Supply Chain Woes
Four causes of worldwide shortages and how to address them
Photo: Photo by Tom Fisk from Pexels
Nowadays, it is common to hear and to read in the news that the world is experiencing unprecedented supply chain woes. China lacks coal and paper. The United States has a shortage of toilet paper and toys. And India is low on microchips. Even we, the masses, have experienced delivery delays and found that certain items, previously one click away, are out of stock. Why is this happening? Below are four current issues that negatively impact the world’s supply chains.
1. Lockdowns (Still) in the World’s Factory: China
Economists say that companies with an overreliance on factories in China are the most vulnerable in this supply chain crisis. But this describes most companies. Back in the early 2000s, when an outbreak of severe acute respiratory syndrome, or SARS, forced China to temporarily shut its manufacturing capacity to control the virus, the country had just the sixth-largest economy in the world, with a nominal gross domestic product (GDP) of $1.4 trillion. Fewer than 20 years later, China’s economy had grown to be the world’s second largest, with a nominal GDP of $14.72 trillion in 2020.
China has also become the producer of 28.7 percent of all the world’s goods, and exports $2.6 trillion of worth of products annually. This makes it the top exporting economy. Coupled with its number-two ranking for imports, it’s no wonder China has garnered the moniker “the world’s factory.”
How did China achieve such a rise? By making itself a manufacturing powerhouse and primary recipient of foreign investments thanks to a large, cheap, but capable labor force and low tax rates. With these manufacturing credentials under its belt, and huge amounts of trade coming in and out, China became a key player on the world stage.
More than two years into the coronavirus pandemic, as vaccines were being rolled out and populations inoculated around the globe, Covid-19 became a norm in our daily lives. We all thought that lockdowns were a thing of the past. But China has continued to implement a zero-Covid strategy, loosening its grip on the population only as 2022 draws to a close under growing pressure from weary citizens.
China’s zero-Covid policy required strict quarantine, even if just a handful of cases are reported. As a result, tens of millions of people in at least 30 regions of China have been ordered to stay at home under partial or full lockdowns. How changes will affect the severity and impact of countermeasures remains to be seen. Until now, these lockdowns have caused massive disruptions to China’s manufacturing activities that have translated into worldwide supply chain interruptions.
2. Worldwide port congestions and bottlenecks
As we all get back to our normal lives and try to move on from the bad memories of the pandemic, economic activity has restarted and demand for various goods are returning to pre-pandemic levels. This hefty appetite from various economies—on top of the prevailing delivery backlogs and shortages caused by the pandemic—has put massive strain on the world’s ports. The situation has been exacerbated by various businesses trying to pile up their respective stocks in the face of supply uncertainties.
Ninety percent of global trade is transported via sea. Delays caused by port congestion have driven up the cost of many goods or, in the worst cases, caused depleted stock of some much-needed items. For example, the United States, the world’s largest importer and second-largest exporter, has seen its ports experience unprecedented cargo ship backlogs. Billions of dollars’ worth of goods are stranded off the coasts of the United States as there’s neither enough manpower nor resources to unload them. Ultimately, this causes delays in delivery to end users. The same thing is happening at major ports around the world.
This existing issue has caused cargo prices, as well as average port-to-port waiting times, to multiply to record levels.
3. Power levels: on red alert
As businesses around the world struggle to address the ongoing logistical and manufacturing disruptions caused by the pandemic and existing production backlogs, another problem has arisen: Where to source power?
It is a given that power is necessary to fuel manufacturing capacity around the world and keep goods in production, but meeting demand means overcoming challenges.
In the Pacific, China last summer experienced its worst heatwave and drought in six decades, and its power source portfolio suffered. Hydroelectricity, the country’s second-largest source of power, yielded an all-time low output due to the much lower water levels at hydroelectric plants. To conserve electricity, the government took steps such as ordering the closure of factories, demanding that air conditioners be set to above 26 degrees Celsius, or shutting down elevators for the first three floors in some provinces. The regions affected are key manufacturing centers for semiconductors, solar panels, and batteries, and the reduced production affected some of the world’s largest electronics companies.
Europe has been on red alert since March as economic sanctions imposed on Russia for its war in Ukraine, measures which include the cessation of gas imports from Russia, have diminished energy supplies. Russian gas normally accounts for about 40 percent of European Union (EU) fuel imports. As winter starts, the EU is bracing for two scenarios—one in which a few member states experience power cuts and another in which blackouts occur in many member states at the same time. Can you imagine the famous Eiffel Tower on a lights-off schedule? The EU is also the location of some of the world’s biggest manufacturing brands, hence this development will mean further disruptions to the global supply chain.
4. Russia’s economic embargo, Part II
As the West and its allies impose costly economic sanctions on Russia to cripple its economy and ability to fund its military operations in Ukraine, they have also cut themselves off from what Russia contributes to the supply chain. Aside from oil and petroleum products, industry relies on the country for metals, including nickel, palladium, platinum, rhodium, aluminum, and copper. These minerals are key components in the production of automobiles, semiconductors, aerospace components, packaging, renewable energy, and other industrial products.
Russia also specializes in chemical production, particularly of the potassium compound potash and ammonia, key ingredients in fertilizers. This area may be impacted most as Russia accounts for roughly 10 percent of ammonia and five percent of urea production globally, as well as 20–25 percent of global ammonia exports. The country is also a significant producer and exporter of potash, delivering about 18 percent of the world’s supply in 2021. Low or no supply from Russia, combined with the existing issue of high energy prices, is likely to result in significant disruption to the supply of fertilizers for the foreseeable future.
It is very evident that manufacturing companies were caught flat-footed as these developments were thrust upon us and found to be overly reliant on certain countries to produce their products. Many have preferred suppliers for materials and labor located in countries where conditions have impacted manufacturing. As these supply chain woes were often not considered in corporate contingency plans, it is normal to execute short-term reactive solutions, such as stockpiling supplies and chartering private container ships. But companies know that these are just temporary fixes and recognize the need for permanent solutions.
Recently, we began to see companies start to implement long-term strategies to “de-risk” their supply chains. Steps may include finding new and more diverse sources of raw materials, widening the list of suppliers, and setting up independent factories in multiple parts of the world to cater to demand in specific regions, diversify operations, and minimize risk.
Even though these long-term action plans will further exhaust significant resources, it is indeed worth the investment for a company to secure its operations and, most importantly, to ensure an uninterrupted supply chain to meet consumers’ unending demand for goods.
For more information, please contact Grant Thornton Japan at info@jp.gt.com or visit www.grantthornton.jp/en
