The world clapped when 2020 came to an end, but 2021 could not exactly be described as any better – and the supply-chain crisis that has been hard-baked into the mix, has added to the problems facing global business.
Everyone in the logistics sector knows at least “kind of” what happened, but empty supermarket shelves and inflationary prices are still mysterious to many people here in 2022.
Basically, back in early 2020, when it became obvious that Covid-19 was going to be more of a problem than the first SARS outbreak was back in late 2002, markets plunged, and businesses laid off workers. Orders were cut back across the board in a world that seemed doomed to be dominated by health fears and lockdowns. Everybody in business cut back on supply – even chipmakers.
Except the calculus was askew. Sure, people cut back on dining out, holidays and amusement-park outings, etc, but they found other things to spend money on – Hey, let’s turn the basement into a gym! People bought desks and office chairs to work at home, they took up hobbies and bought items that are not usually in high demand – lutes and bagpipes, for example. Where are such things made? China. The result was a deluge of shipping containers, a shortage of ships to move them, shortages of warehouses at ports to store the containers, shortages of equipment and trucks to get the containers out of the ports … shortages of containers themselves.
As Robert Swinney, an associate professor at the Duke University of the Fuqua School of Business, puts it, It’s not like there’s a supply chain. There are many chains, like webs with multiple dependencies – in other words, many links with many potential points of failure. What we’re seeing now is the response of a big complex system to major changes in conditions. Some chains are seeing surging demand, some diminished capacity due to reduced staff, others are failing altogether due to a lack of components or raw materials.
Swinny sums it up: when systems are this complex, you fix one bottleneck, and it leads you to another one. “All the bottlenecks are waiting on something else to be fixed in other words.” In short, the problems are not going away overnight.
The Russian factor
In the context of the above problems, as one Twitter analyst put it, “War is a worst-case scenario – carriers are halting operations and suppliers are at risk.” Then again, as another Twitter commentator put it, “Land war in Europe makes EVERY problem facing the world worse [not just supply chains]. Climate change, food insecurity, refugee crises, oil and energy shocks, inflation problems, broken supply chains, financial turmoil. All of it. Only question now is how bad?”
The answer of course is that it makes things worse, but it’s not the end of the world – yet. Analysis by Supply Chain Drive, suggests a lot of business in the Europe region will grind to a halt for obvious reasons, AP Moller-Maersk will be avoiding Ukraine ports and FedEx and UPS have suspended services already.
Just a week ago, Bloomberg reported, “The stranglehold on Russia’s trade with the global economy is tightening, with almost half the world’s container shipping capacity halting service to the country.” Meanwhile, Bloomberg continued, “Copenhagen-based Maersk and MSC in Geneva said separately Tuesday that they also are suspending bookings to and from Russia, something Germany’s Hapag-Lloyd did late last week. Combined, those four carriers control about 47% of global container shipping, according to Alphaliner.”
According to Gartner analysts Koray Köse and Sam New, “The attack on Ukraine and Western sanctions on Russia could prompt key materials shortages, material cost increases, demand volatility, logistics and capacity constraints, and cybersecurity breaches.”
Oil prices – already at their highest since 2014 – are expected to continue to rise because Russia is the world’s third largest oil supplier and the second largest oil supplier for the US.
Meanwhile, note the Gartner analysts, the war in Ukraine entails potentially “disastrous outcomes” for supply chains, leading to uncertainty in key industries, including high-tech electronics, semiconductors and rare earth minerals.
“We expect severe shortages of hydrocarbon, critical minerals, metals and energy. Prices for those items will likely spike, thanks to both the shortages and behaviors such as irrational buying and protectionism,” Köse and New wrote. “This will, in turn, impact manufacturing operations up- and downstream as much as raw material mining.”
Last but not least is the impact on air cargo. As Flexport, a logistics company, puts it, “The most significant impact is the need for rerouting around the conflict zone, extending transit times, and increased carbon emissions … Some flights between Asia and Northern Europe will need to be rerouted via new southerly routings over Saudi Arabia, amid restrictions linked to Iran, Syria, and Yemen.”
The Flexport report adds: “Coordinated sanctions against Russia from the EU, the US and other G7 members will limit the operations of Russian airlines. Sanctions may also include limitations, via export licenses, on provision of aerospace spare parts and services. In addition, Several lease firms have reportedly confirmed they will end their contracts with Russian airlines.”
In short, uncertainty all around, with the exception of the fact that we know that the world’s troubled supply chains are heading into more troubled water and that will affect everybody in terms of availability of goods and pricing.
Meanwhile, in Vietnam and Southeast Asia
Vietnam got off to a good start in 2021 – the major impact on the domestic economy was the absence of international tourism, even though rolling lockdowns continued to be an issue in the broader economy.
As Bloomberg noted, the winning streak held up all through the first half of 2021, with year-on-year growth registering 4.65% in the first quarter and 6.6% in the second. The 13th Party Congress in February of 2021 ushered in new leadership with the promise of institutional support for anti-corruption and anti-cronyism (and nepotism), which have long threatened the credibility of Vietnamese Communist Party.
The winning streak paused for a long breath in July 2021 with the arrival of the Delta strain of Covid-19 among a largely unvaccinated Vietnamese population. Reported Bloomberg, “Ho Chi Minh City, the country’s commercial hub, faced serious restrictions affecting public transportation, public gatherings and non-essential services.”
The business impact was inevitable, with the textile and garment sectors particularly had hit, as Samsung shifted parts of its production facilities out of Vietnam, which is home to its biggest electronics production hub, and Toyota deal with disruptions to automobile production in Vietnam.
Vietnam’s GDP contracted by 6.17% in the third quarter of 2021, but by October many Covid-19 restrictions were being lifted, due to the full vaccination rate increasing from just 4% in August to 31% in October and 66% in December.
In short, Vietnam is well positioned to resume economic growth and the prospects for its manufacturing sector look bright as migrant workers return to the cities and work. But Vietnam is just one node in the global supply networks, so it faces the same supply-chain problems that everywhere else does.
These include inflationary pressures, the possible need for tightening of macroeconomic policies and pressure to push for regional trade deals, such as the CPTPP with countries in the Indo-Pacific and a free trade agreement with the European Union, notes Bloomberg.
It has to be noted that “of 53 countries in Bloomberg’s Covid Resilience Ranking, the bottom five are all in Southeast Asia, with Vietnam – at No. 50 – down four spots from the previous month amid a resurgent outbreak and lagging vaccination drive.”
The Economist is more upbeat, writing, “Its openness to trade and investment has made the country, with GDP per capita of a mere US$2,800, an important link in supply chains. And that in turn has powered a remarkable expansion. It has been one of the five fastest-growing countries in the world over the past 30 years, beating its neighbors hands down.”
Back to the War
According to Forbes, “Interos, a company providing supply chain risk management solutions, did an analysis of likely impacts on the global raw material and commodity supply chains. While the impacts of disruption of trade between US and Europe and Russian and Ukraine are miniscule in comparison to the disruption of trade with China that occurred because of the pandemic, the impacts are not insignificant.”
But this is not the entire story. As we have already learned the hard way, supply chains can be fragile in unexpected ways due to the complexities of their interdependencies.
The Ukraine conflict will not hit the European Union alone – “many nations in the Middle East and Africa also rely on Ukranian wheat and corn, and disruptions to that supply could affect food security in those regions,” Dawn Tiura, president at Sourcing Industry Group, told CNBC.
“China is also a big recipient of Ukrainian corn — in fact, Ukraine replaced the U.S. as China’s top corn supplier in 2021,” she added, noting that food inflation was a major risk in the event of supply-chain disruptions.
Food inflation is a risk from a supply chain disruption. “Ukraine is on track to being the world’s third-largest exporter of corn, and Russia is the world’s top wheat exporter. Ukraine is also a top exporter of barley and rye.”
The pandemic has brought with it many lessons – a lot of people learned to make sour dough, for example – but one major non-health lesson was the networked fragility of supply chains, like reams of code in which the fixing of one line of code can necessitate the fixing of another – and another.
Tom Coughlin, a fellow with IEEE, suggested to Supply Chain Brain that the pandemic has awoken companies to the interdependence of supply chains and the necessity for multiple suppliers to produce crucial components of finished products. “Coughlin predicts a move toward at least partial reshoring of manufacturing capability, with practical and political considerations driving some production back to the US,” Supply Chain Brain writes.
“We’re still going to have global supply chains,” he says, “but there’s going to be pressure for a lot more local content in products.”
The New York Times agrees, arguing “Cheap and reliable shipping may no longer be taken as a given, forcing manufacturers to move production closer to customers.”