Manufacturers reeling from shortages of key components and rising raw material and energy costs are forced to engage in bidding wars for space on ships, pushing freight rates to rocketing levels. records and prompting some exporters to increase their prices or simply cancel shipments altogether.
“We can’t get enough components, we can’t get containers, the costs have increased dramatically,” said Christopher Tse, CEO of Hong Kong-based Musical Electronics Ltd., which manufactures consumer products ranging from Bluetooth speakers at Rubik’s. Cubes.
Tse said the cost of the magnets used in the puzzle toy has increased by around 50% since March, increasing the cost of production by around 7%. “I don’t know if we can make money with Rubik’s Cubes because the prices keep changing. “
China’s determination to eradicate Covid has meant that even a small number of cases can cause major disruption to trade. This month, the government temporarily closed part of the world’s third-busiest container port in Ningbo for two weeks after a single dock worker was found carrying the delta variant. Earlier this year, the Shenzhen docks were idle after a handful of coronavirus cases were discovered.
“Port congestion and a shortage of container transport capacity could last until the fourth quarter or even mid-2022,” said Hsieh Huey-chuan, chairman of Evergreen Marine Corp., the seventh largest ocean liner in the world. world, to an investor. August 20 briefing. “If the pandemic cannot be contained effectively, port congestion could become a new normal. ”
The cost of shipping a container from Asia to Europe is about 10 times higher than in May 2020, while the cost from Shanghai to Los Angeles has more than six-fold, according to the Drewry World Container Index. The global supply chain has become so fragile that a single small accident “could easily have its effects aggravated”, HSBC Holdings Plc. said in a note.
Higher freight rates and semiconductor prices could fuel inflation, said Chua Hak Bin, senior economist at Maybank Kim Eng Research Pte. in Singapore. In addition, producers including Giant Manufacturing Co. of Taiwan, the world’s largest bicycle maker, said they would raise prices to reflect rising costs.
In the United States, forecasters have lowered growth projections for this year and raised inflation expectations through 2022, according to Bloomberg’s latest monthly survey of economists. Compared to a year earlier, the personal consumption expenditure price index is now expected to rise 4% in the third quarter and 4.1% in the fourth, double the Federal Reserve’s 2% target .
Hong Kong-based coffee maker Eric Chan doesn’t see the squeeze easing for months as he juggles a supply chain that involves hundreds of components to meet growing demand for devices of the kitchen.
“We stock critical components for one year of use, because if we miss a component, we cannot manufacture the products,” said Chan, general manager of Town Ray Holdings Ltd., which achieves 90% of large sales. brands in Europe. .
The spread of the delta variant, especially in Southeast Asia, makes it difficult for many factories to operate. 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 affected. The automaker warned this month it would halt production at 14 factories across Japan and cut production by 40% due to supply disruptions including chip shortages.
On the other side of the planet, UK businesses are grappling with record levels of inventory and retail prices are rising at the fastest pace since November 2017.
Germany’s recovery is also threatened. A key measure of business confidence in Europe’s largest economy, released on Wednesday by the Munich-based Ifo institute. fell more than economists predicted, with the drop in part blamed on shortages of metals, plastics and semiconductors, among other goods.
What Bloomberg Economics Says …
It’s hard to see supply chain bottlenecks resolved anytime soon, with some major exporters, including Indonesia and Vietnam, still struggling to contain the delta outbreak. It could continue to weigh on the global recovery by slowing production and driving up costs, without derailing it.
Chang Shu, Chief Economist for Asia
At the heart of the price pressures is the transport bottleneck.
Large retailers tend to have long-term contracts with container lines, but Asian production relies on networks of tens of thousands of small and medium-sized producers who often arrange shipment through logistics companies. and freight forwarders. In turn, they struggle to find space for their customers, as the ship owners sell to the highest bidders.
According to Michael Wang, an analyst at President Capital Management Corp., about 60 to 70 percent of shipping transactions on the Asia-America route are made on a spot or short-term basis. in February 2022.
Buyers agree. In Germany, more than half of the 3,000 companies surveyed by the Association of German Chambers of Commerce and Industry expected widespread supply chain problems to persist next year.
“Now containers don’t sign long-term deals anymore, and most deals are done on a spot price,” said Jason Lo, CEO of Taiwanese gymnastics equipment maker Johnson Health Tech Co.. it became impossible to estimate shipping costs and do 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 in a warehouse in Shenzhen because his US buyer did not want to pay the shipping costs. . Sung said 60% to 70% of its customers have reduced their shipments due to rising costs.
For Asian factories outside of China, the problem is even worse. Many Chinese companies are willing to pay above market rates to load their cargo, said a spokesperson for HMM Co., South Korea’s largest container line. So when ships call at ports outside of China, they are already almost full.
Chinese companies that have spent decades shifting production of lower-value components to cheaper labor markets in South and Southeast Asia are now faced with the headache of trying to get those parts to factories where they can be assembled into finished products.
“We’re talking a lot of money just to make things happen,” said Sunny Tan, executive vice president of Luen Thai International Group Ltd., which makes leather clothing and handbags for global brands.
As factories succumb to blockages, manufacturers are forced to play mole by changing raw materials from country to country. Some have resorted to air cargo materials such as leather for factories to keep production lines running.
Meanwhile, Tan de Luen Thai, who is also vice president of the Hong Kong Federation of Industries, is trying to figure out how he will fill the festive windows in time for Christmas. “I wish that when shoppers see our product, they will embrace it when they realize how difficult it was to get it on the shelves. “