Suez Canal blockage adds to global supply chain chaos

That pressure will continue and intensify under the Biden administration. Biden has ordered an urgent “100-day” review of US supply chains and has outlined plans for incentives and subsidies to increase domestic production of strategic products like semi-conductors and rare earths.

Australian exports were targeted by China in retaliation for matters like the call for an inquiry into the origins of the coronavirus, or condemnation of China’s crackdown on Hong Kong’s semi-autonomy, forcing exporters to try to diversify their customer bases away from China.

The treatment of an Australia overexposed to China hasn’t been lost on other countries in the region and elsewhere.

The longer term themes of reshoring and diversification of supply chains are entwined with the after-effects of the pandemic and the shorter term dislocations of events like the shutting down of the Suez Canal are creating quite severe dislocations in global logistics.

When the pandemic hit last year China effectively shut down its economy, the world’s manufacturing base. That led to shortages of products around the globe.

China’s response to COVID was so effective that it’s economy reopened well ahead of the rest of the world’s, in time to capitalise on a boom in consumer products as lockdowns and quarantines led to a dramatic surge in demand.

The imbalance in activity – the US and European economies were still tanking even as China’s re-opened for business – was reflected in global shipping activity, and still is.

China was shipping massive volumes of goods to advanced economies that, with their quarantine measures and lockdowns, had reduced port and logistics capacity and whose own manufacturing sectors were impacted by the pandemic.

The imbalance in trade is reflected in massive buildups of empty containers in or near the ports of advanced economies and a shortage of containers in China. The cost of containers and the cost of shipping them has rocketed as much as 400 per cent. Ports have been overwhelmed.

Something similar happened in semi-conductors, the building blocks for all forms of electronic technologies.

The pandemic and the rising tensions between a far more assertive and ambitious China and a US now determined to respond will force companies to not only reconsider their overexposure to China but the way they structure their business.

There is a global shortage – global car companies, for instance, have had to reduce production – because manufacturers anticipated demand for their products because of the virus and cut back or cancelled their orders for the chips.

Instead of the anticipated slump in demand, the consumer response to pandemic-inspired restrictions on movements – working and learning from home, the closures of restaurants, theatres cinemas and retailers – was exaggerated by the massive amounts of government relief and stimulus money that poured through the developed world.

Demand surged and the manufacturers were caught short and their efforts to catch up have been complicated, and made more expensive, by the messy state of their supply chains.

Containers are in short supply and in the wrong places, key ports are massively over-congested and workforces throughout the supply chain and in local manufacturing are still constrained by the public health authorities’ responses to the virus.

The pandemic and the rising tensions between a far more assertive and ambitious China and a US now determined to respond will force companies to not only reconsider their overexposure to China but the way they structure their business.

The success of Toyota after developing its “just in time” approach to production in the post-war period has been emulated globally. Almost all major manufacturers practice “lean manufacturing,” which essentially means only ordering or making components as they are needed.

A key benefit from the method is much-reduced holding and funding of inventories. It’s also a key vulnerability that has been exposed by the pandemic. As the car makers have discovered, without inventories or the ability to get access to them “just in time” production lines can’t function.

The sophisticated global supply chains that had been developed to enable the method have been bent or broken by the pandemic and threatened by the super power hostilities.

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It isn’t just shipping that has been impacted. Air freight volumes have also been severely curtailed by the grounding of most of the world’s international aircraft fleet.

Surveys of companies in the US, Europe and Australia are reporting the most severe supply disruptions they have experienced and sharp rises in import prices as a result of the bottlenecks in supply chains.

As the rollouts of vaccines in the developed world accelerate global supply chains will function better but the push to diversify and reshore the sourcing of sensitive and strategic products and their inputs means that, in the longer term, they will inevitably be reshaped.