Global supply chain crunch deepens as Delta variant surges

Virus cases cause major trade disruptions when China shuts down ports; factory operations in Asia affected too

TAIPEI• A supply chain crunch that was meant to be temporary now looks like it will last well into next year as the surging Delta variant upends factory production in Asia and disrupts shipping.

Manufacturers reeling from shortages of key components and pricier raw materials and energy are being forced into bidding wars to get ship space, pushing freight rates to record highs and prompting some exporters to raise prices or cancel shipments altogether.

"We can't get enough components, we can't get containers, costs have been driven up tremendously," said Mr Christopher Tse, chief executive of Hong Kong-based Musical Electronics, which makes products from Bluetooth speakers to Rubik's Cubes.

Mr Tse said the cost of magnets used in the puzzle toy had risen by about 50 per cent since March, lifting production costs by about 7 per cent. "I don't know if we can make money from Rubik's Cubes because prices keep changing."

China's determination to stamp out Covid-19 has meant even a small number of cases can cause major disruptions to trade. This month, the world's third busiest container port at Ningbo shut for two weeks after a single dockworker tested positive for the Delta variant. Earlier this year, Shenzhen docks were idled after the discovery of a handful of cases.

"Port congestion and a shortage of container shipping capacity may last into the fourth quarter or even mid-2022," said Mr Hsieh Huey-chuan, president of Taiwan-based Evergreen Marine Corp, the world's seventh-biggest container liner. "If the pandemic cannot be effectively contained, port congestion may become a new normal."

Sending a container from Asia to Europe costs about 10 times more than in May last year, while the cost from Shanghai to Los Angeles is up about six-fold, noted the Drewry World Container Index.

Higher freight rates and semiconductor prices could feed into inflation, said Dr Chua Hak Bin, senior economist at Maybank Kim Eng Research in Singapore. In addition, producers say they will raise prices to reflect the increased costs.

Forecasters have lowered growth in United States projections for this year and lifted inflation expectations into next year, noted Bloomberg's latest monthly survey of economists.

Hong Kong-based coffee-machine maker Eric Chan does not see the crunch easing for months as he juggles a supply line that involves hundreds of components to meet booming demand for appliances.

"We are storing up critical components for one year of usage because if we miss one component, we cannot manufacture the products," said Mr Chan, chief executive of Town Ray Holdings.

The spread of the Delta variant, especially in South-east Asia, is making it difficult for many factories to operate at all.

In Vietnam, the world's second-largest producer of footwear and clothing, the government has told firms to let workers sleep in their factories to keep exports moving.

Even mighty Toyota Motor is affected, warning that it will suspend output at 14 plants in Japan and slash production by 40 per cent due to supply disruptions.

On the other side of the globe, companies in Britain are grappling with record low levels of stock and retail selling prices are rising at the fastest pace since November 2017.

"It is hard to see supply chain bottlenecks being resolved any time soon, with some major exporters including Indonesia and Vietnam still struggling to contain the Delta outbreak," said Bloomberg Economics chief Asia economist Chang Shu.

At the heart of the price pressures is the transport bottleneck.

Big retailers tend to have long-term contracts with container lines, but Asian production relies on networks of tens of thousands of small and medium-sized producers who often arrange shipping through logistics firms and freight forwarders.

They in turn have been struggling to get space for clients as ship owners sell to the highest bidders.

Buyers agree. In Germany, more than half of the 3,000 firms polled in a recent survey expected widespread supply-chain problems to persist into next year.

"Now container liners don't sign long-term agreements and most deals are done by spot prices," said Mr Jason Lo, chief executive of Taiwanese gym equipment maker Johnson Health Tech. He said it was becoming impossible to estimate shipping costs but "we have no choice".

Mr Colin Sung, general manager of Dongguan-based World-Beater International Logistics, said one client had more than 70 containers of goods sitting at a warehouse in Shenzhen because his American buyer did not want to pay the shipping cost. Mr Sung said 60 per cent to 70 per cent of his clients have cut shipments due to rising costs.

For Asian factories outside China, the problem is even worse. Many Chinese firms are willing to pay above-market rates to load their cargo, said a spokesman at HMM, South Korea's biggest container line. So when the ships call at ports outside China, they are already almost full.

Chinese firms which spent decades shifting production of lower-value parts to cheaper labour markets in Asia now face the headache of trying to get those parts to factories where they can be assembled into finished products.

"We are talking about a lot of money just to move things around," said Mr Sunny Tan, executive vice-president of Luen Thai International Group, which makes clothing and leather handbags.

Meanwhile, Luen Thai's Mr Tan, who is also deputy chairman of the Federation of Hong Kong Industries, is trying to figure out how to meet Christmas demand. "I wish when shoppers see our product, they give it a kiss when they realise how difficult it was just to get it to the shelf," he said.

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A version of this article appeared in the print edition of The Straits Times on August 27, 2021, with the headline 'Global supply chain crunch deepens as Delta variant surges'. Subscribe