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No spare parts? Why coronavirus is giving industry a headache

August 19, 2021

reading time: 3 minutes

by David Wolf, LGT

Lack of spare parts slows down industry

Factories and cargo ships came to a standstill. Manufacturing and logistics cannot be ramped up at will. Industry is coming up against unexpected walls.

Consumers normally pay little attention to fluctuations in supply and demand in their everyday lives. Every now and then, they might notice that individual food items, such as vanilla beans, cost more at the supermarket because their supply has decreased significantly due to crop failures in the regions where they are grown. Such effects are limited to individual sectors, regions or periods of time.

What we are currently observing, however, is fundamentally different: empty shelves at discount shops, outrageously high lumber prices, unusual waiting times for new cars and exorbitant prices for computer graphics cards. The reason for this can be summed up simply: the once well-oiled gears of global trade flows have been abruptly slowed down by the worldwide standstill arising from the pandemic. The existing production and logistics infrastructure is unable to meet demand, which has risen rapidly as the economy recovers. This has already led to bottlenecks, and the situation has worsened since the spring.

The Achilles’ heel of the economy: complex logistics infrastructures

The US industrialist Henry Ford, who revolutionized the automotive industry in the 20th century, eliminated the need for expensive and time-consuming warehousing by introducing “just-in-time” manufacturing. The materials that were needed were delivered only in the quantities required at their time of use. This concept was a resounding success. But if you cut out warehousing, you become more dependent on suppliers and a functioning economic cycle.

Container congestion in Chinese port.
Cause for delays in production: container congestion in Chinese port (© Adobe Stock/Weiming).

Until recently, it was the industries that rely directly on raw materials that tended to be known for having supply bottlenecks. Now, however, we are also seeing issues with components and According to the latest surveys, around half of European companies report supply bottlenecks for their intermediate products. In the case of electronics and automotive manufacturers, 80% are having problems obtaining the chips they need. In mechanical engineering, even the simplest metal components are missing. Depending on the product, either not everything can be delivered, or prices have risen. The extent of this problem is only slowly becoming apparent.

Normalization is still a way off

The issues with supply chains can be easily spotted by looking at container traffic. Delayed departures lead to delayed arrivals, which in turn lead to new delays. Major shipping companies do not expect this situation to ease until 2022. Another problem being faced is the reluctance of shipping companies to procure new large container ships, due to the very fact that the market situation is not expected to ease in the coming months.

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At the same time, demand for shipping capacity is booming. For example, container prices on important routes are exploding due to congestion in Asian ports. The average freight price of standard containers has risen by around 50 percent and capacity limits have been reached. The resulting inefficiencies in supply to industry will all have an impact on prices in the consumer market. Waiting weeks for ordered goods will become the norm. And the latest information of renewed pandemic-related closures of Chinese ports casts doubt on the expectation that the situation will normalize in 2022.

Are local trade and decoupling the solution?

Strained supply chains and flows of goods place a huge burden on the economy. A shortage of components can become an existential burden for companies already battered by the pandemic. What remains are noticeably rising production and consumer prices that are felt by all. There is no quick solution to the current bottlenecks. Waiting for normalization alleviates the symptoms, but not the core problems, such as the dependence on Asia. And if this dependence persists, a similar crisis can arise again at any time.

The ideal of diversified, local value creation is often nothing more than a planned economy fantasy.

David Wolf

Decoupling sounds like a good idea, but it’s not that simple. Although the media often talk about “deglobalization”, it is always in reference to the economy as a whole and not its individual participants. An entrepreneur has a framework within which they make their business decisions. Decoupling from suppliers is usually not even possible.

One option is to broaden the supply chain, which reduces dependence on individual regions and suppliers, but can often be more expensive – which is the reason these dependencies arose in the first place. Recent surveys of companies confirm this with sobering clarity: despite their obvious susceptibility to crises, supply chains are not suddenly being turned upside down. This is why the ideal of diversified, local value creation is often nothing more than a planned economy fantasy. The dependence on containers from Asia, on the other hand, is a harsh reality. And ultimately, it is the consumer who foots the bill.

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