“Stability still far away”
Are the supply chains strong enough for the next crisis?
By Diana Dittmer
01/19/2023, 7:24 p.m
The “perfect storm” in world trade has passed. The movement of goods in the globalized world is working again. Empty shelves in shops, panic buying and traffic jams on container ships are almost forgotten. But that’s not yet a reason for the all-clear.
For three years, the corona pandemic turned the globalized world upside down. Delivery bottlenecks, an industry that only manages shortages, Christmas parties that end up in a nail-biter for fear of empty gift tables. It all seems a long time ago.
Locked ports, stranded containers piling skyward at hubs, and foodstuffs rotting because containers can no longer be refrigerated in China are etched in our minds – but more like Hollywood disaster movies than something our reality is about has accompanied for years.
The supply chains seem to be slipping again. The “perfect storm” in world trade that caused so much panic in the Corona years has subsided – almost as quickly as it came. Freight rates, which have meanwhile skyrocketed, have fallen, container ships are no longer queuing up in front of the ports, and Beijing has even given up its zero Covid policy. The supply chains that were declared dead are suddenly alive again.
CNN quoted the chairman of the Institute for Supply Management, Timothy Fiore, as saying that it was still a problem, for example with components such as integrated circuits and microcontrollers, which were missing in some places and affected production. But “on the whole the pressure is gone”. What happened to the collapsed trade that literally stank to high heaven? Has the crisis really been resolved?
No reason to give the all clear
“Not at all,” says Thomas wandler from Kloepfel Consulting, a service provider for purchasing and supply chain management, in an interview with ntv.de. “We are still a long way from having stable, well-functioning supply chains again.” The supply chains had already changed a lot during the pandemic – out of necessity – but they had not yet had time to “consolidate”. It is true that things are going well at the moment, but “a clear picture” is still missing.
Fortunately, this development is already leaving positive marks on the economy. Producer price inflation has slowed. The overall economic prospects have also improved so much that the widely feared recession has been shelved by economic experts.
However, the latest study by Germany Trade and Invest (GTAI) also gives an indication of how much the economy is caught between a new and an old normal. Imports from the second largest economy in the world have increased rapidly. This means that dependency on China has even increased recently instead of decreasing. The lesson from the supply chain chaos in the pandemic was actually different.
Has the de-globalization project been cancelled?
At the beginning of the crisis, experts and the financial market quickly agreed that with the virus the time had come to test the role backwards in globalization. The appeal was that production sites in the Far East should be reconsidered and diversified as quickly as possible. The experts were certain that the supply chains would never be the same again. So have the good resolutions to become less dependent on production sites in China already been forgotten?
One study by the Capgemini Research Institute shows that companies have certainly drawn conclusions from their experiences in the pandemic. Supply chain resilience has become a top priority. So there can be no talk of the all-clear or forgetting.
Almost 90 percent of those surveyed worldwide (even 91 percent in Germany) consider interruptions in the supply chain to be the greatest risk for global economic growth in the next 18 months, ahead of rising commodity prices and the energy crisis. Therefore, to mitigate risk, 43 percent of decision makers plan to increase investment in their supply chain over the next year and beyond. On average, additional spending of a good 10 percent is planned.
However, according to supply chain expert Wand, such numbers are quickly misleading. “Reality is different from wishful thinking. A closer look reveals three areas: one is pure declarations of intent, the next is declarations of intent with wishes, and the third is declarations of intent that are actually implemented.”
The fact is that for 20 years “whatever the hell, everything was relocated to Asia, we cut off entire industries in Europe. We can’t bring the whole thing back seamlessly within a year or two”. On the one hand, Europe does not have the capacities, and on the other hand, in some cases, it also does not have the technologies. There are ambitious projects to help the economy become more independent of China, such as the European Chips Act. But that means high investments. In addition, a fundamental consideration must be given to “which production technologies do we want to bring back. Where does it make sense?”
And when the next shock comes?
The experts are convinced that the supply chains are more resilient today than they were at the end of 2019. In their opinion, the disturbances in the movement of goods caused by the invasion of Russia in the Ukraine could be better cushioned as a result.
Surveys show that the situation is also considered stable in the management floors of companies. The so-called Logistics Managers’ Index (LMI), a value that measures inventories and their costs as well as storage and transport capacities and their prices, was 54.4 in December. That’s a one-point rise after eight straight declines. Before that, the index had been consistently in the high 70s or 80s throughout the pandemic.
Despite great efforts and investment projects, the companies are still a long way from reaching their goal with the restructuring of their supply chains. Nobody could currently make reliable forecasts, says wandler. “Anyone who has budgeted for 2023 does not know whether they will reach the budget. Why? Because we are still in a highly volatile market and the circumstances have not yet stabilized.”
But time is pressing. “Of course everyone says, get out of China. That’s where the dispute between China and Taiwan is smoldering.” In a year and a half to two years this could be the next big crisis, the next black swan.