The supply chain crisis, which was supposed to be temporary, looks set to drag on well into next year as the growing delta variant disrupts factory production in Asia and disrupts shipping, further disrupting the global economy.
Manufacturers reeling from shortages of key components and rising raw material and energy costs are forced into bidding wars for space on ships, driving freight rates to record highs and prompting some exporters to raise prices or simply cancel shipments.
“We can’t get enough components, we can’t get containers, costs have gone up tremendously,” said Christopher Tse, chief executive officer of Hong Kong-based Musical Electronics Ltd. which makes consumer products from Bluetooth speakers to Rubik’s cubes.
Tse said the cost of the magnets used in the puzzle toy has gone up about 50% since March, increasing the cost of production by about 7%. “I don’t know if we can make money on Rubik’s cubes because prices keep changing.”
China’s determination to crack down on Covid has meant that even a small number of cases can cause major disruptions to trade. This month, the government temporarily shut down part of the world’s third-busiest container port in Ningbo for two weeks after a single stevedore was found to have the delta variant. Earlier this year, Shenzhen’s docks came to a standstill after the discovery of a handful of coronavirus cases.
“Port congestion and container shipping capacity shortages may last until the fourth quarter or even mid-2022,” Hsieh Huey-chuan, president of Taiwan-based Evergreen Marine Corp, the world’s seventh-largest container shipping company, said at an investor briefing on Aug. 20. “If the pandemic cannot be effectively contained, port congestion may become a new normal.”
The cost of shipping a container from Asia to Europe is about 10 times higher than it was in May 2020, while the cost from Shanghai to Los Angeles has increased more than six-fold, according to Drewry’s Global Container Index. The global supply chain has become so fragile that a single, small accident “could easily have its effects compounded,” HSBC Holdings Plc. said in a note.
Rising freight rates and semiconductor prices could fuel inflation, said Chua Hak Bin, senior economist at Maybank Kim Eng Research Pte. in Singapore. In addition, producers including Taiwan’s Giant Manufacturing Co, the world’s largest bicycle maker, say they will raise prices to reflect rising costs.
In the U.S., analysts have lowered growth forecasts for this year and raised inflation expectations through 2022, according to Bloomberg’s latest monthly survey of economists. Compared with a year earlier, the personal consumption expenditures price index is now expected to rise 4% in the third quarter and 4.1% in the fourth quarter, double the Fed’s 2% target.
Hong Kong coffee maker Eric Chan doesn’t believe the downturn will abate in the coming months as he juggles a supply line that includes hundreds of components to meet growing demand for appliances.
“We are stockpiling critical components for a year’s worth of use, because if we are missing a component, we can’t manufacture the products,” said Chan, chief executive officer of Town Ray Holdings Ltd, which gets 90% of domestic brand sales in Europe.
The spread of the delta variant, especially in Southeast Asia, is making it difficult for many factories to operate. In Vietnam, the world’s second-largest footwear and apparel producer, the government has ordered manufacturers to allow workers to sleep in their factories to try to keep up with exports.
Even the mighty Toyota Motor Corp. is affected. The automaker warned this month that it will suspend production at 14 plants in Japan and cut output by 40% because of supply disruptions, including chip shortages.
On the other side of the globe, U.K. companies are grappling with record low stock levels and retail prices are rising at the fastest pace since November 2017.
Germany’s recovery is also under threat. A key gauge of business confidence in Europe’s largest economy, released Wednesday by the Munich-based Ifo institute, fell more than economists expected, with the drop partly due to shortages of metals, plastic products and semiconductors, among other goods.
At the heart of the price pressures is the transportation bottleneck.
Large retailers often have long-term contracts with container lines, but Asian production relies on networks of tens of thousands of small and medium-sized producers who often arrange transportation through logistics companies and freight forwarders. These, in turn, find it difficult to get space for their customers, as ship owners sell to the highest bidder.
According to Michael Wang, an analyst at President Capital Management Corp, 60% to 70% of freight deals on the Asia-Americas route are done through spot or short-term agreements. He said the pricing style of auctions could continue until Chinese New Year in February 2022.
Buyers agree. In Germany, more than half of the 3,000 companies surveyed by the Association of German Chambers of Industry and Commerce expect widespread supply chain problems to persist into next year.
“Now container carriers don’t sign long-term agreements, and most deals are done for spot prices,” said Jason Lo, general manager of Taiwanese fitness equipment maker Johnson Health Tech Co. He said it was becoming impossible to estimate shipping costs and do financial planning, but “we have no choice.”
Colin Sung, general manager of Dongguan-based World-Beater International Logistics Co, said one customer had more than 70 containers of goods in a Shenzhen warehouse because its U.S. buyer didn’t want to pay shipping costs. Sung said 60% to 70% of his customers have reduced shipments because of rising costs.
For Asian factories outside China, the problem is even worse. Many Chinese companies are willing to pay above-market rates to load their goods, said a spokesman for HMM Co, South Korea’s largest container line. So when ships call at ports outside China, they are already nearly full.
Chinese companies that spent decades moving production of lower-value components to the cheaper labor markets of South and Southeast Asia now face the headache of trying to get those parts to factories where they can be assembled into finished products.
“We’re talking about a lot of money just to move things around,” said Sunny Tan, executive vice president of Luen Thai International Group Ltd, which makes leather apparel and handbags for global brands.
As factories succumb to closures, manufacturers are forced to play roulette, shifting raw materials from one country to another. Some have resorted to airlifting materials such as leather to factories to keep production lines running.
Meanwhile, Tan, of Luen Thai, who is also vice chairman of the Hong Kong Federation of Industries, is trying to figure out how he will fill the festive window displays in time for Christmas. “I’d like when shoppers see our product to give it a kiss when they realize how hard it was to get it on the shelf.”