How China’s lockdowns are affecting global businesses

International brands are revealing the damage to their bottom line from China’s “Covid-zero” policy, where tens of millions of people remain in lockdown and nearly all big business has come to a halt.

In recent weeks, dozens of cities across mainland China, including the financial hub of Shanghai, have been on lockdown as authorities work to stamp out the coronavirus.

For industries ranging from Big Techs to consumer goods, this is destroying both supply and demand — and giving executives another major headache.

Many companies have just lost millions or billions of dollars due to the war in Ukraine, which has led to a massive – and expensive – corporate exodus from Russia.

The combination of both events created an impressive double whammy for multinational corporations such as Estée Lauder, which said last week that the “two significant headwinds” forced it to lower its outlook for the year.

The crisis is a stark reminder of China’s enormous 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 consultancy China Market Research Group.

“And it’s probably their main production base, or it’s responsible for a significant amount of their 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 to their homes for more than a month, leading to high levels of mental stress.

In many cases, residents cannot 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 just consumer spending but employment.

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

The company said it was harmed by suspending all business in Russia and Ukraine after the invasion, leading to a decline in sales.

Sales also dropped 4% in Asia-Pacific in the last quarter, which was “entirely driven by Greater China,” Chief Financial Officer Tracey Travis said on an earnings call.

Some companies refused to make a prediction.

Last week, Starbucks 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 are practically unable to predict our performance there in the second half of the year.” The country is Starbucks’ second largest market.

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

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

However, the mood there is darker.

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

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

Now, even as access increases, many people focus on what’s known as “group shopping,” allowing users who live in the same community to order large amounts of groceries and other essentials.

Even those who are not stuck at home can be affected. Consumers living in unrestrained cities may also be hesitant to go out and go to the mall, for fear of “what happened in Shanghai,” where people remain confined indefinitely, Cavender said.

“It has been a major negative drag on consumption.”

Still the factory of the world

Companies are also facing problems in the backend.

In recent years, many companies have worked to move at least some of their manufacturing out of China, thanks to the trade war with the United States. But that hasn’t stopped a large number of household names from being caught up in the country’s Covid crackdown.

Last month, Apple warned of heavy losses related to the Covid-19 outbreak in China, saying supply chain problems could affect its sales by as much as $4 billion to $8 billion this quarter.

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

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

In some cases, the tension overflowed. Videos posted on Chinese social media last week showed workers at a factory in Shanghai pushing through barriers and clashing with security guards dressed in protective clothing, suggesting further friction over weeks of lockdowns.

It was not immediately clear what triggered the incident.

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

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

Last month, Microsoft also said that Chinese production shutdowns have hurt its supply of 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 latest list of top suppliers.

The global auto industry has also been particularly hard hit, with some players temporarily closing factories, suffering a drop in sales or having to delay new car launches.

Two of the world’s biggest automakers, Volkswagen and Toyota, were forced to suspend production for weeks recently. While both companies have resumed production, they warned that they would only gradually increase as supply chain problems continued.

Tesla, which runs a Gigafactory in Shanghai, was also able to restart production last month after a multi-week shutdown, but the company may have run into another hurdle.

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

According to Cavender, many car suppliers continue to struggle to keep their own factories running or deliver components.

Demand for electric vehicles has remained strong: both Volkswagen and Chinese manufacturer BYD have reported a recent increase in Chinese sales.

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

Last month, Amazon signaled that “shipping line air and ocean shipping rates remain at or above rates in the second half of last year” in part because of the Covid outbreak in China.

These “were already much higher than pre-Covid levels,” Chief Financial Officer Brian Olsavsky told analysts during the company’s earnings call, citing the spread of the Omicron variant in China and a shortage of labor in several locations. .

Adverse effects

Many brands have expressed optimism that their businesses will recover once the crisis has passed.

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

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

The damage can be seen from all sides. Last month, China’s massive service sector suffered its second sharpest decline on record, while manufacturing activities also hit a record low.

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

According to the last calculation of the CNN Based on government data, at least 31 cities in China are under full or partial lockdown, potentially affecting an estimated 214 million people nationwide.

The current dilemma may prompt some companies to reconsider their positions, according to trade groups.

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

“I definitely see arguments,” he told the CNN Business .

Cavender said recent challenges in Ukraine and China have highlighted “a period of increased risk” more broadly for international companies.

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

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