China's Silicon Valley Shenzhen 'COVID Lockdown'... Spread Could Impact Samsung and Other Korean Companies (Comprehensive)

'4 Major Cities' Shenzhen Under Full COVID-19 Lockdown
Amid Worsening Global Supply Chain Crisis... Rising China Risk
Prolonged Situation Expected to Negatively Impact Domestic Companies

[Image source=Yonhap News]

[Asia Economy Reporters Jin-ho Kim and Byung-hee Park] Shenzhen City in Guangdong Province, considered one of China’s “four major cities,” has been completely locked down due to COVID-19, raising concerns about significant repercussions not only for the Chinese economy but also for the South Korean economy. Shenzhen is known as the “Silicon Valley of China” because it hosts many large technology companies. Especially amid the worsening global supply chain crisis caused by Russia’s invasion of Ukraine, the addition of risks originating from China is expected to inevitably have a negative impact on the global economy.

◆ Shanghai also at risk... China’s Zero-COVID policy faces a critical juncture = Shenzhen is the center of China’s IT industry, home to the headquarters of major Chinese telecom companies such as Tencent, Huawei, and ZTE. The world’s largest drone manufacturer DJI (Dajiang) and electric vehicle company BYD (Biyadi) are also headquartered in Shenzhen. Shenzhen was designated as China’s first special economic zone in 1980 during Deng Xiaoping’s presidency, symbolizing China’s reform and opening-up. With a resident population of 17.5 million, it is one of China’s four first-tier cities alongside Beijing, Shanghai, and Guangzhou.

Japan’s Nihon Keizai Shimbun reported that in 2020, Shenzhen’s IT industry had a total production value of 2.2 trillion yuan (approximately 427.3 trillion KRW), accounting for one-fifth of China’s entire IT industry output. China’s state-run Global Times described Shenzhen as “China’s top export city,” reporting that last year’s export volume reached 1.92 trillion yuan (approximately 372.5 trillion KRW).

The problem is not limited to Shenzhen. Before Shenzhen, Changchun, the capital of Jilin Province in the northeast, was locked down, and schools in Shanghai have been closed. If Shanghai, China’s largest logistics hub, is locked down, a global logistics crisis could occur.

China has faced a surge in infections this month, putting its Zero-COVID policy to a critical test. Due to the highly contagious Omicron variant, confirmed cases have recently surged, and economic damage is spreading, leading to analyses that the Zero-COVID policy is at a critical turning point.

According to Our World in Data, the daily new COVID-19 cases in China, which remained at 28 on February 28, rose to 224 on March 1, 293 on March 9, and 2,142 on March 13. Within China, it is expected that the number of confirmed COVID-19 cases will peak in early April.

◆ Prolonged situation could affect domestic companies = A state of emergency has been declared for Korean companies and the overall industry operating locally. According to the Korea Trade-Investment Promotion Agency (KOTRA), as of 2020, 24 Korean companies have directly entered Shenzhen. True to its reputation as a “technology hub” in China, many manufacturing and science and technology service companies have established a presence there. Due to China’s city lockdown measures, most of these companies are reported to have significantly suspended factory operations and business activities.

A KOTRA official explained, “From the 14th, companies operating locally have shifted to remote work, and office access restrictions have delayed customs clearance and logistics operations,” adding, “We are monitoring whether the lockdown measures will be extended.”

Fortunately, major Korean conglomerates such as Samsung Electronics do not have factories locally, but they are expected to face indirect difficulties such as parts supply disruptions through their partners. With ongoing global supply chain issues, the emergence of risks originating from China could pose a considerable burden for these companies. Previously, Samsung Electronics withdrew its telecommunications equipment and smartphone factory located in Shenzhen in 2018.

In fact, Samsung Electronics is expected to face difficulties in procuring smartphone parts due to the Shenzhen lockdown. General Interface Solution (GIS), a touch panel subsidiary of Foxconn, halted production at its Shenzhen factory starting from the 14th. GIS has been supplying fingerprint recognition modules to Samsung Electronics since the Galaxy S10 series. If GIS’s production halt is prolonged, there are concerns that the recent success of Samsung Electronics’ Galaxy S22 series could be adversely affected.

Nikkei Asia reported, “GIS, which counts Apple and Samsung Electronics as clients, is shifting some of the production previously handled at its Shenzhen factory to other factories,” adding, “Shenzhen is not only home to Huawei but also Foxconn’s second-largest production facility in China.”

The “consumption contraction” caused by the city-wide lockdown is also a significant burden for Korean companies with sales subsidiaries locally. If consumption is suppressed, serious damage to sales and other areas is inevitable. In China, consumer activity has not returned to pre-pandemic levels since the COVID-19 outbreak in 2020.

The industry is extremely wary that the COVID-19 lockdown measures could spread beyond Shenzhen to the entire Guangdong Province and even across China. A local company official said, “If the lockdown spreads or continues for a long time, sales damage is inevitable,” adding, “We are closely monitoring the situation.”

Another industry official noted, “In China, when COVID-19 spreads, ultra-strong measures such as shutting down entire cities are implemented, so the impact is bound to be significant,” and predicted, “If the lockdown spreads comprehensively, Korean companies could face direct damages such as production disruptions and logistics crises.”

This content was produced with the assistance of AI translation services.