Rising costs and supply chain constraints continue to disrupt U.S. manufacturing activity and may worsen as the world’s factory floors brace for more shutdowns linked to the spread of the coronavirus delta variant. Even U.S. companies that do not have operations in other countries can expect to feel the strain, considering they likely have global suppliers somewhere in their supply chain.
We expect disruptions in Asia—where the United Nations estimates around 42% of global exports to be sourced from—will work their way through global supply chains and show up in rising costs and clogged ports. Factories and ports in Southeast Asia are already struggling to maintain activity due to rising infections.
“Delta is likely to significantly disrupt trade in Asia,” Deborah Elms, executive director of the Singapore-based Asian Trade Centre, told Bloomberg. “Most of the markets have been fortunate in managing COVID well so far. But as COVID continues to spread, this lucky streak is likely to end for many locations.”
Factories in Thailand are potentially becoming the new hotspot for infections, with not enough vaccines available to protect workers. Auto companies Toyota and Isuzu have temporarily shut down plants in Thailand due to part shortages exacerbated by the pandemic. In China, first the Yantian port in Shenzhen was closed for a month at the end of May due to the coronavirus and then the Ningbo-Zhoushan port—the world’s third busiest container port—was partly closed for a short time starting in August for the same reason. Port closures affect cargo handling and lead to a back up of goods in factories and storage yards. Such closures put more pressure on already strained shipping capacity, especially at a time when shipping demand spikes up to meet the upcoming holiday season.
Main exports through Ningbo in the first half of 2021 included electronics, textiles and low- and high-end manufactured goods, according to Ningbo’s Customs District. Although countries like Indonesia, Thailand, Vietnam, Malaysia and the Philippines may have a small share in global exports, they have a big impact on economies like the United States and China, which rely on this group for a significant share of semiconductors, telecommunication equipment and other electronic products.
Supply chain disruptions stemming from factory and port closures in Asia are causing further spikes in production and shipping costs as companies across the world struggle with elevated costs for ocean and air freight. The Drewry World Container Index reached $9,421.48 per 40-foot container as of Aug. 12—about 350% higher than what it was a year ago. Shipping capacity constraints mean product does not reach customers when needed, thus affecting activity in other regions, too.
Manufacturing economies in Europe including Germany and the United Kingdom are also burdened by supply problems. UK car production dropped to 65-year lows due to shortages of semiconductors and labor. A global supply squeeze in intermediate components including semiconductors, metals, plastics and even paper—along with rising infections—is slowing down manufacturing activity in Germany, Europe’s largest economy.
“The shortage of raw materials and supply-chain problems are hitting the German economy in full scale,” Volker Treier, head of foreign trade at the Association of German Chambers of Industry and Commerce (or DIHK), told Bloomberg. Shortages mean companies will pass on rising prices to customers. More than 67% of 3,000 German companies polled in a DIHK survey are passing on rising prices to customers and more than 88% in the survey reported higher prices for products and services they consume.
Economists are paring back global growth forecasts on account of rising infections in Asia and worldwide supply chain disruptions. Inflationary pressures—transitory or not—are a real concern as companies incur high freight costs to get product and keep up with demand. Manufacturing sector demand remains strong but will only help economic growth and recovery if it can be fulfilled.
U.S. manufacturing companies reliant on global supply chains—whether in their own operations or those of external suppliers—need to factor these potential disruptions into their supply and operations planning to proactively manage supply shortages and demand swings. Demand forecasting methodologies such as demand sensing help forecast near-term disruptions with reasonable accuracy by applying weekly, daily and even hourly data. Where plant closures are anticipated, companies might consider re-routing supply chains, where feasible, by moving production to other facilities.
Collaboration and constant communications with suppliers may provide a better understanding of possible supply chain delays and shortages, which can allow companies to make arrangements to address potential disruptions and price escalations. Lessons learned during the initial stages of the pandemic may perhaps help manage disruptions this time around.
