Have you recently encountered delays in the delivery of imported goods? Or seen empty shelves in supermarkets that have not been replenished for quite some time? In September, McDonald’s warned that its popular crispy chicken wings could run out due to the uncertainties plaguing global supply chains.
Earlier in the year, businesses in Hong Kong were already sounding the alarm over the effects of a tangled supply chain. According to findings from a Chamber survey conducted in July, “supply chain disruption” was considered a major challenge that businesses expected to face as the year progressed. It should therefore be no surprise that 2021 could go down in history as the year of supply shortages.
Supply chain issues are also affecting businesses globally. The world’s largest carmakers have trimmed production, citing shortages in raw materials and semiconductor chips. Industries and brands have been hit by factory and port closures due to Covid-19 outbreaks and associated social restrictions.
The very nature of the pandemic has complicated efforts to address the supply problems. This is because even if port activities in one place return to normal, ports in another location could grind to a halt due to a spike in local Covid cases – creating a web of backlogs. Distancing measures have also disrupted the way port and warehouse workers and cross-border truck drivers operate under normal circumstances.
In August, a terminal at Ningbo-Zhoushan port in eastern China, the world’s third-busiest port, was closed for a fortnight after a worker was infected with the Delta variant. The grounding of Ever Given in the Suez Canal in March and adverse weather further compounded the global supply chain crunch, which was already buckling under the pandemic. This has resulted in shortages in parts and finished products.
The supply side of such a global malaise is only one aspect of the equation. To further complicate matters, consumer demand has been soaring since shortly after the onset of the pandemic. This has been fuelled by generous government handouts in many jurisdictions that have mostly been channelled into online purchases as brick-and-mortar shops were forced to shutter temporarily.
The easing of Covid restrictions around the world as vaccination rates go up has served to push up demand driven by rising consumer confidence. “Revenge spending” supported by accumulated savings and stimulus cheques has turbocharged purchases, putting further stress on a supply chain that was already stretched thin.
Global recovery in the first half of 2021 has already lifted merchandise trade above its pre-pandemic levels, prompting the World Trade Organization to upgrade its forecasts for trade in 2021 and 2022. The new forecasts are for global merchandise trade volume to increase by 10.8% this year and 4.7% in 2022, compared to previous predictions of 8% and 4% respectively.
There are also structural issues with the system itself. Over the past decades, multinational businesses have prioritized efficiency and lower manufacturing costs by developing highly integrated supply chains and just-in-time manufacturing systems. This seemingly optimal operational model, however, offers little margin for error to cope with unexpected shocks.
At the time of writing, the Financial Times reported that some 580 container ships were stuck outside ports around the world – nearly double the number at the beginning of the year – according to real-time data from Kuehne+Nagel, one of the world’s largest logistics companies.
As a result, shipping costs have skyrocketed, with the average cost of shipping a standard 40-foot container climbing to a record high of more than US$11,000 in mid-September, compared to the pre-pandemic rate of sub-US$1,500, based on data provided by Freightos, a freight automation platform. At the same time, data from the consultancy firm Sea-Intelligence shows that global shipment schedule reliability has fallen to between 35%-40% for most of the year, well below the 75%-85% range recorded in 2019.
While companies may absorb the increase in costs initially to avoid losing price-sensitive consumers, the unrelenting increase in freight rates mean that the buying public will have to shoulder higher prices this year. There are increasing worries that the price pressure might not be transitory, as initially thought, and supply chain bottlenecks, if sustained, could undo the fragile economic recovery.
Projections on how long supply chain disruptions may last vary and are heavily dependent on the course of the pandemic. In the long run, investment in port infrastructure and automation will be needed. Meanwhile, multinational businesses are increasingly aware of the necessity for a strategic change from a “just-in-time” to “just-in-case” operating model to prepare for contingencies and build resilience.
For now, policymakers and central bankers can only hope that the market’s “invisible hand” will restore some semblance of normalcy, which would ideally be achieved through an increase in the supply of materials and goods rather than a decline in demand. Otherwise, the risk of stagflation – the unwelcome combination of rising prices and low economic growth – could become a real threat.
Wilson Chong, email@example.com