The vulnerability of complex global supply chains, built over decades of globalization, has been exposed by COVID-19 and geopolitical shocks.
Taking the global automobile industry as an example, Southeast Asia is neither the largest automobile consumer market nor the concentration place of core components and technologies. Nonetheless, Southeast Asia has become the "strategic hub" of some auto giants due to its industrial concentration in some non-core components and chip packaging. However, the spread of the Delta variant in August has left Southeast Asia's automotive industry chain vulnerable to external shocks.
In early August, a single worker at a huge factory in Vietnam that makes cable harnesses for Toyota vehicles was tested positive for COVID-19. Local authorities in Vietnam immediately suspended operations at the auto parts maker's factories. The cable harness is an essential auto part, which is used to connect the internal parts of automobile. Toyota's inventory dwindled as the factory's infection disrupted operations.
Since July, Toyota has been conducting daily inspections of various suppliers in Southeast Asia to assess the severity of the situation. However, Toyota caved when it couldn't get some parts, including cable harnesses from Vietnam and chips from Malaysia. The world's largest automaker shocked the market by announcing it would cut vehicle production by 40% in September compared with planned. Toyota said its biggest concern was whether its operations in Southeast Asia could continue. The lockdown, rising cases of infections, and the production restrictions introduced by the government are clearly indicating that auto suppliers, particularly in Malaysia and Vietnam, will not be able to continue operating, which disrupts parts supplies to Toyota.
The problems are not confined to Southeast Asia. Automakers around the world are seeing their revenues drop as parts shortages are severely affecting production. India's largest automaker Maruti Suzuki India Ltd. said sales in September could fall to about 40% of normal levels. Tata Motors Ltd. said on September 1 that "the recent lockdown measures in East Asia" had worsened the supply situation. China's NIO is also struggling with parts supplies from its Malaysian partner. In Japan, Suzuki Motor Corp. will cut vehicle production by 20% in September. In Europe, Renault is preparing to shut down assembly plants in Spain for up to 61 days by the end of the year.
The global automobile industry is facing supply chain shocks, and industries such as semiconductors and consumer electronics are also experiencing supply crises to varying degrees. It is clear that the more globalized industries are, the more dependent they are on global supply chains, and the more they will be affected by the shock. Researchers at ANBOUND believe that as the pandemic continues, the impact on global supply chains will deepen. We believe that the impact of the pandemic on the global supply chain is noteworthy in the following aspects.
First, the impact of the external supply chain will change the characteristics of concentrated production centers and low-profit competition in the industry. An important purpose of the global distribution of industries and the formation of regional production centers is to reduce production costs and improve efficiency. The automotive industry, for example, which has a long industrial chain, has long been accustomed to low-profit margins, and remains so after decades of efforts to keep costs down. Over the past decade, Japanese automakers have invested heavily in Southeast Asia, eyeing the region's cheap labor and the ability to complement their Chinese operations as trade frictions between the U.S. and China heat up. Suppliers working with Toyota alone have more than 400 plants in Malaysia and Vietnam. This centralized approach worked well, but quickly failed when the pandemic hit. The spread of the Delta variant has exposed the vulnerability of existing supply chain systems to external shocks. In the future, the model of regional production centers for mass production and cost reduction may need to be adjusted.
Second, the supply side will get a bigger say. The global industrial chain is facing increasingly severe supply constraints. Take automotive semiconductor as an example, international auto giants such as Volkswagen, Ford, General Motors, Renault, Honda, etc., and Chinese auto companies such as Chang'an Automobile, etc., are troubled by the chip shortage. Even Tesla, which relies heavily on its own chips, shut down its factory in Fremont, California, for a time because of the chip shortage. In the global auto parts supply and demand chain, some important components mainly rely on a few companies such as Bosch, Continental, and ZF; semiconductor chips are mainly controlled by Infineon Technologies, NXP, Samsung, Renesas Electronics, and other semiconductor manufacturers. This means that the suppliers of key components and the resource will have a bigger say, and the past pattern of demand-side and market having the final say will have to be partially reversed.
Third, price increases on the supply side may become a trend, which will increase the inflationary pressure on the market. Take the chip market for example, due to the tight supply in the market, chip manufacturers take the initiative, and the upstream industry chain takes the opportunity to raise the price, which may also be one of their goals. We would also like to point out that shortages and price hikes on the supply side of the industry chain are related to the excess capital. As excess capital amplifies the demand side and makes the supply side have a bigger say in the market, this situation may stimulate more industrial investors to take advantage of the supply-side price hikes. ANBOUND noted in its tracking research that some semiconductor chip makers have started to push for price increases, citing rising raw material costs and longer production cycles. For example, several chipmakers, including NXP, Renesas Electronics, and Toshiba, have raised prices for auto chips.
Fourth, the global logistics difficulties will increase supply chain costs. Global logistics costs are rising rapidly as a result of the pandemic. From the beginning of 2020 to August 2021, the cost of shipping a container from Ningbo port to the United States has increased by nearly eight times, from USD 3,000 to USD 26,000. The typical market price for shipping a standard 40-foot container from China to Europe is around USD 4,000 - USD 8,000 in 2020 and around USD 6,000 - USD 12,000 in 2021. The vast majority of goods exported from China to Europe and the United States are clothing, home appliances, and some simple machinery. A container full of goods is worth about USD 40,000. If the shipping cost is USD 3000, the shipping cost is about 8% of the total value of goods; if the cost of shipping increases to more than USD 20,000, it means that the cost of shipping goods accounts for 50% or even more than 60% of the total value of the goods.
As a result, some retailers have been forced to opt for alternatives to shipping, and air freight, once considered too expensive, is back on the options. There are even logistics companies that choose to use passenger flights to deliver goods. The global average price for air cargo flights in August was USD 3.39 a kilogram, up 6% from January and 14% from a year earlier, according to Amsterdam-based data tracking firm. Freight prices from Southeast Asia to the United States have risen 24% in the past year to USD 7.66 a kilogram.
Fifth, part of the restructuring of global supply chains is likely to continue. The main lesson of supply chain shock caused by COVID-19 for many global enterprises is not to concentrate production and parts supply too much on a single source, and to maintain at least 2 or 3 important supply chain sources. Enterprises will change their zero-inventory strategy and maintaining proper inventory will become the norm in the industry. In Toyota's case, the challenge now is to secure supplies of alternative parts and make up for production lost in time to meet global demand for vehicles as inventories shrink. The pandemic ended up shaking one of the world's best-maintained supply chains. The underlying question for enterprises is: will the auto industry continue to follow the business strategy of putting efficiency first and keeping minimum inventory after the pandemic? It now looks like enterprises will have to adjust to keeping supply chains in "high visibility" and keeping some stocks of "risky components" such as semiconductors.
Final analysis conclusion:
The COVID-19 pandemic has severely impacted global supply chains. As the pandemic continues, the global supply chains of multiple industries will undergo a long-term transformation, and the short-term shocks to supply chains will become irreversible long-term structural changes.
