Global Supply Chain – How China’s energy crisis will affect the global economy
Supply Chain Globally - How China's energy crisis will affect the global economy?
The intensifying energy crisis in China is forcing factories to reduce production, which is becoming an increasing burden for the global supply chain. The main source of energy acquisition in China is coal. China is the largest emitter of CO2 in the world. In 2019 its total emissions were greater than the total emissions of the United States and the European Union put together. In order to reduce these emissions, the world’s largest national emissions trading system (ETS) was established.
For this reason, China is currently facing a dramatic price bulge and power cuts in factories and households. This autumn there have been blackouts (a major electrical system failure of a sudden and unexpected nature) in 17 provinces, which altogether represent 66% of China’s GDP. The Chinese government, as an additional effort to reduce carbon emissions, requires provinces and manufacturers to reduce their use of fossil fuels for every unit of economic output.
Shortage of diesel fuel
Another problem that the Chinese economy is facing is fuel rationing for diesel vehicles due to a shortage of diesel fuel. This has a direct impact on transport, especially over long distances. In some provinces, a refuelling restriction of 100l per vehicle has been introduced. This directly affects exports and delays in supplying the international market.
However, from the point of view of the seller and consumer of products manufactured under the ‘Made in China’ label, the most important thing is not the causes of the energy crisis. But the effects it will have on the supply chain.
Production prices in Global Supply Chain
The biggest problem is turning out to be the increase in production prices. Consequently, entrepreneurs will be forced to increase the retail price of the product. Other consequences are delays in the delivery of goods.
In addition, sellers have to be aware of the possibility that factories may stop the production of the goods they want to buy. All these effects are interlinked and may result in consumer expectations not being met. The supply will no longer keep up with the demand.
The crisis in the Middle Kingdom has already led to reduced sales of Apple products. Chinese subcontractors are unable to produce the units that are necessary to produce the new iPhone 13s. Moreover, more than 80% of the medicines available on the European market are now produced in China. The great concern is the restriction of access to medicines throughout Europe.
Entrepreneurs from all over the world are worried about the consequences of the crisis. China is considered the ‘producer of the world’. Most of the goods or materials sold in the world are produced in China. Businesses are anxious about falling sales, rising production prices and delayed deliveries.
The high time for a change?
If there are any positive aspects to be mentioned in such a situation, it is definitely the potential consequence of limiting production in China. Namely, it is the probability that the competition curve in the world’s manufacturing industries will level off. The reduction in production in China may result in the mobilisation of manufacturers from around the world to expand their business.
I decided to take up this topic because I have noticed that the energy crisis in China is beginning to have a direct impact on our company’s operations. These days, the factories producing the products that we sell work for only 2 days and rest for 5 days. This affects efficiency and production time.
As a result, the waiting time for goods to be delivered to the warehouse increases. This results in more out of stocks and consequently fewer sales. Additionally, manufacturers are increasing the prices of the products we purchase, which results in higher selling costs and higher unit prices.
China’s energy crisis favours a deterioration in the global economic situation. More and more often, economists mention the risk of stagflation – a macroeconomic phenomenon characterised by high demand but also by increased prices and reduced production.
While looking at how the situation in China affects the global economic situation, one thing is certain. There is no doubt about the power of Chinese industry and how the international market is dependent on it.
Despite many speculations, the long-term effects of the crisis are not entirely clear yet, but we can certainly expect many changes in the supply chain and challenges to be faced by economic entities: households (consumers), entrepreneurs and the government.