By Christopher Findlay and Hein Roelfsema
Worried about disruptions to global supply chains, policymakers are pledging to get gifts on the shelves for Christmas. But U.S. retailers are taking their own steps. They have brought the shopping season forward by launching their Christmas “sales.” This extended shopping period reduces the uncertainty of whether presents will be on time.
The higher costs and lower reliability of international freight transport have been a problem since the start of Covid-19. For instance, the price of shipping a container from Asia to the United States went up from US$2000 at the beginning of 2021 to US$20,000 in August. Ships are still queued outside U.S. ports and arrivals outside of booked times have knock-on effects through the use of trucks and warehousing. Delivery times have lengthened and reliability has fallen.
At the heights of the pandemic, there was greater demand for goods, which had to be shipped — mainly from the Asia Pacific. Freight rates rose because demand increased.
The longer delivery times and lack of reliability led to purchasers making larger orders than usual, worsening the delays. Large retailers chartering small vessels lengthened ship queues. On the supply side, mobility in port areas and among crews has been restricted.
Air transport is an option, but it often occurs in combination with passenger flights, which are still far from their pre-pandemic levels. Air freight rates hit record levels in mid-September 2021.
There are some signs that the worst is over. Sea freight rates have fallen since early October on some routes, although that effect may be seasonal. Also, the global picture shows rising rates, and delays remain. Additionally, air freight rates have risen again with the continuing demand for “on-demand” delivery of some goods. If the pandemic situation improves, the mix of consumer demand may shift back to services and some of the staffing constraints in ports will relax.
One immediate response has been discussions around the geographic distribution of supply chains and the move to nearshoring. There is some evidence of the relocation of activities previously based in Asia to locations in or close to European markets.
But this experience directs attention to the provision of more and better services (or “servicification”) in supply chain operations. These are related to better use of data, new business models, and more efficient infrastructure management.
Before Covid-19, some major players in global value chains were beginning digitalization processes, as we now illustrate. The lack of formal organization and contracting in freight markets is surprising, with hundreds of emails exchanged to transport a single container. Digitalization creates greater scope for the application of new technology. The application of blockchain technology can cut the process of document exchange in Shanghai port from days to hours, while the digitalization of air cargo booking systems reduces booking times.
Analysis of data can also help to economize on freight costs through better fleet management. Integrated operators have an advantage. For example, Amazon manages its fleet by applying its vast data pool. Other specialist operators like DHL and FedEx are highly concerned about the battle for digitalization and e-commerce. Simulations, involving the construction of a “digital twin,” are being used to anticipate and deal with blockages.
A parallel development is the relocation of companies in the value chain. Extending up the value chain and internalizing aspects of production and distribution is a strategy to respond to greater risk. While this shift incurs fixed costs, these are currently outweighed by the reduction in uncertainty in supplies.
Another example of a business model change is the demise of the combination model of passenger flights and cargo transport. If the pandemic continues to disrupt overseas travel, there will be a broad victory of fully dedicated parties to cargo transport.
Reform is needed to make better use of existing capacity, particularly in ports. These sorts of reforms are now talking points in the U.S., for example. Port reform is back on the policy agenda in Australia, following a competition agency report. These are key elements of structural reform programs.
These changes are about making better use of the existing capacity of ports, airports, and transport providers. But improving signals and processes will not induce a response if there are capacity constraints. Investment is the other agenda item.
The issue is not going to be access to ships or planes. There has been a global rush in 2021 to build new ships, at more than twice the level of the two previous years. Aircraft makers are planning new freighter models or re-purposing older aircraft. Some substitution between modes also makes sense and China’s ambition to build overland rail links between Asia and Europe as part of the Belt and Road Initiative is important.
The constraint will be the infrastructure — such as ports and airports — and the connections to road and rail systems. These assets are generally in public hands, where there are often impediments to progress. The way forward is for each economy to identify its top structural reforms in this area and commit to dealing with them. Regional cooperation in this process would be useful.
With these developments in place, Christmas in 2022 will hopefully be an improvement on 2021.
Christopher Findlay is Honorary Professor in the Crawford School, ANU.
Hein Roelfsema is Associate Professor in International Entrepreneurship, Utrecht University.
The News Lens has been authorized to republish this article from East Asia Forum. East Asia Forum is a platform for analysis and research on politics, economics, business, law, security, international relations and society relevant to public policy, centered on the Asia Pacific region.
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