Climate

China's supply chain is melting in extreme heat. Whose will be next?

Blistering temperatures have baked a large portion of China, curtailing power to factories. It shows the new supply chain woes that await if we don’t adapt.

The lakebed of China's largest freshwater lake, Poyang, is exposed due to high temperatures and drought on August 19, 2022.

China’s heat wave is on another level in terms of ferocity and scope. Daytime highs have reached well into the triple digits across a large swath of the country, crushing all-time heat records.

Photo: Shen Junfeng/VCG via Getty Images

Searing temperatures have turned China into a furnace this summer, with a profound impact on the world’s industrial powerhouse that could be a preview of how other climate crisis-fueled changes will affect factories around the world.

Rivers have dried up and with them, hydropower supplies, right at a time when people are relying more heavily on air conditioning to keep cool. In an effort to keep the lights on, provincial governments have asked factories to cut power.

The issues reflect the bumpy road ahead for climate tech, one where the world’s race to decarbonize will be affected by the results of the climate crisis already baked into the system.

China’s heat wave is on another level in terms of ferocity and scope. Daytime highs have reached well into the triple digits (upper 30s and low 40s for Celsius readers) across a large swath of the country, crushing all-time heat records. Among the more eye-popping numbers are the overnight lows, which include Chongqing, a city of 32 million, cooling to just 95 degrees Fahrenheit. Again, that was the low temperature.

The heat has enveloped manufacturing hubs across the country, leading to factory shutdowns. That includes in Sichuan, where Toyota and Contemporary Amperex Technology, the world’s largest battery maker, have suspended operations in response to provincial demands to save energy. The province produces major amounts of lithium and polysilicon needed for batteries and solar panels, respectively, and numerous other manufacturers have also shut down shop during the blistering heat. SAIC Motor (China's largest automaker) and Tesla have also impacted operations in Shanghai, which is located far from Sichuan, because suppliers in the province have been unable to ship needed parts.

Most research has focused on the impact that climate shocks are having on worker productivity, but there’s a growing body of evidence — both in academic literature and the real world — that supply chains are increasingly vulnerable, too. The heat wave in China is a prime example, one that Christoph Schiller, a finance professor at Arizona State University, said shows the “big knock-on effects” the climate crisis can have on how goods are made and moved around the world.

He and Nora Pankratz, an economist at the Board of Governors of the Federal Reserve System, authored a 2021 paper showing that supply chain customers factor climate shocks into choosing suppliers. But when those shocks — in the case of the research, floods and heat waves — are worse than expected, customers are up to 11% more likely to end their relationship with a supplier.

But it’s not just the supplier-customer relationship that could be disrupted, given that heat and high water aren’t the only shocks that could affect the supply chain. Drought in Europe is currently making waterways unnavigable, affecting the shipping of raw materials.

A 2020 McKinsey analysis found that the odds of a typhoon near South Korea, Japan or Taiwan plunging the semiconductor industry into chaos could quadruple by 2040. Meanwhile, the chances of heavy downpours affecting rare earth mining could increase threefold by 2030, resulting in a 20% drop in production. This is the stuff of climate nightmares given the role those minerals play in the transition to an all-electric future.

While many tech companies have focused on getting their suppliers to decarbonize, the risks that are already here — to say nothing of the future ones in the pipeline — show the need for companies to also work with suppliers to adapt to climate shocks.

“Adaptation can take a whole lot of different ways,” Schiller said. “[There are] physical adaptations, as in, we put a higher wall so the floods aren't going to get to a factory, or it could mean changing patterns of work: Do you work later, do you work earlier?”

Pressure could come from companies looking to keep their supply chains from breaking down as well as people buying their products advocating for more just working conditions or cheaper goods. Ultimately, companies need to be looking to what the future holds. Extreme heat will increase in nearly every corner of the globe, but other effects like drought and downpours are more variable.

“Rather than purely rely on what types of climate shocks have happened to us, over the last two, three, four, five years in this particular supply chain relationship, what if we look at climate models,” Schiller said. “What would be the optimal supply chain if that is the scenario that we were working with? That is a question that managers have to ask themselves.”

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