The Perfect Storm & Then Back to the Future

Manohar Patwardhan | Intelistics Corp.

When three large weather systems collided off the coast of New England, Nova Scotia and Newfoundland in late October 1991, the result was the “Perfect Storm,” a term coined at the time by the National Weather Service. The storm claimed 12 lives, including the six men aboard the MV Andrea Gail, a commercial swordfishing boat based out of Gloucester, Massachusetts, that was caught some 500 miles out to sea. The “Perfect Storm” that we currently find ourselves in started with a unknown coronavirus and has become a combination of actions and events occurring across the globe.

COVID-19

COVID-19 is an infectious disease caused by severe acute respiratory syndrome coronavirus-2, with the virus first being identified in December 2019 in Wuhan, China. Per the World Health Organization (WHO), the virus is a very highly transmittable disease, and, as of June 8, 2020, had infected roughly 7.2 million people and killed more than 407,000 globally.

In response to this epidemic, most countries shut down all non-critical, non-essential activities and required a large percentage of their populations to shelter-in-place. The tourism industry—which includes air travel for pleasure, hotels, Airbnb properties, cruises, and theme parks—have shut down. Hair salons, most retail stores, and restaurants have also shut down, although some restaurants have managed to stay open by providing takeout or delivery services, but with dining rooms remaining closed.

The overall mission has been to reduce the gatherings of people. Where possible, companies have closed offices and have requested that employees work remotely. It appears that while nations have succeeded in decreasing the spread of infections, the number of deaths continues to increase. However, shutting down large parts of the global economy has led to a severe global economic and financial crisis.

Some companies have been forced to furlough or layoff their employees during this crisis. According to a report from The Wall Street Journal, several airlines have idled a large percentage of their jet fleet and, despite having received federal relief, will emerge smaller than before the pandemic. Unfortunately, this theme is being repeated across many industries.

Supply & Demand

Shutting down the global economy drastically reduced the demand for non-essential goods and services. Manufacturing in the United States contracted in April at the sharpest rate since the recession of 2007-2009, as companies pulled back due to lockdowns. The Institute for Supply Chain Management’s manufacturing index fell to 41.5% in April, from 49.1% in March. In addition, according to the IHS Markit, the U.S. manufacturing Purchasing Manager’s Index fell to 36.1 in April, from 48.5 in March.

The oil industry is no exception to the laws of supply and demand. According to a report by Reuters, the global fuel demand has plunged by around 30 million BPD (or 30% of global oil supplies), as steps to fight the pandemic have grounded planes, cut vehicle usage and curbed economic activity. With demand dropping due to lockdowns, the downward trajectory of demand has affected employment within the U.S. Economists surveyed by The Wall Street Journal forecast that the new unemployment report will show that unemployment rose to 16.1% in April and that employers have shed 22 million non-farm payroll jobs.

Will China Maintain Its Status as the World’s Factory?

The availability of skilled, but low-cost, labor had enabled China to begin the process of becoming a manufacturing country. Then, on December 11, 2001, China became a member of the World Trade Organization (WTO). Since then, China hasn’t looked back—becoming the “World’s Manufacturing Factory.” Over the last few decades, China’s trade has expanded tremendously. According to ChinaPower, a project of the Center for Strategic & International Studies, in 1995 the value of China’s imports and exports of goods totaled $280.9 billion, or 3% of global trade. By 2018, China’s total trade in goods had jumped to $4.6 trillion, or 12.4% of global trade. Even after years of providing this capability to the world, China still offers lower production costs and advanced production capabilities.

Digitization is no longer a perk or added benefit; rather, it has become an essential and important component of any business plan in the logistics domain.

China will likely maintain its status as the World’s Factory in the short-term and maybe in the mid-term. However, there are doubts that China will remain so in the long-term—with two factors that could play a contributing role. The U.S. imposing tariffs on Chinese manufactured goods coupled with the effects of the COVID-19 pandemic will likely force retailers into evaluating sourcing from multiple countries, instead of mainly from a single country. The former forced the reduction of exports from China, while the latter caused China to shut down during the COVID-19 pandemic; this prevented possible exports of manufactured goods. By sourcing from multiple countries, retailers will look to reduce business risks across international borders. This new sourcing strategy will certainly impact existing supply chains, most of which have been in existence for decades.

Impact on Maritime Trade

Since China’s acceptance into the WTO, retailers slowly, but surely, began sourcing their products from China. Why not? China had the ability to provide manufactured goods at reasonable prices. In fact, China invested money in its infrastructure to enable quicker and faster supply chains from its manufacturing facilities. According to Lloyd’s List, in 2001, three of the 10 largest seaports in the world were in China, and, by 2019, that number had increased to seven. The maritime shipping companies were building bigger and better container vessels. At the same time, China was jumboizing its ports to cater to bigger vessels and increased trade.

Then there was the start of the trade war between the U.S. and China in 2018, with the imposition of mutual tariffs, followed by the COVID-19 pandemic toward the end of 2019. In some cases, retailers bought goods early from China to avoid tariffs while in other cases, retailers bought goods after a settlement was reached between the U.S. and China. But in either case, retailers could not totally avoid tariffs, resulting in higher costs for which they did not plan. International traders do not like uncertainties because their planning horizons are longer, and they are buying across international borders. Therefore, they are always interested in controlling trade risks as much as possible. Now, however, the writing is on the wall; retailers will need to look for other sourcing locations besides China. In the long run, retailers will source some goods from China, but they will also diffuse their sourcing over parts of South and Southeast Asia, as well as maybe Africa and Latin America.

The gateway ports in the countries located in South and Southeast Asia are not large; in fact, none of these ports appear in the Top 10 Largest Seaports in the World listing. This brings us to the next major decision for maritime shipping companies. These companies will not be able to deploy their larger container vessels in trade between South and Southeast Asia and the U.S. According to Lars Jensen, CEO of Sea-Intelligence Consulting, the heavy dependence of retailers and manufacturers on 15,000 TEU-plus vessels linking a handful of gateways in North Asia with a limited number of ports in North America will lessen over the next two decades. In fact, some economists think that sourcing from South and Southeast Asia, as well as the Indian subcontinent, will require the deployment of 8,000-10,000 TEU vessels. If these smaller container vessels are tasked to move goods from South and Southeast Asia to the U.S. East Coast, they will likely transit through the Red Sea/Suez Canal/Mediterranean Sea, and the Atlantic Ocean to the U.S. East Coast.

These trade lanes could be carrying more cargoes than before. This will hold true for cargoes destined for the U.S. East Coast and the Midwest. Here is another question that will likely come up in a couple of decades: Could some of the smaller Eastern ports in the U.S., such as Boston, Philadelphia, and others, become attractive discharge ports for the trade lanes from Asia via the Suez Canal? This will depend on the cargo mix and the attractive pricing that these smaller ports could offer.

To sum it up, the results from the trade/tariff fight between the U.S. and China, coupled with the effects from COVID-19 on sourcing and trade, will likely begin to appear toward the end of this decade. We will need to watch the progress and prepare for it.

And Now, Back to the Future: Remote Working

This is a surprising, but important topic. During the pandemic, large numbers of companies closed their offices due to lockdown orders and enabled millions of employees to work remotely. There were some bumps along the way—such as communication problems—but IT departments worked to eliminate these problems, so that employees could successfully work remotely. Notably, feedback from some employees has been eye-opening.

According to a new study from IBM, 54% of adults want to work remotely most of the time after the pandemic.

According to a new study from IBM, 54% of adults want to work remotely most of the time after the pandemic. Also, Berkshire Hathaway’s CEO, Warren Buffett, wonders if staffs will return to offices. He says that people have learned that they can work from home, or that there are other methods of conducting business. He thinks that “the supply and demand for office space may change significantly.”

Moreover, the “Amazon Effect” has had a negative impact on some retail store chains and malls. Could the after-effects of the pandemic have a similar impact on office spaces in the U.S.? We shall see.

 Digitization

COVID-19 will have a serious and deep impact on international trade. Not only could we see increased cargo moving via the Suez Canal to the U.S. East Coast, but also that digitization will play a greater role in the execution of business processes.

Digitization is no longer a perk or added benefit; rather, it has become an essential and important component of any business plan in the logistics domain. We will need to develop an operating model that is more agile, in which business operations can leverage digitization to improve efficiency and reduce costs.

API and EDI will need to play a greater role. While EDI is an older technology, it is still an automated method of exchanging data between many customer/partner companies. Systems within a company and between customers/partners will need to be automatically connected. Manual input not only adds costs, but also slows down decision making and, in some cases, introduces errors.

IoT has become an essential element in day-to-day operations and needs to play a bigger role in the logistics domain. Sensor data from a single source can provide tracking and tracing information. Or, in other cases, sensor data from multiple sources will need to be integrated to generate actionable intelligence and situational awareness, as well as to conduct risk analysis and threat assessment for high-value cargoes.

In general, we will have to leverage technology not only to reduce costs, but also to make organizations more agile, so that we are able to respond faster and better to our customers’ needs. As we make investments in various solutions and technologies, we must remember that the Total Cost of Ownership (TCO) of such investments should not exceed the value the investments provide to the organization. As the lockdown ends, the future of work will change. Organizations could look more dispersed, and we will need to act with urgency to recover revenues.

To conclude, we are facing a lot of uncertainties and are living through unprecedented times. While COVID-19 has shut down major parts of our economy, it can become a catalyst for us to not only to survive, but also to thrive as we come out of this crisis. We will need to be agile and leverage technology to the fullest to help us weather this “Perfect Storm.” It is not an impossible task. We can and will be preparing for it. As a scholar once said, “the future belongs to those who prepare for it today.”       

Manohar Patwardhan is an SME in Logistics and is the President of Intelistics Corp., which provides IT consulting services to customers in the logistics industry. He may be reached at (609) 423-3190 or mpatwardhan@intelistics.com.

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