The Gist: COVID-driven societal restrictions and civil demonstrations against them in China are again sparking fears of supply chain disruption, but so far promo products suppliers tell ASI Media their networks have not been significantly affected, though they’re monitoring the situation closely.

Context: What’s Going on in China?

Throughout the pandemic, China’s government has imposed a “zero-tolerance” policy on COVID-19, leading to restrictions or full-blown lockdowns in cities and areas where cases of the virus are detected.

Protests in China are not rare. What *is* rare, are multiple protests over the same issue, at the same time, across the country. The protest below, apparently in central Beijing’s liangmaqiao, is astounding #China #protests pic.twitter.com/UHJCqqF1YG

— Tom Mackenzie (@TomMackenzieTV) November 27, 2022

COVID counts have spiked in China this month, leading to lockdowns in places like Beijing, Wuhan and Chongqing, and obstacles to movements in Suzhou, Guangzhou and Tianjin. Many other cities/areas are reportedly experiencing restrictions, too.

Then, a fire in the Xinjiang region’s capital of Urumqi, which had been under lockdown for more than 100 days, killed 10 people. Over the weekend, that triggered widespread unrest as protesters took to the streets to rail against COVID-related restrictions they felt delayed firefighter response. The protest stirred a groundswell of simmering anti-lockdown sentiment in China, leading to protests breaking out in Shanghai, Beijing, Guangzhou, Wuhan and Chengdu.

Supply Chain Perspective

China is the world’s factory, accounting for about 30% of global manufacturing output. It’s also where the vast majority of products sold in the North American promotional products market are produced. In 2021 and early 2022, COVID-related restrictions in China contributed to supply line disruptions that caused inventory shortages for North American promo suppliers.  

Carmakers in China sideswiped by strict Covid-19 controls, with production curtailed at several plants https://t.co/UFDzK1U0uB

— South China Morning Post (@SCMPNews) November 29, 2022

While promo’s supply chain/inventory situation has improved greatly thanks in significant part to strategic, proactive sourcing practices by suppliers (bringing more product stateside farther in advance, for example) and overall declining demand by Western importers, there are concerns that the potential for spreading restrictions amid a COVID spike, combined with the potential for protests to grow, could upend manufacturing and export capability in China.

China’s factory and services activity has contracted further in November as a record number of Covid cases prompt widespread movement curbs, further damaging the economy’s fragile outlook https://t.co/CI8c7QkR1q

— Bloomberg Markets (@markets) November 30, 2022

That, the worry goes, could reignite production/inventory issues that plagued not just promo but retail and other industries earlier in the pandemic. The concern isn’t unfounded: Apple, for instance, announced that it expects iPhone Pro device production to fall short by nearly 6 million units due to worker unrest at a key manufacturing plant in Zhengzhou. The worker backlash is rooted in COVID and COVID-related restrictions.

“When you look at Apple not being able to fulfill the orders for their iPhone because the factories in China are shut down, I think that’s a perfect example of how something in one country can affect somewhere else,” Victoria Fernandez, chief market strategist at Crossmark Global Investments, tells CNBC. “It just has a ripple effect through the global economy when you have something as large as the Chinese economy shutting down.”

Shanghai-based Thomas Gronen, head of Greater China at Fibs Logistics, tells The Loadstar: “The protests are very local actions. What will impact the supply chain, sooner or later, are newly imposed COVID restrictions.” 

The Word From Promo

Even so, promo suppliers that spoke with ASI Media say their supply lines remain in a good position and that inventory continues to be much more robust than in 2021 and early 2022.

“We are not experiencing any supply chain disruptions,” says Liz Haesler, chief global merchant at New Kensington, PA-based Polyconcept North America (PCNA, asi/78897), promo’s fourth-biggest supplier. “We have an incredible team in Shanghai who are monitoring the situation in China daily. We don’t anticipate any disruptions based on what we know today.”

Jeffrey Nanus, CEO of Norwood, NJ-based hard goods supplier AAA Innovations (asi/30023), says his firm ordered spring merchandise early and that products have shipped as scheduled, meaning the supplier’s already strong inventory position should remain so in the months ahead. Still, he’s a bit concerned about what could come down the pike.

“HPG has been closely monitoring the situation in China and has brought in additional inventory as a hedge against some of the variables occurring there.” Chris Anderson, HPG

“We’re holding our breath that the situation will not worsen,” Nanus shares. “I do think it’s very possible that many areas/factories will close early for the Chinese Lunar New Year. The holiday is set to begin on Jan. 22, but I would suspect that factories could close weeks earlier as workers want to go home before the government locks them down.”

During Lunar New Year, factories customarily close and workers return home. A longer New Year-related closure for factories could have implications for supply chains, depending on how long it lasts and when a particular supplier/importer placed orders and needs goods.

Jing Rong, vice president of global supply chain and compliance at Top 40 supplier HPG (asi/61966), shares a similar perspective to Nanus on Lunar New Year, but she’s not much worried.

“As far as supply chain disruption, I expect the government might ask factories and universities to close down and send people home early for Chinese New Year,” Rong says. “HPG already has a plan in place in case our suppliers have to close down earlier due to unforeseen circumstances.”

Adds HPG CEO Chris Anderson: “HPG has been closely monitoring the situation in China, and has brought in additional inventory as a hedge against some of the variables occurring there.  Additionally, we continue to make strategic investments in geographically diversifying our supply chain to reduce the potential for impact due to regional issues.”

Some analysts have speculated on whether the protests could rise to such a level in China that they effectively shut down or significantly detract from the nation’s economy, including the manufacturing infrastructure of factories, transporters and ports. Rong doesn’t foresee that happening.

“I do not expect this to expand into large scale revolution such as the Arab Spring,” Rong says. “There still aren’t enough blue-collar citizens in China that are willing to step out against the government. And, students and white-collar protesters who are stepping out are too small in number.”