Authors: Christopher Findlay, ANU and Hein Roelfsema, University of Utrecht
Worried about disruptions to global supply chains, policymakers pledge to put gifts on the shelves for Christmas. But US retailers are taking their own measures. They brought the shopping season forward by launching their Christmas “sales”. This extended purchase period reduces the uncertainty of whether the gifts will be on time.
The higher costs and lower reliability of international freight transport have been a problem since the onset of COVID-19. For example, the price of shipping a container from Asia to the United States has increased from US $ 2,000 in early 2021 to US $ 20,000 in August. Ships are still queued outside US ports and arrivals outside of reserved hours have ripple effects through the use of trucks and warehouses. Delivery times have lengthened and reliability has declined.
At the height of the pandemic, there was a greater demand for goods, which had to be shipped – mainly from Asia-Pacific. Freight rates have increased because demand has increased.
Longer delivery times and unreliability led buyers to place larger orders than usual, compounding delays. Large retailers chartering small vessels have lengthened the lines. On the supply side, mobility in port areas and among crews has been restricted.
Air travel 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 highs in mid-September 2021.
There are signs the worst is over. Ocean freight rates have declined since early October on some routes, although this effect may be seasonal. In addition, the global picture shows rates rising and delays persist. In addition, air freight rates have increased again with the continued demand for “on-demand” delivery of certain goods. If the pandemic situation improves, the combination of consumer demand could return to services and some of the staffing constraints in ports will ease.
An immediate response was discussions on the geographic distribution of supply chains and the shift to nearshoring. There is evidence of the relocation of activities previously based in Asia to locations in or near European markets.
But this experience draws attention to the provision of more and better services (or “servicification”) in supply chain operations. These relate to better use of data, new business models and more efficient management of infrastructure.
Before COVID-19, some major players in global value chains were starting digitization processes, as we now illustrate. The lack of formal organization and contracting in freight markets is surprising, with hundreds of emails being exchanged to transport a single container. Digitization creates greater possibilities for the application of new technologies. The application of blockchain technology can reduce the process of exchanging documents in the port of Shanghai from days to hours, while the digitalization of air cargo reservation systems is reducing reservation times.
Data analysis can also help save freight costs through better fleet management. Integrated operators have an advantage. For example, Amazon manages its fleet by applying its large data pool. Other specialist operators like DHL and FedEx are very concerned about the battle of digitalization and e-commerce. Simulations, involving the construction of a “digital twin”, are used to anticipate and deal with blockages.
A parallel development is the relocation of companies in the value chain. Extending the value chain and internalising production and distribution aspects is a strategy to respond to greater risk. Although there are fixed costs associated with this change, these are currently being offset by the reduction in supply uncertainty.
Another example of a business model change is the demise of the combined model of passenger flights and freight transport. If the pandemic continues to disrupt overseas travel, there will be a large victory for parties fully dedicated to freight transport.
Reforms are needed to make better use of existing capacities, especially in ports. This kind of reform is now debated in the United States, for example. Port reform is back on the political agenda in Australia, following a report from the competition agency. These are key elements of structural reform programs.
These changes aim to make 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 item on the agenda.
The problem will not be access to ships or airplanes. There was a global rush in 2021 to build new ships, more than double the level of the previous two years. Aircraft manufacturers are planning new models of freighters or repurposing older aircraft. Some substitution between modes also makes sense, and China’s ambition to build land rail links between Asia and Europe under the Belt and Road Initiative is significant.
The constraint will be infrastructure – such as ports and airports – and connections to road and rail systems. These assets are usually in the hands of the state, where there are often impediments to progress. The way forward is for each economy to identify its main structural reforms in this area and commit to tackling them. Regional cooperation in this process would be useful.
With these developments in place, Christmas in 2022 will hopefully be an improvement over 2021.
Christopher Findlay is Honorary Professor at Crawford School, ANU.
Hein Roelfsema is Associate Professor of International Entrepreneurship at the University of Utrecht.