The business world stands at crosshairs as three crises converge to hit the global economy
The global economy is facing its most turbulent times in recent years. An unprecedented catastrophe is threatening to spoil the post-COVID-19 recovery for both the economies of the Third Industrial Revolution – the factories with smokestacks, as well as the smokeless manufacturing of technology products of the Fourth Industrial Revolution. And the attack is multifaceted. While rising energy costs of oil and shortage of coal is hitting the industrial age economy, the logistics industry has been gravely hit by the pandemic scare, and semiconductor supply chain disruptions are impacting production of everything digital – including automobiles, computers, mobile phones, and every communication device.
It is perhaps unparalleled in history that several shortages have converged simultaneously – coal and oil, chips, labour, and a historic logistical blockage of ports and shipping – creating dangerous headwinds for the global economy. Almost 90% of global trade flows through shipping, and this has been severely disrupted in the last few months to cascade into a calamity. However, even if the ships reach the ports, they have to wait several weeks, or even months, to dock. And finally when they dock, there are no lorries to transport the consignments due to a shortage of lorry drivers.
Central European economies such as Poland, the Czech Republic, Slovakia and Hungary are closed to full employment, with wages rising, drying up a major source of cheap labour for Western Europe. This helps explain the shortages of low-paid meatpackers and hospitality workers in Germany and Denmark, as well as a pan-European squeeze on truck drivers.
Freight Crisis – Just give me a Box
The pandemic has thrown the vital but usually humdrum world of logistics into a tailspin, with factories closed and supplies of raw materials disrupted, spurring shortages of everything: masks and vaccine vials, semiconductors, plastic polymers, bicycles, and even baseball bobbleheads. The system underpinning globalization – production on one side of the planet, connected to consumers on the other by trucks, ships, planes, cranes, and forklifts – is too rigid to absorb the prevailing COVID-19 tremors, or to recover from the jolts to consumer demand or the labour force.
The chief challenge is freight, and it starts with what used to be cheap, plentiful commodities: shipping containers. About 25 million are in use globally, shuttling goods around the world on some 6,000 ships. Companies such as Denmark’s A.P. Moller-Maersk A/S or China’s Cosco Shipping Holdings Co. own or operate most of these vessels, with the 10 top companies controlling 85% of global capacity.
Container rates and availability are usually built into annual contracts between shippers and the carriers, and these deals normally have strict requirements, such as only nonstop service between ports or a minimum of two sailings a week. But over the past 18 months, companies had to let those demands go and instead brawl for ship space in the spot market, where the daily rates quoted by carriers and freight agents have soared. Two years ago, a 40-foot container cost less than $2,000 to transport goods from Asia to the US. Today the service fetches as much as $25,000 if an importer pays a premium for on-time delivery, which is a luxury. That’s translated into big money for container carriers, with the industry on track to post $100 billion in net profit this year, up from about $15 billion in 2020. The cry around the industry is ‘Just give me a box!”
Energy prices – A supply-demand balancing act
In China, rolling blackouts are now a regular feature. Indian power plants are reported to have just two days of coal stock as on the second week of October. In Europe, natural gas is treading a historic high of $230 per barrel – up more than 130% since the start of September. With a harsh winter around the corner, the situation is only going to exacerbate. Energy prices are climbing around the world amid a perfect storm of extreme weather, rising power demand, and supply constraints. It’s roiling markets overseas, with China and India facing electricity crises while a dozen power companies in the UK have gone belly-up. Prices for both oil and natural gas have roughly doubled over the last year, and gasoline at US pumps is up by about 50% on average.
The current price trajectory is the result of supply moderating while demand heads skyward, driven by the following:
- The reopening of the global economy over the last year pushed energy needs up around the world.
- High demand led to natural gas shortages in Europe and China, prompting some power companies to swap gas for oil — pushing up prices of both.
The supply side is more complicated:
- Oil production dropped off at the start of the pandemic when demand cratered for everything from airplane fuel to gasoline. US independent producers are far more cautious now, thanks to a recent wave of bankruptcies and investors demanding more focus on returns.
- OPEC isn’t raising supply significantly, in a bid to keep prices at profitable levels.
- Production has been more constrained because the world’s largest economies have made transitioning to more renewable power a top priority.Semiconductors – Geopolitics, Regionalization and Digital Transformation
The current demand for semiconductors, and the shortage in the automotive industry, reinforces three core views.
- Technology has become a geopolitical issue, with the semiconductors battle between the US and China, with Taiwan in the centre. This means that the transfer of tech design and machinery between economies and multinational firms operating in these markets will be limited and subject to government intervention.
- Supply chains are becoming regionalized, with many countries and regions looking to bring production closer to ensure better access; this can be either through a domestic or foreign company.
- Every company is turning into a technology company and must ensure that they can mitigate any adverse impact should they wish to launch a tech-heavy, mass-market consumer product.
The semiconductor shortage stems partly from increased demand for consumer electronics during the lockdown, as some chip makers have allocated extra capacity to fulfilling that demand. Furthermore, the supply of semiconductors is also being eroded by the recent increased demand for medical devices, such as ventilators and diagnostic equipment. Data centres, too, are increasingly taking up more of the global supply as more people working from home drives up demand for storage facilities and Cloud computing services they host.
Over the first eight months of 2021, the global chip industry has seen some substantial investment commitments and changes in the supply of chips. It will likely take at least another quarter for chip producers affected by the second COVID wave to work through the backlog of orders. The average semiconductor prices will continue to increase through 2022 as excess demand creates an auction-like trading environment, with large chip buyers like Apple and Samsung increasingly paying more for them. Indeed, Taiwan Semiconductor Manufacturing Company (TSMC), a major global chip supplier, plans to increase the price of its chips by 10%-20% in 2021, and we expect this upward price pressure to carry into 2022 and filter into the cost of end-products.
The Opportunities – Never waste a crisis
After all, is said and done, every crisis has a silver lining if one can be at the right place at the right time to seize the opportunity. Following are a few such areas that might get a boost out of the current situation:
- Push for alternative energy: The effect of oil companies refusing to raise output in response to higher demand is functionally identical to the effect of a carbon tax. So long fossil fuel prices continue to shoot, the thrust for developing renewable alternatives will be more lucrative.
- Closer to customer: Companies are now considering moving manufacturing closer to their consuming centres to de-risk supply chain challenges. Of course, it is easier said than done as it involves new investments in infrastructure and training of the workforce. But the idea holds.
- Countering the shipping crisis with Artificial Intelligence: Using data and analytics to identify and map the inventory being affected by the global shipping crisis, could open up new avenues. If you don’t yet have the full data about what is on a ship transporting materials, then this crisis is an opportunity to justify prioritizing supply chain digital transformation with data science, IoT, and advanced analytics (e.g., machine learning and simulation). Tracking location of all goods all times will be crucial to successfully gauge what impact a shortage might have on operations.
- The Labour opportunity: Data collated by the OECD, which groups most of the advanced industrial democracies, shows that in its 38 member countries, about 20 million fewer people are in work than before COVID struck. Of these, 14 million have exited the labour market and are classified as “not working” and “not looking for work.” Compared to 2019, three million more young people are not in employment, education or training. For governments, this might offer a few key policy lessons:
- maintain cross-border labour markets;
- target continued subsidies at sectors that are still facing restrictions due to health measures;
- promote investment in human capital to facilitate the redeployment of labour from legacy industries which will not return to pre-COVID levels of activity, toward future growth sectors.To recruit and retain staff, private sector companies are going to have to compete harder, offering more attractive pay and conditions, be more sensitive to their employees’ work-life balance, and providing better training and career paths.