SINGAPORE (Apr 17): Global supply chains have been facing one disruption after another, starting with the trade war between the US and China in 2018 and 2019. Now, no thanks to the Covid-19 global pandemic, further changes are seen, as capacity has been cut and schedules upended. “Covid-19 has seen a blanket increase in freight prices,” says Eytan Buchman, chief marketing officer at global freight forwarding operator Freightos.
Now, just to be sure, supply chains of food clothing and basic supplies across borders remain “functional”, says Buchman. However, “the lockdowns have grounded airlines and reduced air freight. With air cargo accounting for nearly 60% of global supply movement, this has increased the cost of flying goods across borders”. Air freight costs have skyrocketed to an average of US$23-US$24 ($32-$34) per kg, from pre-pandemic rates of around US$4-US$5 per kg, he says.
Sea freight has become just as expensive, as logistics operators reduce their fleet size, notes Buchman. The higher costs reflect the reduction in demand for both imports and exports, particularly in industries providing non-essential services. This is because retailers do not want to incur expenses from storing unsold inventory in their factories, while logistics operators are reluctant to move goods due to the increased checks they have to undergo.
The global supply chain was facing a different kind of pressure from a different angle just two years ago. The tit-for-tat tariffs imposed by the superpowers on each other’s goods have significantly reduced the global demand for manufacturing, automobiles, semi-conductors and capital goods. This is because the tariffs significantly increased the cost of producing goods in the global value chain, explains Tian Lin, an associate professor at INSEAD who specialises in international trade and spatial economics.
When the US and China reached a preliminary truce on Dec 15 last year, it brought anticipation that global supply chains would soon go back to the pre-trade war levels by the end of 2020. Such hopes are now dashed by the Covid-19 outbreak, and more upheaval is now seen.
“The trade war brought out the dimension of risk to supply chains as tariffs and the disrupted Chinese imports prompted companies to weigh surety of supply over cost of shipment,” says Patrick Bossche, partner at global consultancy Kearney. Covid-19, which exerts an “unexpected shock”, is a stark reminder that supply chains need to be resilient, he adds.
Now, even as the world grapples with fallout from the Covid-19 pandemic, major shifts are already taking place. According to Kearney’s annual Reshoring Index, which compares US manufacturing gross output to import data from 14 Asian low-cost countries, ranging from China to Cambodia, the change last year was the sharpest jump in five years.
Mismatched demand
Consumers are already feeling the pinch of these changes. For instance, Singapore’s food supplies face increasing strain amid “severely diminished global production capacities and global supply chains”, says Singapore’s Trade and Industry Minister Chan Chun Sing.
“The size of our stockpile is determined by a range of factors such as our consumption rate, the supply chain reliability, resupply rate and frequency, shelf life of the products, and the cost of storage, the duration of possible disruptions and our local production surge capacities,” Chan noted in Parliament on April 6.
Vegetable traders are now seeing less produce lining their baskets. Lim Hwee Yang, a vegetable seller at Kovan wet market, says that with the Covid-19 outbreak, his supply of vegetables from neighbouring countries has more than halved, while prices have increased by 15%. “Nowadays, very few vegetables are coming in from Malaysia and Thailand because of the movement control restrictions,” he says.
Others such as apparel store owner Kimmie Lai have completely stopped replenishing their stocks. “I think people are now focusing on necessities so it doesn’t make sense for me to import more clothes, especially at this time when the cost of shipment is so much higher,” notes Lai, who sells women’s apparel at Chinatown Point.
Meanwhile, producers too have their own struggles. Wong Teek Son, executive chairman and CEO of Malaysia-headquartered glove maker Riverstone Holdings, says his company, even when running at 93% utilisation rate as it is now, has difficulty meeting demand. “We had to reject some orders from newer clients as priority is being given to existing ones,” says Wong. He adds that orders placed in March will only reach end-users in October amid more tedious freight-forwarding routes.
A new normal
As supply chains stay in a flux, as manufacturers, middlemen, and customers try and adapt to new patterns, the World Trade Organization (WTO) has forecast global trade to collapse by up to a third this year – surpassing the –0.1% dip registered in 2019 as well as the levels logged during the 2008/2009 global financial crisis. This is expected to spill over into 2021 if the health and economic crisis do not abate.
“The unavoidable declines in trade and output will have painful consequences for households and businesses, on top of the human suffering caused by the disease itself,” observes WTO’s Director-General Roberto Azvêdo. Calling the current levels of global trade “ugly”, he believes a rebound largely hinges on how companies and governments adjust their supply chains in response to the current pandemic.
Market watchers are already seeing a shift away from some traditional industry norms. In the good old days when things moved smoothly, logistics managers prided themselves on perfecting the art of “just in time” delivery. Parts arrived at a manufacturer’s assembly lines just before it was required. Manufacturers strive for zero inventory; they take pride in their efficiency.
While this reduces costs from inventory and warehousing, companies are realising that it does little to manage unexpected surges in demand. “Companies will realise that while maintaining higher inventory levels may cost more, it does pay dividends in terms of customer satisfaction and competitive positioning ing during a crisis. It is better to have enough buffer stock and not need it, than to need it and not have it,” says Arjun Sethi, who chairs Kearney’s Asia Pacific office.
Aside from this, the havoc wreaked by the pandemic in China — the epicentre of global manufacturing and production — has made companies sit up and realise the importance of diversifying their risks by engaging multiple suppliers. While this may not lead to a full exit from Chinese imports, Jee Chang and Uziel Alvarez from Deloitte’s transfer pricing department say it will translate into companies expanding their footprint into more countries.
Some semblance of this had been spurred by the trade war, with companies moving to Thailand for automotive solutions, while Vietnam and Bangladesh have created a name for themselves in apparel production. Meanwhile, Malaysia has established itself as a credible player in electronics manufacturing.
30 by 30
National policies have changed as well. Singapore, for years, has built up a network of free trade agreements, so as to minimise the impediment on goods and also services across borders. However, there are specific areas, such as food production, where the country has to turn increasingly inwards and be more self-reliant, reversing the decades-long mantra that there is hardly any space for the land-scarce country to indulge in agricultural activities.
Under the so-called “30 by 30” plan, 30% of Singapore’s domestic nutritional requirements is to be produced locally by 2030. At present, less than 10% of food available here is produced locally. According to the Singapore Food Agency, domestic production of leafy vegetables stood at 14% of total consumption in 2019. Meanwhile, hen-egg farmers made up 26% of total consumption while fish farms contributed 10%.
The unprecedented pandemic has lent this “30 by 30” strategy a greater urgency. On April 8, the government introduced a $30 million “30x30 Express” grant, to help accelerate local farms’ production capacity in the next 24 months.
Local farmers are invited to submit ideas on how to “grow more and grow faster”. Those chosen will be able to tap the $30 million pot and defray costs needed to scale up production in their farms.
Minister for the Environment and Water Resources Masagos Zulkifli has urged consumers to do their part as well. “Demand from consumers will spur our farmers to become more productive, and allow them to reap the benefits of economies of scale. This, in turn, will bolster our food security, and create good jobs for our people,” he says.
If Singapore, which prides itself on its broad, all-encompassing global trade ties, is forced to look inwards, other countries with a larger domestic market and production base will be too. The immediate impact will put further pressure on global trade. Importers have less incentive to produce, while exporters will find fewer buyers to sell to. The obvious downside: the erosion of economies of scale that come from specialisation.
Others believe the need to match basic needs should take precedence and countries should have some ability to match them domestically — at least in times of crisis. And this seems to have become a new normal now, as countries struggle to keep up with consumer needs in this time of low production and movement of goods and services.
Whether this remains status quo is left to be seen. However, Asean+3 Macroeconomic Review Office’s chief economist Khor Hoe Ee says this is not the way forward. “Global trade is what has propelled growth in many countries because it has allowed countries to specialise in producing goods in which they have a comparative advantage.” As such, he is appealing to policymakers to remain committed to the rule-based multilateral trading system and leverage technology, and to update rules governing trade to enable freer cross-border flows. This is as “a more inter-connected global supply chain is what is needed for the global economy to rebound”.
