

Shutdowns, according to Woitzik, are already having an impact on Sichuan’s semiconductor producers, and they “are likely going to have additional rippling effects through semiconductor supply chains.”

However, he also pointed out that there aren’t many semiconductor manufacturers in Sichuan, so the effect on the ongoing chip shortage will probably be less severe than in the past due to pandemic-related interruptions.

There are many other electric component companies, particularly Taiwanese ones, who have settled down there [in Sichuan]. “In terms of semiconductor difficulties, they’ll definitely be more constrained,” he said. Therefore, in Sichuan, electronic components other than semiconductors are really more important.

effects of prolonged plant shutdowns

Currently, Sichuan factories are only anticipated to remain closed for a brief period of time.

The situation for Chinese manufacturing would worsen if the heat persisted and they were forced to remain closed for an extended period of time.

Woitzik stated, “If it’s limited to the five to seven days, it would still be tolerable.

However, Woitzik highlighted that certain factory closures in Chongqing, a self-administered municipality in Sichuan province, have already been postponed until August 24.

Regarding the hot wave, he stated, “Factories can organize inventory, and shutdowns won’t have that great of an impact.” But if the delay lasts longer than that—10 days, two weeks, or anything else—serious supply disruptions are in store.

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