The impact of the Covid-19 pandemic has been disastrous for the global supply chains, with persistent effects since early 2020, and knock-on effects now gaining intensity. In this post, Sharmila Kantha discusses the factors responsible for supply chain disruptions, the global impact of the crisis, and the ways in which India – and the world – and private businesses can navigate the situation to build long-term resilience against similar crises.
Global supply chain disruptions have exacerbated in recent months, owing to a ‘perfect storm’ of multiple developments that converge to question the very model of globalisation that the world has followed since the 1970s. Global companies, including automakers, footwear manufacturers, and mobile phone producers, have had to cut down production and the ripple impact is being felt across sectors and geographies. With the advent of the Omicron mutation, further disruptions may be in store.
The range of factors causing global supply chain disruptions is extensive, and these have led to supply gaps in products such as household essentials, computer chips, cars, and so on, and are combining to increase input costs, delivery timelines, and logistics costs, and even disrupt festival plans that typically involve higher consumer purchases.
Impact of the Covid-19 pandemic
The impact of the pandemic has been disastrous for the supply chain, with persistent effects since early 2020, and knock-on effects now gaining intensity. The varying trends of economic recovery, lockdowns, and slowdowns, at different points in time, in different hubs across the globe have clogged the movement of goods across borders.
Divergent vaccination progress among countries and the fear of mutations of the Virus spreading among low-vaccination populations have created ‘fault lines’ in growth trajectories. While 58% of the population in advanced economies is fully vaccinated and vaccine supplies are sufficient, low-income countries have less than 5% rates (IMF (International Monetary Fund), 2021). The pickup in vaccination in advanced economies encouraged a rebound in global economic recovery, which, in turn, has accentuated supply shortages. For example, the US witnessed the sale of houses and cars rising to their highest levels in 14 and 15 years, respectively.
The global shipping industry is in the throes of unprecedented logjams. In October 2021, almost 600 container ships were waiting for berths outside ports, and port turnaround time in key ports had doubled. Shipping freight costs have surged. For example, the Shanghai Containerized Freight Index went up from less than US$ 1000 per TEU (twenty-foot equivalent unit) in June 2020 to US$ 7,395 by the end of July 2021. According to Moody’s, 77% of the world’s largest ports face backlogs.
The issues here are many: (i) Surge in shipping demand following global recovery; (ii) Port slowdowns due to Covid-19 restrictions; (iii) Shortage of port workers and other workers; (iv) Typhoons and (v) Impact of stuck ship in the Suez in March 2021.
During the pandemic period over 2020, many manufacturers across the world had cut down their production and reduced orders for intermediate goods and raw materials. Once recovery commenced, the strength of suppressed demand rising again caught them on the back foot. This led to supply bottlenecks in critical inputs – particularly microchips and shipping containers.
Microchips further saw a rise in demand owing to higher purchases of electronic items such as laptops and phones as working professionals and students shifted to virtual interactions during Covid times. The lead time between ordering chips and their delivery was estimated at 21 weeks in August 2021 compared to six weeks in July 2021. As chips require investments of US$ 10-12 billion and a long period to set up new manufacturing facilities, the shortage could continue despite the fact that governments have earmarked funds for investing in setting up new production centres.
Similarly, with ships being stranded at ports, containers too are stuck and in short supply. Container production – carried out almost entirely in China - had been cut back in the pre-pandemic period, due to the slowdown in world trade, to 2.8 million TEUs in 2019 but is expected to reach 5.4 million TEUs this year. The average price for a standard 40-foot container made in China went up by two-thirds over 2020.
While China was one of the first economies to begin recovering after a short shutdown in the early part of 2020, the third quarter GDP (gross domestic product) growth rate in 2021 fell to 4.9% from 7.9% in the second quarter of 2021, below expectations, in part due to energy shortages and policies to curb the real estate sector. China’s manufacturing contracted in September 2021 owing to multiple factors, including regulatory measures in many sectors of the economy.
Energy shortages led to the shutdown of many factories in China. Curbs on imports of Australian coal, pressure to reduce carbon emissions, and rising export demand have led to power cuts across China. With slower manufacturing growth in the world’s largest manufacturing and exporting country, supply chain bottlenecks in many parts of the world have also suffered from uneven linkages.
Labour supply and energy issues
Truck-driver and port-worker shortage in the US has intensified the backlog of clearances at its ports impacting the entire global supply chain. There was a gap of 61,000 between required and available truck drivers in 2019, which has since gone up due to new regulations on alcohol- and drug-related tests. As a result, worker costs in truck transport have risen significantly, and ports have seen a surfeit of stuck containers.
Similarly, EU and Asian countries are also experiencing tight labour markets as workers are dropping out of the workforce. In the first quarter of 2021, the Eurozone had 2.6 million fewer active workers than in the pre-pandemic period. In Vietnam, about 1.3 million workers returned to their hometowns in July-September 2021 due to the impact of the pandemic.
Gas prices in the EU and the UK have risen about four times since the start of 2021, affecting sectors such as fertilisers and steel. Petroleum prices too are on a rising track, with Brent crude oil reaching its highest since 2018 in mid-October 2021 due to a shift from high priced gas, and expectations of an increase in aviation demand, apart from overall demand increases in line with economic recovery. Coal shortages are placing pressures on energy as well, in countries like China and India.
What is the global impact?
The most critical impact of supply chain disruptions in the world economy is rising inflation, which in turn is causing policymakers to revisit stimulus packages. The IMF has cited supply bottlenecks as the first among the factors responsible for higher global inflation rates.
While some smaller economies have commenced interest rate reversals, major economies have so far retained low interest rates. The US Federal Reserve has signalled that it may start tapering and winding down the stimulus package, which could raise uncertainties in the global financial markets and thereby impact growth.
Supply chain disruptions have also led to subdued investments as businesses work to overcome current uncertainties. Global real investments slipped into the negative territory in the second quarter of 2021 and this is bound to impact future growth as well (IMF, 2021).
Impact on world trade is expected to be muted, according to the WTO (World Trade Organization), which forecasts a growth in merchandise trade volume of 10.8% in 2021 as the post-pandemic demand remains strong.
Recent geopolitical developments1 have raised a possibility of de-globalisation and decoupling gaining pace over the long term. Several governments have attempted to address supply chain disruptions through specific policies due to concerns regarding dependence on key source nations, and the term ‘supply chain resilience’ is now a consistent part of the lexicon in world affairs.
Given the multiplicity of factors responsible for creating this ‘perfect storm’, untangling the strands, and reverting to the status quo ante in supply chain efficiency will be a complex task.
In general, it can be expected that while the snarls at ports, container clogging, and labour shortages in advanced nations can be overcome quickly, issues such as energy shortages, and the lack of shipping availability and chip supplies would likely take much longer. With inequalities in vaccine access and new variants still cropping up, the likelihood of Covid-19-related disruptions remains a possibility.
Options for India
India’s exports over April-September 2021 have surged owing to a rebound in global demand, and are expected to reach a record US$ 400 billion this year. The surge comes after a decade of sluggish performance, and addressing the immediate issues of faster cross-border clearances, easier export-credit availability, and improved port performance could help Indian exporters position themselves as reliable sources of goods for a sustainable export effort.
India should set up a continuous monitoring mechanism to track global risks in supply chains. Such a risk surveillance and monitoring tracker could help identify bottlenecks before they worsen, and steps could be taken to address the emerging issues.
Several countries such as the US have established supply chain management groups that are looking into issues arising from over-dependence on source countries for critical goods, and supplies of critical items, as well as short-term disruptions. India could set up a similar group for efficient trade facilitation and longer-term issues such as imports of critical intermediates like semiconductors, minerals, etc.
Over the long term, India should develop a strategy for port development that includes creating transshipment capacity, containerisation for goods movement, and multimodal transport networks.
The recent supply chain disruptions owing to multiple factors have emphasised the vulnerabilities and fragilities of the global sourcing model. This model is very deeply entrenched and has worked well over the last three decades. It has helped developing economies to leverage their advantages to deploy the trade routes to promote growth, while keeping inflation low and stable in advanced economies, and opening up access to a massive range of goods for consumers.
Given the time taken to build supply chains, restructuring them will not be easy and could in fact hamper global growth. While the nodes of the supply chain may shift from time to time, depending on natural advantages offered by an economy and its economic reform processes, the concept of long and winding routes passing through multiple centres will, and should, remain the chief trade model. As such, risks and vulnerabilities would always be a part of the model, to a lesser or higher degree.
Countries and businesses must therefore build resilience and risk management capabilities within these parameters, with the understanding that various risks could erupt and wane. As not all disruptions are predictable in terms of scale or time, internal strategies are key to ensuring that supply chain disruptions do not lead to mass business failures.
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- China’s assertiveness on the global stage and its dominant position in production and export of many goods, including critical minerals, electronics, medical equipment, and so on coupled with the pandemic-related disruptions in supply chains have contributed to new alliances such as Australia-UK-US, the Quad of Australia, Japan, India and the US, and Supply Chain Resilience Initiative of Australia, Japan and India.
- IMF (2021), 'World Economic Outlook October 2021’, Report.