Suez/Panama Canal disruptions confirm need for companies to move to local-for-local supply chains

Global supply chains were a great idea during the Boomer-led SuperCycle from the mid-1980s. But today we have lost the demographic and peace “dividends” that turbocharged the SuperCycle.

It’s time to go back to the more resilient and reliable ‘local for local’ supply chains that existed before the SuperCycle.

The charts highlight the rising level of risk from the effective closure of the Suez Canal by the Houthis:

  • Container freight rates have sky-rocketed from $930 on 30 October to $4857 on 22 January
  • Ships are now having to spend 36 days going from Asia to Europe round the Cape of Good Hope
  • They spent only 26 days using the Canal. And, of course, they face the same delay on the way back

And it’s not just Europe that is having problems. Climate change means the Panama Canal is short of water. As the chart shows, the number of South to North crossings has more than halved in recent months:

  • The shortage of container shipping has also led Asia – US West Coast rates to rocket
  • They have more than doubled from $1593 on 11 December to $3721 on 22 January

And the disruption is spreading as I.C.I.S has reported. Major Taiwanese producer Formosa Plastics had to declare force majeure earlier this month:

“Although we had tried our best to arrange the shipment, considering such circumstance is beyond our reasonable control under the force majeure clause in our contract, we would like to terminate all unshipped CIF shipments to Europe and Turkey from January 12, 2024.”

The risk now is that companies have low inventories down most value chains, due to weak demand. And so the delays may force buyers to go into the market to replace delayed product.

Inevitably this will start to create a vicious circle of rising prices and potential product shortages.

Spring is normally the strongest month for consumer demand, as the weather improves. And Q2 would normally be particularly strong this year as Easter is in March, reducing the disruption from public holidays.

COMPANIES ARE NOW MOVING BACK TO MORE LOCAL SUPPLY CHAINS

Globalisation made good sense during the Boomer-led SuperCycle. Demand was expanding, and the “peace dividend” after 1989’s fall of the Berlin Wall meant risks were lower.

This transformed incomes in countries like China after it joined WTO in 2001, as the chart shows:

  • Disposable income  jumped from $829/capita in China’s urban areas to $6962/capita
  • It rose almost 10-fold from $286/capita in rural areas to $2844/capita

But today, the low-spending, lower-earning Perennials 55+ cohort are the main source of global population growth.

And so global supply chains are no longer necessary.  As the Swiss IMD Business School reported back in 2020:

“Firms today are prioritizing resilience over efficiency as they look to curb costs to weather the disruption from the pandemic…

“Trying to produce and ship locally will ensure less disruption in case of limited movement of people and goods,” says Bettina Büchel, Professor of Strategy and Organization at IMD.

“This shift was already well underway prior to the coronavirus outbreak, which has simply reinforced the change, she argues.”

And as American Express reported last year, local supply chains are not only more resilient. Companies can be more agile when dealing with local supply chains, and also reduce their carbon emissions.

Companies such as BMW are already ramping up the use of regional supply chains on the principle of “local for local”.

The growing disruption in the Suez and Panama Canals is set to encourage more companies to move to ‘local for local’ supply chains. These are not only more resilient, but also make firms more agile – and reduce their carbon emissions.