From mid-August, the large electricity outage in the majority of Chinese industrial provinces caused a domino-effect disruption, straining global supply chains. In an attempt to wean itself off dependency on coal and meet the targets for reducing carbon emissions, Chinese authorities forcefully halted electricity supply to the regions that did not meet their goal.
Amid halting factory production, the event already caused a ripple effect in the supply chains of giant corporations like Apple, Tesla, Toyota, and others, let alone small businesses dependent on Chinese suppliers. In this article, we’ll take a closer look at the causes of the massive power crunch and its implications for global supply chains.
Why Did the Electricity Crunch Happen?
One of the central contributing factors, according to several analysts, was the goal to meet President Xi Jinping’s aim for a carbon-neutral China by 2060. In particular, the Chinese government is expecting a 3% reduction in “energy intensity” per unit of GDP this year.
However, as of August 2021, 20 of the country’s provinces didn’t meet the requirements for power intensity. As a result, authorities limited energy supply, which caused major industrial factories that serve as global suppliers to shut down. For some plants, the shortage meant a 30 to 40% reduction in operational efficiency.
China Power Crunch: Impact on Global Supply Chains
The electricity rationalization efforts resulted in being the latest supply chain threat, with a month-long duration. With winter approaching, experts expect the issue to intensify.
Global Supply Chain Disruption
The surge is being driven by an increase in orders for cell phones, appliances, exercise equipment, and other items produced by China’s manufacturers.
The disruption occurs as manufacturers and shippers struggle to satisfy the demand for everything from apparel to toys for the year-end Christmas shopping season, contending with supply lines that have already been disrupted by skyrocketing raw material costs, long wait times at ports, and cargo container shortages.
Apart from the general chaos and uncertainty, the major implication of the China power crunch is lengthy delays in supplies shipping to western countries and the rest of the world.
Spike in Supply & Product Prices
Growing coal prices and soaring demand for supplies are already resulting in a spike in product and shipping costs. Some manufacturers have even started to use diesel fuel or rent power generators to keep up the pace of production, which adds to the final product cost. Prices for components have already risen by 30% to 50% compared to last year, as labor expenses and raw material prices have risen.
Chinese factory owners are already naming 2021 as the worst year for their businesses. Tighter export control due to the recent wave of COVID-19 outbreak has also caused disruption at major Chinese ports. According to analysts, electricity shortages will certainly affect heavy industries such as aluminum and steel, as well as downstream sectors.
Struggles with new power regulations and restrictions initially strained the tech supply chains of Apple and Tesla. Pegatron, a Taiwanese company that assembles components for Apple, was also subject to a power shortage, saying to CNN that they are “cooperating with local government policies to activate energy-saving mechanisms and adjust their production line.”
Cutting Growth Forecasts
According to Goldman Sachs, up to 44% of China’s industrial output has been disrupted, resulting in a 1-percentage-point drop in annual GDP growth in the third quarter and a 2-percentage-point drop from October to December.
Power shortages around the country have forced experts to lower their projections for China’s growth this year. Nomura, a Japanese financial organization, reduced its prediction for GDP growth in the last three months of this year to 3% from 4.4%.
“Global markets will feel the pinch of a shortage of supply from textiles and toys to machine parts,” stated Lu Ting, chief China economist at Nomura Holdings in Hong Kong. “The hottest topic regarding China will very soon shift from “Evergrande” to “Power Crunch.”
While the final consequences of the China power crunch and its impact on global supply chains are yet to be witnessed, it is clear that the issue wouldn’t just vanish in a few weeks.
Local authorities are already struggling to provide energy and heating to residents, let alone sustain factory demands. The outcome will rely on further government action to regulate the crisis. Meanwhile, supply chain executives should focus on getting end-to-end visibility into their supply chain and analyzing transactional insights to detect possible risks.
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