A perfect storm is brewing for businesses in view of the disruption in the global supply chain that has peaked amid the Covid-19 pandemic.
The new global supply chain pressure index or GSCPI developed by the Federal Reserve Bank of New York shows that global supply chain disruptions are at their highest in the last 25 years.
The elevated global supply chain pressure has led to a shortage of raw materials of essential goods, leaving customers waiting for months to receive products.
This is because manufacturers have been grappling to supply as much as they had done in the pre-Covid period due to a labour shortage and lack of raw materials, which have also contributed to inflationary cost pressures.
In Asia, pandemic-related disruption concerns are also rising in Japan’s fast-food chain because of delays in potato shipments due to floods in Canada.
As such, two weeks ago, McDonald’s Holdings Co Japan announced the sales suspension of medium and large-sized french fries for a week.
Likewise, many industries in the Asean region have also been impacted by supply chain disruptions, especially those linked to China.
For instance, tech firms in Penang, which is one of the world’s largest electrical and electronic (E&E) hubs, have been impacted by supply chain disruptions as they depend on China to supply components.
It is learnt that 20% of Penang-based Pentamaster Corp Bhd’s components and parts come from China. The company is a high-tech firm specialising in providing factory automation equipment, as well as systems and information and communications technology solutions to industrial and commercial customers.
Meanwhile, textile firms in Cambodia and Vietnam have also faced disruptions in the supply of raw materials from China.
It is noteworthy that Cambodia’s garment industry procures around 60% of its textiles from China.
Looking ahead, the onset of the fast-spreading Omicron variant could eventually lead to new shutdowns, further straining the already-stretched global supply chain.
Not only that, severe weather disruptions from climate change have hit some countries, including Indonesia, the Philippines and Malaysia, with violent storms resulting in flooding.
Notwithstanding the impact of the pandemic and climate change, global businesses have already started to feel the heat in the first month of the year.
According to AmBank Group chief economist Anthony Dass (pic below), the issue in the supply chain could last up to two years because of disruptions from China, the United States and the United Kingdom.
“The outbreak of Covid in China’s manufacturing hub of Zhejiang, which is home to the world’s largest cargo port, Ningbo-Zhoushan, saw tens of thousands being quarantined under China’s strict zero-Covid policy.
“The worst delays are still coming from the US west coast. Ships have been waiting for four weeks to unload due to the lack of workers on land.
“There are labour shortages and ships are limited, which could result in disruptions of the supply chain for a longer period,” he explains.
Dass notes that the already-stretched supply chain is likely to get further disrupted due to workers and truckers being off for the year-end holidays in North America, Europe and the upcoming Chinese New Year in Asia.
“In short, it seems that supply chains are still hit with ‘high blood pressure’. It will likely take to mid-2024 to get back to normal,” he notes.
The supply chain crisis has led to some international companies moving production capacity closer to home.
For instance, German fashion house Hugo Boss has announced that it is expanding production capacity closer to its base in Europe to reduce its dependence on South-East Asia at a time when global supply chains are under severe pressure.
Many American brands are also moving their manufacturing operations back to North America.
Though not at an alarming rate, Dass says some global companies are “relocating capital”, while others are focusing on alternative suppliers to have a reliable backup strategy.
However, he points out that geographically diverse supply chain partners, which could serve as a contingency plan, may require additional assessments, higher costs and consistent oversight.
As such, this may persuade some companies to produce more of their goods locally.
To mitigate the impact of the disruption, Deloitte Asia Pacific international tax and global value chain alignment partner Sharon Tan says companies are also diversifying suppliers in existing markets and moving operations closer to end-customers in different regions.
“In addition, they are also enhancing data integration for supply-and-demand visibility and planning.
“Centralising a manufacturing control tower can bring together data from different facilities, production lines and equipment and visualise dependencies on suppliers and effects on logistics.
“Digital supply networks and data analytics can be powerful enablers for a more flexible, multi-tiered response to disruptions,” she suggests.
Given the major shifts in supply chain, Ernst & Young Consulting Sdn Bhd consulting partner Tan Chiaw Hooi (pic below) believes South-East Asian countries would be the beneficiaries of the shift, as the region will play a pivotal role in reshaping the global supply chain landscape.
“Post-pandemic, real estate, fast moving consumer goods or FMCG and food logistics and manufacturing industries will likely emerge transformed as a result of major shifts in supply-demand dynamics.
“There will be major development strides in new industries, such as agritech, medtech and edtech, and radical shifts in certain industries like automotive and electronic manufacturing services (EMS).
“For EMS, opportunities are opening in the South-East Asian region, as entities re-adjust from their current facilities in China and develop more resilient supply chain networks in the region,” she says.
In addition, Deloitte’s Tan adds that economic partnerships and trade agreements such as the Regional Comprehensive Economic Partnership or RCEP signed last year and the Comprehensive and Progressive Trans-Pacific Partnership are also gaining traction, especially with China’s application to participate.
That said, the region will not be missed by companies seeking to grow their top-line despite the supply chain disruptions.
By Zunaira Saieed / thestar
The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the position of AsiaWE Review.