A record-breaking heatwave in southern China has forced local authorities to introduce power-rationing measures, putting domestic and foreign manufacturers in a bind at a moment when multinationals are rethinking their position on China.

With the three-pronged effect of having the highest temperatures, the highest demand for air conditioning and the lowest rainfall since records began in the 1960s, the government in Sichuan, which generates 80% of its electricity using hydropower, launched the highest-level emergency response on August 21 to guarantee energy supplies. 

Last week, it mandated that businesses operating in 19 of the province’s 21 cities temporarily halt operations between August 15 and August 20 in favour of providing electricity “to the people” over industrial users.

Chinese domestic companies, such as Tongwei’s subsidiary Sichuan Yongxiang — the world’s biggest polysilicon manufacturing company, according to Bernreuter Research — was one of the most notable victims of the government order. Polysilicon is a key raw material in the production of solar photovoltaic cells and semiconductors. 

Taiwanese chip giant Foxconn and Japanese carmaker Toyota were also forced to suspend operations last week, and the latter is still operating in line with government restrictions as it resumes operations. Foxconn maintains that the impact on its China operations has not been “significant”.

A ‘concerning’ outlook

Given Sichuan’s position as a manufacturing hub, and key source of components for manufacturers inside and outside China, Nick Marro, the lead for global trade and Asia analyst at the Economist Unit Intelligence, tells fDi that the impact of these shutdowns will bring more challenges to industries that have already been hit by the global chip shortage. 

“The factory shutdowns paint a concerning near-term outlook for industries, not just in terms of the domestic picture but also on a global scale, given China’s importance in international value chains,” he says. 

Already within China, the effects of this power shortage have had far-reaching implications. The automotive sector has been particularly affected as car manufacturers in Shanghai have been unable to access key supplies. 

On August 18, the Shanghai Municipal Economic and Information Technology Commission sent a letter to the Sichuan Provincial Department of Economy and Information Technology, asking the latter to provide enough power to key suppliers to China’s largest automaker SAIC and US electric vehicle giant Tesla.

Mr Marro adds that the more significant consideration is multinational companies’ confidence in China as supply chain diversification becomes more pressing. 

“This energy crisis is eroding business conditions further … given these multiple shocks, I imagine that boardrooms are looking closely at alternative markets – particularly among companies in the export-oriented manufacturing space,” he says. 

This follows concerns that China is losing its allure to foreign investors amid Beijing’s zero-Covid policy and a slowing economy.

Net-zero vs adaptation 

Alice C Hill, a senior fellow for energy and the environment at the Council on Foreign Relations, says that the focus of the corporate world has favoured net-zero ambitions over adaptation, but with events such as drought in Sichuan, there should be equal focus on adaptation to a warming world.

“It’s one thing to promise to cut emissions to reduce the threat of future global warming; it’s another to talk about how to address the risks that are already occurring and cannot be avoided as a result of climate change,” she points out, citing flooding, extreme heat and the “cascading” failure of infrastructure.

As governments grapple with unpredictable meteorological phenomena that threaten their country’s power supply, the dilemma of rationing power between residential and industrial users is here to stay, according to Mr Marro.

He also notes that another concern is that the response to energy shortages in China and elsewhere will likely lead to “a pivot back to coal power generation and other sources of dirty energy”. 

“What’s scary is the risk that these policies might lock us in an endless downward spiral, as greater near-term reliance on fossil fuels prompts more future climate-linked disasters,” he cautions.