It is a temporary turmoil with no end in sight. ” Nothing like it has been seen since the end of World War II. It’s a mess! Unbelievable bazaar! ”, Summarized a few days ago in The Globalism Michelin President Florent Ménégou. For nearly two years, manufacturers have been living on the rhythm of shortages, delays in delivery and price increases. Many of them have never before said that supply problems are hampering their production, while demand is lacking. Nearly half in France and more than three quarters in Germany are in this case.
This shortage has a significant impact on production capacities… and on the final prices paid by the consumer. Cars are particularly affected: in April, new car registrations in Europe fell by 20% compared to last year.
During 2021, “bottlenecks” slowed industrial production in the eurozone by 6% and reduced GDP by 2%, according to IMF calculations, which also increased prices for industrial products. Inflation could accelerate, with more and more companies passing on their increased costs. In France, nearly half of manufacturers increased their selling prices in April, much more than in previous months.
From covid to war
So where does this “indescribable bazaar” come from? First, there were initial restrictions, at the start of 2020, which led to supply shortages and tensions. Then unbalanced recovery. On the other hand, there is a very strong demand for manufactured goods, especially in the United States. On the other hand, a slow show he was struggling to follow. Since the end of 2020, raw materials and components have been out of stock: copper, wood, steel, aluminum and, of course, semiconductors. The chip shortage could continue until 2024, the Intel chief recently estimated. It takes time to ramp up production.
The health crisis has also disrupted supply chains. Major ports found themselves bottled up; The movement of goods suddenly became slower and more expensive. The price of container shipping from East Asia to Northern Europe has increased fivefold since November 2020, according to the Freightos Index.
The turmoil that China’s “zero Covid” policy risks prolonging. The rebuilding of several cities, including Shanghai from March to May 2022, is complicating the logistics within the country. The port of Shanghai, the largest in the world, remained in operation but in low volumes, as goods destined for export did not arrive. This could lead to more delays and traffic jams this summer.
The war in Ukraine further complicated this puzzle. First because Russia is a major source of energy but also of a metal: titanium used in the aerospace industry. Palladium, platinum or nickel are used in cars. The uncertainty caused their prices to rise even before the adoption of sanctions targeting these sectors. Even the high rise for steel, especially semi-finished products (steel bars or blocks not yet rolled), which are supplied to Europe largely in Russia and Ukraine. Aluminum is also not spared. Its price has jumped, especially because the main supplier of alumina in Europe is the Russian giant Rusal.
Another striking example: before the war, Ukraine provided 70% of the world’s exports of purified neon, a gas used mainly for the manufacture of semiconductors. The country is also a major supplier of wire, the labor-intensive parts to manufacture. blow to the german auto industry, “Heavily dependent on Ukrainian production”, According to consulting firm AlixPartners. The conflict thus reminds us of how dependent certain stages of production are on a small number of countries or players.
“Global value chains,” as economists call them, have lowered costs but have weaknesses
This endless crisis calls into question the regulation of international production that has been in place for several decades. The fragmentation of the production process into several stages, which took place in different countries, was at the heart of the “hyper-globalization” that took off in the 1990s.
“Global value chains,” as economists call them, have lowered costs but have weaknesses. For products such as neon gas, “Concentrating production in the same place threatens the entire chain,” Explains Vincent Vicar, economist at Cepii. A report from the World Trade Organization stresses increased geopolitical and environmental risks as well.
Manufacturers are also becoming aware of the limitations of geographical segmentation and ” right on time “, Strategies designed in a world where the flow of goods has generally been very fluid and almost free. Since the 1980s, inspired by the automaker Toyota, they have been looking for inventory, bringing components when they needed them, sometimes from very far away, notes Willie Shih, a professor at Harvard Business School in the US. Risky Policy: “When shipping is not reliable and predictable, there are disruptions in supply.” However, Toyota has always made sure to provide it ” next to “, He remembers. Since the Fukushima incident, the Japanese manufacturer has also tried to identify not only its direct suppliers but the entire supply chain. A task to be undertaken by its competitors after ten years.
Tesla is considering opening a lithium mine
“For the main parts, you have to revise the right time”, Alexandre Marian is a consultant at AlixPartners. Likewise, diversify suppliers of strategic components ‘Completely possible and planned’ Among the car manufacturers, even if this does not have to be done for all parts, because this anticipatory work requires a lot of effort.
Manufacturers can also benefit more from long-term contracts and partnerships to secure their supply. This industry specialist notes that trends have already been promoted regarding energy transition and the threat of shortages in biomaterials. BMW signed three contracts between 2019 and 2021 to cover its cobalt and lithium needs. Meanwhile, Tesla is openly considering opening a lithium mine.
Less global globalization
In a McKinsey survey, in the spring of 2021, the majority of large companies said they had already increased their inventory of critical products and diversified their raw material supply sources. A quarter said they had moved part of their supply chain to their part of the world. Localization and diversification are yet to gain in stats, much to the chagrin of Vincent Vicard. Nothing more than moving to the country of origin, an option that manufacturers do not often mention.
So far, GVCs have been rather “steadfastness”, recalls the economist. As of 2021, international trade in goods has exceeded the pre-pandemic level. but, “It is possible that the multiplication of shocks and geopolitical risks that arise with the war in Ukraine could lead to deeper and more lasting changes.”
The United States, after imposing tariffs on Chinese products, is promoting the idea of globalization between the two countries ” friends “ (friendship). Thus new activities can leave China moving towards closer countries, from a political or geographical point of view. ‘Global’ value chains have always been primarily regional, Vincent Vicard mentions: European, North American, or Asian. They could become more than that.