For a moment, think back to those heady days pre coronavirus.
Electronics giants were fretting about their reliance on China. Apple’s contract manufacturer, Foxconn, eyed opportunities to expand its presence in India to handle iPhone 12 assembly. Concerns about Chinese manufacturers stealing intellectual property, uncertainty resulting from Trump-era tariffs and the ensuing US-China trade war all threatened the passage of goods.
In other words, the machinery of the global supply chain was already in a delicate state in 2019.
When the pandemic hit, companies and individuals responded fast. Miners who mine precious metals needed for advanced electronics, along with factory workers in thousands of factories, were all sent home to quarantine.
Sales of most items flatlined. In the early months of 2020, worried consumers stopped spending on anything but the basics. Businesses cancelled orders for equipment. Shipping companies cancelled sailings. Vehicle makers cancelled orders for semiconductors, a telling issue because these are ‘long-lead’ components that take a long time to make and ship. Retailers and manufacturers slashed their projected revenues and prepared for economic winter.
What happened next caught almost everyone by surprise.
It turned out that office workers in many countries, including the U.S., were able to continue working from home with little hit to schedules or productivity. Government loans underwrote paychecks and massive economic stimulus payments kept dollars flowing even to those who had been laid off.
With travel at a standstill and trips out to restaurants and movie theaters no longer an option, those government handouts fueled a massive increase in spending on home improvements (hence the increase in lumber costs), clothes, furnishings, cars and gadgets. Instantaneously, we entered the “Zoom life” and families could no longer make do with shared PCs and tablets - everyone in the household needed their own device. Demand for many products, particularly consumer electronics, went through the roof. Best Buy sales grew by nearly 250% in the second quarter of 2020. Apple grew revenues by over a third. Amazon grew revenues by 44% and profits by 220% from 2020 to 2021 as millions of consumers, stuck at home, indulged their whims.
And yet, in mid 2020, the raw materials to satisfy all this demand weren’t available because miners weren’t mining, factory workers weren’t working and many electronics factories had been retooled to make ventilators or thermometers.
As China implemented comprehensive contact tracing and reversed the spread of coronavirus more quickly than the West, workers returned to factories and production of Chinese goods destined for the U.S. started to catch up with demand.
But the machinery for getting goods across the ocean was in disarray. Millions of ocean-bound shipping containers, usually filled with shoes or electronic goods destined for the U.S. from China or soybeans on their return journey were unavailable. They had been stuffed full of packages of masks and other PPE, and were now sitting in places in the “wrong places” for major trade routes, including Africa and South America. Replacement containers were throttled. 80% of the containers used for shipping the world’s goods are supplied by just three Chinese companies and many of their factories had closed early in the pandemic. Major ports in the U.S. were choked by the sudden uptick in imports, with far fewer workers available to load and unload in response to social-distancing rules.
A trend towards much larger container ships means that a single ship arriving actually needs more workers, more trucks and more trains – all in short supply because of labor shortages and “precision scheduling” on U.S. railroads that’s designed to use fewer trains more efficiently through a ‘just-in-time’ approach for cargo management that left little room for unexpected bursts of activity. Even warehouse space was suddenly in short supply.
The sheer volume of trade and challenges unloading containers resulted in a shipping traffic jam that continues to grow: ports are now taking days, sometimes weeks to unload cargo. The cost of transporting a single container from Asia to Europe or the U.S. has risen from around $2,500 in March 2020 to over $20,000 this summer and $26,000 by September. Some observers believe prices will soon rise to $35,000 because of the disruption to rail and trucking services in the U.S.
There are few signs of the situation easing in the short term. Raw materials are still in short supply and likely to remain so throughout 2022. Extreme weather events including record floods in Germany and China, Hurricane Ida in the U.S. and powerful storms on the Panama Canal have hampered efforts to recover, and the grounding of the gargantuan Ever Grand in the Suez Canal blocked over 10% of the world’s trade for a few days, generating its own backlog that took months to sort through.
And “things made of other things” are hit by a ripple effect: “shortages and delays in some products have made it impossible to make others.” It’s a problem that’s exacerbated by a complex supply chain that’s both fragmented and opaque. Rising wages in China mean that lower-cost components are now often manufactured in cheaper parts of south and southeast Asia, from where there’s now a struggle to transport them to China for assembly. For car manufacturers in the U.S., “a semiconductor may be designed by one firm, manufactured by a second firm, embedded into a component… by a third supplier, and only then delivered… In most cases, neither the automaker nor the semiconductor manufacturer can trace what goes on in these intermediate layers (or “tiers”) of the supply chain, due in part to lack of trust among parties in supply chains, who fear that the information might be used to replace them or to bargain for a price reduction.”