Supply Chain Crisis: Disruption Should Lead to Greater Diversification

We believe the impact of supply chain disruptions on businesses and households is likely to remain significant in the first half of 2022. While the second half could bring some relief if China relaxes its zero-COVID and power-rationing policies and U.S. labor shortages wane, Russia’s war in Ukraine and the sanction responses have led to further disruptions. Although the Russia-Ukraine conflict is likely to have a limited near-term impact on the tech supply chain in Asia Pacific, with sufficient inventory of key raw materials (such as neon gas and palladium) for the coming four to six months, any prolonged disruption to the global supply chain could drive up computer chip prices and further delay shipments. As we noted in our recent Cyclical Outlook, “Anti-Goldilocks”, even after a conclusion to the war in Ukraine, sanctions would likely remain in place for a long time, hampering the flow of trade and capital and exacerbating supply chain issues.

In the longer term, we expect recent disruptions will prompt companies to further diversify their supply chains, reducing China’s role. Other countries in Asia could benefit.

U.S. companies have been hit hard by supply chain disruption

Global supply chain bottlenecks have made headlines the past couple of years amid the COVID-19 pandemic and geopolitical tensions. Initially, the pandemic reduced global demand. However, fiscal stimulus and consumption of goods in place of services have helped to re-stimulate demand. This has placed increasing pressure on the supply side and created congestion and a backlog of orders – from auto parts to manufacturing machinery to logistics – with a shortage of truck drivers further exacerbating the problem. Parts shortages and home-bound employees have prompted many U.S. companies to cut their sales guidance or issue profit warnings.

Port congestion continues to be a challenge: The average wait time in New York ports was about five days at the end of 2021 compared with last year’s 1.6-day averageFootnote[1]. As of 21 March, 44 ships were queueing offshore to enter the ports of Los Angeles and Long Beach, still elevated but declining from an all-time high of 109 in January, according to the Marine Exchange of Southern California.

In addition to a shortage of truck drivers, COVID protocols are gumming things up. For example, since 15 January, truckers entering Canada had to show proof of vaccination, a policy which the Canadian Trucking Alliance estimates will lead to a 10%–15% reduction in cross-border truckers. While the week-long protest at the Ambassador Bridge, North America’s busiest land border crossing connecting Ontario and Michigan, has now ended, we could see similar demonstrations in future that impede transportation routes.