The global supply chain crisis is about to experience a fresh shockwave as factories reopen in China and begin a mad rush to resume production and fill orders, industry observers say.
Following a series of lockdowns and renewed public health restrictions in response to COVID-19 outbreaks, manufacturers have restarted operations and are now frantically trying to catch up.
Recently, the Shanghai Commission of Economy and Information Technology identified 666 local companies as priority businesses that would be allowed to resume production. The city’s industrial development authority noted that the hundreds of companies on the list manufacture critical goods, including automobiles and semiconductors.
Businesses that find it difficult to ensure that production lines come back online can request assistance from the municipal body.
One of the companies to reopen its Shanghai factory is Tesla Motors. The electric vehicle maker is attempting to ramp up output and ensure products are shipped on time by adding beds and showers for employees to camp out on-site. Many other firms have installed comparable systems to accelerate production.
But it doesn’t mean Shanghai has moved on from COVID-19 as officials recently announced new measures that include citywide testing and quick transfers of infected patients to quarantine locations.
Shanghai is a key manufacturing hub in China, filled with many vast and lucrative factories that manufacture automotive and electronics supplies for the likes of Apple, Sony, and Unimicron Technology Corp. The Chinese city also possesses the world’s largest container port, as well as a crucial airport that offers inbound and outbound air cargo.
However, industry observers warn that this frenzy to ease the backlog could add new pressures to the global supply chain crisis, particularly in the United States.
US’s Supply Chain Crisis Isn’t Improving
U.S. ports along the West Coast that manage incoming cargo from China are bracing for a significant increase in deliveries. The main problem is that these areas are already facing substantial congestion issues and staffing shortages that are fueling the shipping container crisis. The fresh shipments will result in more shipping containers piling up, forcing new arrivals to wait offshore until enough port space is available.
When could conditions ease? Not for a while, warns James McKenna, president of the Pacific Maritime Association.
“As the lockdown in China becomes a thing of the past, hopefully you’ll see that surge start to pick up momentum again,” McKenna, whose organization represents dozens of carriers, shipping firms, and terminal entities, told Bloomberg. “But by no stretch of the imagination do we think it’s over. In fact, we’re planning for this to go for the entire year.”
Today, hundreds of cargo ships are lined up in Shanghai. By comparison, there are about 40 container ships waiting off the coast of southern California. In addition, data from freight-forwarder Flexport reveal that it takes an average of 111 days for Asian goods to reach the typical warehouse in the United States, up from about 85 days from the same time a year ago.
Ultimately, the supply-chain bottlenecks will likely remain the same without new infrastructure, intensifying the contagion event across the whole logistics network, whether in warehousing or transportation.
“There’s a lot of backlog still waiting to get out of China,” he said. “It’s just all a big puzzle that has to come together.”
Industry experts warn that there’s a growing concern that ocean carriers could cancel sailings in response to supply disruptions in Shanghai.
While there haven’t been too many cancellations, carriers are skipping some Shanghai calls, data from American Shipper spotlight. But at the same time, there is yet to be “any material impact” on the supply chain fiasco.
“There has not been any material impact on blank sailings, beyond the normal state of affairs, to the degree that the market prior to the Shanghai lockdown can be called ‘normal,'” Alan Murphy, the CEO of Sea-Intelligence, a research and data services firm, told American Shipper.
However, Murphy expressed caution.
“We could still be in an early phase of the Shanghai lockdown, and if the factory closings persist, it is highly likely that the number of blank sailings will begin to increase in the coming weeks,” he said.
In a 42-page Economic Report of the President (pdf), White House economists warned that trade woes will outlast the coronavirus pandemic, alluding to shipping backlogs and product shortages that have made supply chains “complex and fragile.”
“Though modern supply chains have driven down consumer prices for many goods, they can also easily break,” the Council of Economic Advisers wrote in the April 14 report.
“Because of outsourcing, offshoring, and insufficient investment in resilience, many supply chains have become complex and fragile. This evolution has also been driven by short-sighted assumptions about cost reduction that have ignored important costs that are hard to turn into financial measures, or that spilled over to affect others.”
This year, inventory levels have not been perfect, with many in-person and online buyers noticing empty shelves and out-of-stock notices.
But the IRI CPG Supply Index does show that most products are in stock. The weekly data highlight that pressures are building for a broad array of items, such as pest control, paper products, home care, refrigerated and frozen foods, and tobacco.
While product shortages have yet to turn into a crisis, price inflation continues to be an agonizing struggle for businesses and consumers.
In March, the U.S. annual inflation rate hit 8.5 percent, with prices rising for a wide range of goods and services. The food index climbed 8.6 percent, the apparel category advanced 6.8 percent, and new automobiles soared 12.5 percent.