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Home›Air Freight›Assess the impact of global supply chain shocks

Assess the impact of global supply chain shocks

By Michael K. Davidson
September 27, 2021
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The vulnerability of complex global supply chains, built over decades of globalization, has been exposed by COVID-19 and geopolitical shocks.

Take the global auto industry. Southeast Asia is neither the largest automotive consumer market nor a major supplier of basic components and technologies. Still, the region has become a strategic hub for some auto giants due to its concentration of certain non-essential components and chip packaging. As a result, the spread of the Delta variant of COVID-19 in August left Southeast Asia’s auto supply chain vulnerable to severe external disruption.

In early August, a single worker at a huge factory in Vietnam that makes wire harnesses for Toyota vehicles tested positive for COVID-19. Local authorities immediately suspended operations at the parts maker’s factories. Toyota’s inventory then declined as the plant infection disrupted operations.

Since July, Toyota has been carrying out daily inspections with various suppliers in Southeast Asia to assess the seriousness of the situation. Nonetheless, he was seriously affected by the inability to obtain key parts, including wire harnesses from Vietnam and chips from Malaysia. In September, the world’s largest automaker shocked the market by announcing a 40% cut in vehicle production.

Toyota said its biggest concern was whether its operations in Southeast Asia could continue. The lockdown, increased infection cases and production restrictions introduced by the government, especially in Malaysia and Vietnam, threaten the automaker’s ability to maintain operations.

The problems are not limited to this part of the world. Automakers around the world are seeing their revenues plummet as parts shortages impact production. India’s largest producer, Maruti Suzuki India Ltd., said September sales could drop to around 40% of normal levels. Tata Motors Ltd. said on September 1 that recent lockdowns in East Asia had worsened the supply situation. Chinese NIO is struggling to source spare parts from its Malaysian partner. In Japan, Suzuki Motor Corp. announced it would cut vehicle production by 20% in September. And in Europe, Renault is preparing to close assembly plants in Spain for up to 61 days by the end of the year.

The global auto industry faces supply chain shocks, and industries such as semiconductors and consumer electronics are feeling the effects to varying degrees. It is clear that the more globalized industries are, the more they depend on the health of extended supply chains. We believe that as the pandemic continues, the impact on global supply chains will increase. The dilemma is notable for the following reasons.

First, the impact of the external supply chain will change the characteristics of concentrated production centers and low-profit competition in the industry. A major goal of global industries has been to reduce production costs and improve efficiency through the formation of regional production centers. The auto industry, for example, which has an extensive industrial chain, has long been subject to low profit margins, and the rest after decades of efforts to cut costs.

Over the past decade, Japanese automakers have invested heavily in Southeast Asia, eyeing the region’s cheap labor force and the ability to supplement their Chinese operations amid interstate trade friction. United and China are stepping up. The suppliers who work with Toyota alone have more than 400 factories in Malaysia and Vietnam. This centralized approach worked well for many years, but quickly failed when the pandemic struck. In the future, the model of regional production centers for mass production and cost reduction may need to be adjusted.

Second, the offer will have more of a say. The global industrial chain is facing increasingly severe supply constraints. Take the case of automotive semiconductors. International auto giants such as Volkswagen, Ford, General Motors, Renault and Honda, and Chinese automakers such as Chang’an Automobile, are troubled by the shortage of chips. Even Tesla, which relies heavily on its own chips, shut down its Fremont, Calif., Plant for a while due to the chip shortage.

In the global auto parts supply and demand chain, some major component producers rely primarily on a handful of companies such as Bosch, Continental and ZF, while semiconductor chips are primarily controlled by Infineon Technologies. , NXP, Samsung, Renesas Electronics and a few others. manufacturers. This means that key component suppliers will have more of a say and the past model of the demand-driven market will need to be at least partially reversed.

Third, price increases on the supply side may become a trend, which will increase inflationary pressures in the market as a whole. In times of scarcity, chipmakers take the initiative and the upstream industrial chain takes advantage of this to raise prices.

According to Anbound’s tracking research, some semiconductor chipmakers have started pushing for price increases, citing rising raw material costs and longer production runs. Suppliers such as NXP, Renesas Electronics, and Toshiba have increased prices specifically for automotive chips.

Fourth, global logistical challenges will increase total supply chain costs, which are already rising rapidly as a result of the pandemic. From early 2020 to August 2021, the cost of shipping a container from the port of Ningbo to the United States increased more than eightfold, from $ 3,000 to $ 26,000. The typical market price for shipping a standard 40ft container from China to Europe was between $ 4,000 and $ 8,000 in 2020, rising from $ 6,000 to $ 12,000 in 2021.

The vast majority of goods exported from China to Europe and the United States consist of clothing, household appliances and a few simple machines. A typical container full of cargo is worth around $ 40,000. An increase in shipping costs from $ 3,000 to over $ 20,000 means that the expense goes from about 8% of the total value of the goods to 60% or more.

As a result, some retailers have been forced to opt for alternatives to shipping, and air freight, once considered too expensive, is now an option. There are even logistics companies that choose to use passenger flights to deliver goods. The global average price of air cargo flights in August was $ 3.39 per kilogram, up 6% from January and 14% from the previous year. Freight prices from Southeast Asia to the United States have risen 24% in the past year to reach $ 7.66 per kilogram.

Fifth, the restructuring of global supply chains is expected to continue. For many global companies, the main lesson from the supply chain shocks caused by COVID-19 is not to focus too much production and spare parts supply on one source, and to maintain at least two or three important sources in the supply chain. In the months and years to come, companies will change their zero inventory strategy and maintaining proper inventory levels will become the industry standard. In Toyota’s case, the challenge now is to secure alternative parts supplies and make up for lost production in time to meet global demand for vehicles as inventory dwindles.

The pandemic ended up shaking one of the best-maintained supply chains in the world. The underlying question for companies is: will the auto industry continue to follow the business strategy of prioritizing efficiency and maintaining minimum inventory after the pandemic? It now appears that companies will have to adapt to keep supply chains with high visibility, by maintaining some stocks of “at risk” components such as semiconductors.

The COVID-19 pandemic has severely affected global supply chains. As the pandemic continues, the global supply chains of several industries will undergo long-term transformation, and short-term supply chain shocks will become irreversible long-term structural changes.

Chan Kung is the founder, and He Jun is partner, director of China macroeconomic research team and senior researcher, at Anbound think tank.


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Tagsair cargoair freightcovid pandemiclong termsupply chainsunited states

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