(Bloomberg) -- China’s zero tolerance approach to Covid has idled Toyota Motor Corp. and Volkswagen AG factories the past week, a troubling sign for global carmakers as the omicron variant begins to spread in the world’s biggest auto production hub.
The two top-selling carmakers’ factories in Tianjin, 108 kilometers (67 miles) southeast of Beijing, have been halted since Jan. 10 as the local government carries out multiple rounds of mass testing for the city’s 14 million residents.
The disruptions caused by China’s strict Covid-Zero policy are sparking broader concerns about what the months ahead will look like for manufacturers operating in China, which has imposed strict quarantines and mass testing to stamp out infections. The clash between those policies and the omicron variant could put further stress on already strained supply chains, given the country’s role as a manufacturing powerhouse.
The strategy “will have a global impact given the role China still plays in the global autos supply chain,” analysts at Fitch Solutions wrote in a recent report, adding that lockdowns will probably impact carmakers indirectly as well through their wider supply chains.
Fitch sees the recovery of global vehicle production now being delayed until 2023 due in part to high rates of new omicron infections and localized lockdowns, “especially in China with its Covid-Zero strategy.”
Domestic and foreign-owned car plants in China churn out about 25 million cars a year -- around one-third of all vehicles globally, according to the International Organization of Motor Vehicle Manufacturers.
On Saturday, the Tianjin municipal government mandated a third round of testing for its citizens, uncovering 59 new cases of the virus. With companies unable to resume operations until employees test negative and receive a green light from local authorities, the repeated rounds of testing are fueling concern among businesses.
Toyota’s venture with China FAW Group Co. in Tianjin is based in the city’s western Xiqing district, which has sealed off some neighborhoods due to the detection of Covid infections. The joint operation, has an annual production capacity of more than 500,000 vehicles.
VW said its plant on the other side of the city, which produces around 300,000 cars a year including the Audi Q3, has been temporarily shut down due to parts shortages and pending test results of workers.
The omicron variant has led to record case numbers across Europe and the U.S. In China, after the first sign of a virus flare-up, cities have been known to test their entire populations as many as 10 times to keep infections under control.
China is a central player in many automotive-parts supply chains, especially for electric vehicles. The country’s Covid policies will likely worsen the existing shortage of batteries, presenting a “major risk” to EV production, according to the Fitch report.
Indeed, broken links in the auto parts supply chain are already appearing in Tianjin, a sign that disruption to output may linger even after city officials allow business activity to resume.
A gearbox supplier controlled by VW and Rohm Co. were among operations that were halted last week. Some shifts at the VW component factory resumed Jan. 13, and the German automaker said it hopes to catch up with lost production.
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