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Global Supply Chain Crisis Round Two Could Be ‘Bigger Than Last Year’

Bloomberg
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April 26, 2022

By Brendan Murray, Ann Koh and Kevin Varley (Bloomberg) China’s stringent rules to curb Covid-19 are about to unleash another wave of summer chaos on supply chains between Asia, the U.S. and Europe.

Beijing’s zero-tolerance approach amid an escalating virus outbreak brings the pandemic full circle, more than two years after its emergence in Wuhan upended the global economy. Shipping congestion at Chinese ports, combined with Russia’s war in Ukraine, risks a one-two punch that threatens to derail the recovery, already buffeted by inflation pressures and headwinds to growth.

Even if the virus is reined in, the disruptions will ripple globally — and extend through the year — as bunched-up cargo vessels start sailing again.

“We expect a bigger mess than last year,” said Jacques Vandermeiren, the chief executive officer of the Port of Antwerp, Europe’s second-busiest for container volume, in an interview. “It will have a negative impact, and a big negative impact, for the whole of 2022.”

China accounts for about 12% of global trade and Covid restrictions have idled factories and warehouses, slowed truck deliveries and exacerbated container logjams. U.S. and European ports are already swamped, leaving them vulnerable to additional shocks. “Once product export activities resume and a large volume of vessels make their way to the U.S. West Coast ports, we expect waiting times to increase significantly,” said Julie Gerdeman, CEO of supply-chain risk analytics firm Everstream Analytics.

WATCH An American Ship Get Locked Down In China

In the short run, the pileups will mean more costly headaches in the $22 trillion arena for global merchandise trade, which slumped in 2020 and rebounded last year. Longer term, such chaos is redrawing the contours of a global economy tied together by cross-border commerce. For some corporate executives, reeling in far-flung production networks is no longer a patriotic political slogan — it’s a business necessity given all the uncertainty.

“This has accelerated the pressing need for supply chains to become more regional,” Lorenzo Berho, CEO of Vesta, a Mexican developer of industrial buildings and distribution centers, said on a conference call last week. The shift toward shorter supply chains to places like Mexico is under way to reduce exposure to Asia. Said Berho: “Globalization as we know it may be coming to its end.”

Key policy makers are coming around to the idea that a sea change in the developed world’s supply lines is necessary. U.S. Treasury Secretary Janet Yellen calls her idea for more resilient trade linkages “friend-shoring” — a not-so subtle jab at China and Russia. Much of the shift hinges on whether the pandemic has convinced consumers to accept higher prices for products made closer to home, and at least one consultant’s analysis says they are.

Relocating supply chains “might cost more, but if you can make smaller quantities that you can then sell at closer to full price, you can actually completely change the game,” said Brian Ehrig, a partner at the consulting firm Kearney and co-author of a report this month that found 78% of CEOs are either considering reshoring or have done it already. Added Shay Luo, a Kearney principal who helped write the report: “My bet is that globalization will never die, however, it will evolve to a different form.”

Companies have weathered the roughest bouts of supply turmoil over the past year partly by raising prices — and consumers have largely absorbed the hit. In the near term, though, supplies from China pose a more menacing cloud than the questions about household demand.

Tesla Inc. lost about a month of work during the Shanghai shutdown. Retailer Bed Bath & Beyond Inc. earlier this month said an “abnormally high” level of inventory was in transit, unavailable or held at ports through the early part of this quarter. Alcoa Corp., the aluminum giant that’s a bellwether for the global economy, last week blamed transport snarls for higher inventories. Continental AG, Europe’s second-largest maker of car parts, lowered its growth forecast for global production of passenger cars and light commercial vehicles to a range of 4% to 6%, from 6% to 9% previously.

Wang Xin, head of the Shenzhen Cross-Border E-Commerce Association, an organization representing some 3,000 exporters, said that even though a lockdown in that Chinese tech hub lasted only a week, “many sellers are suffering about a one-month delivery delay.”

It still takes an average of 111 days for goods to reach a warehouse in the U.S. from the moment they’re ready to leave an Asian factory, close to the record of 113 set in January and more than double the trip in 2019, according to San Francisco-based Flexport Inc., a freight forwarder. The westbound journey to Europe takes even longer — a near-record 118 days.

Longer queues of vessels seen off China’s coast aren’t helping. The line of cargo carriers has jumped after Shanghai, home to the world’s largest container port, initiated a city-wide lockdown late last month to combat Covid-19 cases. The total number of container ships in port and off the hub’s shared anchorage with nearby Ningbo stood at 230 as of last Wednesday, a 35% increase from this time last year, according to Bloomberg shipping data.

Imported containers are waiting on average for 12.1 days at Shanghai’s port before they are picked up by truck and delivered to destinations inland, according to supply-chain data provider project44. The rate for April 18 was almost triple the 4.6 days on March 28. Trucking shortages have crippled efforts to supply key inputs to factories and transport goods such as autos and electronics to the ships.

Air freight is also being affected, with deliveries into Shanghai Pudong International Airport backed up, Taipei-based air and ocean freight forwarder and logistics specialist Dimerco Express Corp. said. That congestion has spread to Shenzhen, as the city that borders Hong Kong has seen a sharp increase in shipments rerouted from Shanghai. 

To ease congestion around Shanghai, sailings are being diverted to Ningbo and Taicang, according to Donny Yang, Dimerco’s director of ocean freight. At the same time, the central government has instructed that highways be kept open and unobstructed. 

Carmakers to electronics manufacturers in China’s financial hub have been gradually resuming operations, as authorities have encouraged the use of closed-loop systems, in which workers live on site at their factories.

Still, ramping up production from a shutdown isn’t an instant process. Tesla restarted its Shanghai factory after a three-week closure, though it’s uncertain how long the plant can operate with a limited supply of components.

“The change in Covid prevention policies in different cities has imposed an extraordinarily severe impact on logistics,” said Cui Dongshu, the secretary general of the China Passenger Car Association.

Economists at Goldman Sachs Group Inc., in a research note last week, said supply-chain setbacks “have been somewhat worse than we anticipated, and we have adjusted our growth and inflation forecasts slightly in response in recent weeks.” When the bottlenecks in Asia start to clear, it will likely bring a flood of containers just as a seasonal pickup in imports gets under way.

“Some companies may have already tried to ship their orders somewhere else or they canceled them,” said Stephanie Loomis, vice president of international procurement at freight forwarder CargoTrans Inc. “But my guess is we’re going to see an enormous backlog of freight come out of there like a buckshot.”

The total container-ship count for America’s dual hub of Los Angeles and Long Beach reached at least 57 vessels last Wednesday, the highest since late February. A few other gauges like container dwell times are also creeping higher again.

Some of California’s backlog has merely shifted east in search of faster routes — shiploads of goods are lined up from New York City to Charleston, South Carolina. Data from MarineTraffic recently showed a major reversal: The U.S. East Coast topped the West Coast in the amount of container capacity that’s waiting at anchor to offload.

The pileups in Europe are just as severe or worse, compounded by the proximity to the war in Ukraine. Key ports such as Rotterdam, Hamburg, Antwerp and three in the U.K. are working at or above capacity, which means they’re already struggling to accept more containers because they don’t have space to store them.

European Central Bank President Christine Lagarde, in a speech Friday, said Europe’s integration in global value chains was even deeper than the U.S.’s. Trade as a share of the euro area’s gross domestic product rose to 54% in 2019 from 31% two decades earlier, she said, compared with America’s 3 percentage-point rise to 26%.

She also cited a recent survey that found 46% of German companies get significant inputs from China. Of those, almost half are planning to reduce that dependency. Russia’s invasion now means the search for the lowest-cost suppliers must be refocused around geopolitical alliances.

“We must work towards making trade safer in these unpredictable times, while also leveraging our regional strength,” said Lagarde, the former managing director of the International Monetary Fund. “Even industries that are not considered strategic are likely to anticipate the fracturing of the global trading order and adjust production themselves.”

By Brendan Murray, Ann Koh and Kevin Varley. With assistance from Laura Curtis, Ana Monteiro, Danny Lee, Kyunghee Park, Chunying Zhang, Daniela Wei and Bryce Baschuk. © 2022 Bloomberg L.P.

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