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The World Economy’s Supply Chain Problem Keeps Getting Worse

Supply Lines is a daily newspaper that tracks business and supply chains disrupted by the pandemic.
Supply chain shortfalls that were temporary now look like they will last well into next year as rising delta volumes ramp up factory output in Asia and disrupt shipping, causing further shocks to the world economy.
Manufacturers grappling with shortages of key components and high raw material and energy costs are being forced into bidding wars for space on ships, pushing freight rates to records and pushing prices to some exporters. Being prompted to increase or simply cancel the shipment altogether.
“We can’t get enough components, we can’t get containers, the cost has gone up significantly,” said Christopher Tse, chief executive officer of Hong Kong-based Musical Electronics Ltd. Cubes.
Tse said the cost of magnets used in the puzzle toy has risen about 50% since March, raising production costs by about 7%. “I don’t know if we can make money out of a Rubik’s Cube because the prices keep changing.”
China’s determination to stamp out Covid means that even a small number of cases can cause major disruptions in business. This month the government temporarily closed part of the world’s third-busiest container port for two weeks after a dockworker found a delta version. Earlier this year, ferries were disabled after some coronavirus cases were discovered in Shenzhen.
“Port congestion and a lack of container shipping capacity could last into the fourth quarter or even mid-2022,” said Hsieh Hye-chuan, president of Taiwan-based Evergreen Marine Corp. Briefing on 20 August. “If the pandemic cannot be effectively controlled, port congestion could be a new normal.”
According to the Drury World Container Index, the cost of shipping a container from Asia to Europe is almost 10 times higher than in May 2020, while the cost from Shanghai to Los Angeles has exceeded six times. The global supply chain has become so fragile that a single, small accident “could easily amplify its impact,” HSBC Holdings Plc. Said in a note.
Chua Hak Bin, senior economist at Maybank Kim Eng Research Pte, said higher freight charges and semiconductor prices could contribute to inflation. in Singapore. In addition, producers, including Taiwan’s Giant Manufacturing Company, the world’s largest bicycle maker, say they will raise prices to reflect increased costs.
In the US, forecasters have downgraded growth projections for this year and raised inflation expectations to 2022, according to the latest monthly survey by Businesshala economists. Compared to a year ago, the personal consumption expenditure price index is now expected to rise 4% in the third quarter and 4.1% in the fourth quarter, doubling the Federal Reserve’s 2% target.
Hong Kong-based coffee-machine maker Eric Chan doesn’t see Crunch easy for months as he adds a supply line that includes hundreds of components to meet growing demand for kitchen appliances.
Chan, chief executive of Town Ray Holdings Ltd., said, “We are stockpiling critical components for one year’s use because if we miss a component, we cannot manufacture the products, which are domestic in Europe. Gets 90% of sales from brand names.” .
The proliferation of the Delta version, especially in Southeast Asia, is making it difficult for many factories to operate at all. In Vietnam, the world’s second largest producer of footwear and clothing, the government has ordered manufacturers to allow workers to sleep in their factories to try to keep exports going.
Even the mighty Toyota Motor Corp. is impressed. The automaker warned this month that it would suspend production at 14 plants across Japan and cut production by 40% due to supply disruptions, including chip shortages.
On the other side of the planet, companies in the UK are grappling with record lows in stocks and retail selling prices rising at their fastest pace since November 2017.
Germany’s recovery is also in danger. A key measure of business confidence in Europe’s largest economy, released on Wednesday by the Munich-based Ifo Institute. Shortages of metals, plastics products and semiconductors, among other goods, have caused further declines than economists had predicted.
What does Businesshala Economics say…
With some major exporters, including Indonesia and Vietnam, still struggling to contain the delta’s outbreak, it is hard to see supply chain bottlenecks resolved any time soon. It could continue the global recovery by slowing production and raising costs, though not derailing it.
Chang Shu, Chief Asia Economist
At the heart of the price pressure is the transportation bottleneck.
Large retailers have long-term contracts with container lines, but Asian production depends on a network of thousands of small and medium-sized producers who often arrange shipping through logistics firms and freight forwarders. In return they are struggling to secure space for customers as shipowners sell to the highest bidders.
According to Michael Wang, an analyst at President Capital Management Corp., about 60% to 70% of shipping deals on the Asia-America route are done through spot or short-term deals. He said auction-style pricing could continue until the Chinese New Year. in February 2022.
Buyer agrees. In Germany, more than half of the 3,000 firms polled by the Association of German Chambers of Industry and Commerce expect widespread supply-chain problems next year.
‘no option’
“No longer do container liners sign long-term agreements, and most deals are done at spot prices,” said Jason Low, CEO of Taiwan’s gym equipment maker Johnson Health Tech Co. He said that it was becoming impossible to estimate and do the shipping cost. Financial planning, but “we have no choice.”
Colin Sung, general manager of Dongguan-based World-Beater International Logistics Co., said a customer had more than 70 containers of goods sitting in a warehouse in Shenzhen because his US buyer did not want to pay shipping costs. Sung said 60% to 70% of his customers have cut shipments because of rising costs.
The problem is even worse for Asian factories outside China. A spokesman for HMM Co., South Korea’s largest container line, said many Chinese companies are willing to pay above-market rates to load their goods. So when ships call at ports outside China, they are already almost full.
Chinese companies that have spent decades shifting production of low-value components to cheaper labor markets in South and Southeast Asia are now faced with the headache of trying to get those parts into factories where they are made into finished products. can be assembled in.
“We’re talking a lot of money to turn things around,” said Sunny Tan, executive vice president of Luen Thai International Group Ltd., which manufactures clothing and leather handbags for global brands.
As factories succumb to lock-downs, manufacturers are forced to move raw materials from one country to another in a game of odd-even bargains. Some have resorted to air-freighting materials from leather to factories to keep production lines running.
Meanwhile, Luen Thai’s Tan, who is also the vice president of the Federation of Hong Kong Industries, is trying to figure out how they will fill the festive display window just in time for Christmas. “I wish when buyers see my product they give it a kiss when they realize how hard it was just to get it off the shelf.”

 

Bloomberg

Aug 28, 2021 12:51
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