Path Forward: Global Turbulence Forcing Companies to Rethink Their Supply Chains

In this week’s Path Forward event, U.S. Chamber President and CEO Suzanne Clark met with a panel of experts to discuss how rising COVID lockdowns in China and the conflict in Ukraine are driving supply chain and inflation impacts worldwide.

The Path Forward, a U.S. Chamber of Commerce Foundation event series, helps business and community leaders find the answers they need to execute responsible strategies for a post-pandemic world.

China Lockdowns, Ukraine War Disrupt Global Trade Routes, and Supply Chains

The world is going through tremendous change at an amazing pace. The global spread of the Omicron variant and resultant lockdowns in China and the war in Ukraine are having outsized impacts on global trade, supply chains, and the price of basic goods.

“As demand has surged and production has halted in many parts of the world, consumers have become acutely aware of how delicate the global supply chain really is,” Clark said. “Now, new lockdowns in China and Russia’s war in Ukraine are putting increased strains on the flow of goods around the world.”

China’s zero-COVID strategy of limiting the spread of the disease has meant many Chinese factories are either closed or are operating under restrictions according to Dr. Alicia García Herrero, chief economist for Asia Pacific at Natixis. For example, auto manufacturer Tesla’s factories in the country are operating at half of their production capacity to comply with COVID protocols, she said.

“The situation is actually terrible, not only socially but economically,” García Herrero said. “We are increasingly close to the loss of mobility at the national level that we saw in the first months of 2020. We need to start thinking about that kind of shock for the global economy.”

Dr. Yanzhong Huang, senior fellow for Global Health on the Council on Foreign Relations, said that he does not see the Chinese government changing its stance on the zero-COVID policy soon.

“We are not expecting the [Chinese] government to change, fundamentally, the zero-COVID policy in the coming months,” Huang said. “The government leaders are still convinced this is the only correct approach in coping with the pandemic. But we know implementing that approach is increasingly difficult and incurring a higher socioeconomic cost.”

The sectors most impacted by the COVID shutdowns in China are leisure, travel, airlines, and many manufacturing sectors which often rely on workers working side-by-side.

“Autos and semiconductors are doing the worst,” García Herrero said. “This is because, first, they depend on parts and components imported from the rest of the world. And second, they face the same constraints as any other company in China: the ability of workers to work in a factory.”

Supply Chain Constraints Boost Inflation and Instability

Supply chain issues and the rerouting of trade routes due to the Ukraine conflict are having a far-reaching impact: boosting global inflation.

“Any disruption in the value chain is basically inflationary,” García Herrero said.

One example is wheat prices. Ukraine and Russia supply about one-quarter of the world’s wheat, according to Dr. Andrea Little Limbago, senior vice president of Research and Analysis at Interos. With that supply now constrained, already-high prices are headed higher.

“It’s exacerbating volatility that was already there and food prices that were already reaching record highs,” Limbago said. “A good percentage of those exports go to North Africa and the Middle East…Some of the big importers are dependent on the wheat from Ukraine. They’re going to have yet more shocks.”

Changing routes over closed European and Russian airspace means companies who carry air freight can no longer take the most direct routes but must figure out alternate, longer routes that generate higher costs.

“Finding circuitous routes, that alone requires additional jet fuel … and the cost of that fuel coupled with the longer flight adds on extra time, which requires extra jet fuel which means you have less room for cargo,” Limbago said. “The Asia-Pacific/Europe route has taken the biggest hit—cargo has fallen close to 20 percent since the invasion.”

How Companies Can Ride Out the Turbulence

Some experts said that companies need to adapt their supply chains for new, more uncertain times.

“Too few companies truly understand their overall supply chain,” said Renato Scaff, senior managing director of Strategy and Consulting, Supply Chain and Operations, North America Lead, for Accenture. “They might know their first-tier suppliers, but their second- and third-, and fourth-tier suppliers—they really don’t have that visibility.”

Limbago said that the trend to closer supply chains is likely to continue with more companies onshoring, near-shoring, or even “ally-shoring” their supply chains, meaning ensuring their supply chains are located in friendly countries. She added that 750 global companies have left Russia since the Ukraine invasion began in February.

Scaff said that the just-in-time delivery supply chains—which many companies have built up over decades—deserve additional scrutiny in a changing world.

“There is clearly going to be a regionalization of supply chains,” Scaff said. “Companies are going to look to diversify…You need to be placing bets in different places and creating the technology that allows you to be flexible and constantly sense and react.”