First came the toilet paper shortages. Next, there were delays for furniture, electronics, cars and even candy canes in the week before Christmas. But the coup de grâce may have been when New York bagel shops ran low on cream cheese. An onion bagel deprived of its cherished schmear? Depending on your shopping list, the upheaval in global logistics systems is stirring anything from mild indigestion to outright hair pulling.
By now, the checkerboard of factors contributing to the Great Supply Chain Breakdown are well-documented: severe parts and labor shortages, scarce raw materials, logjams at ports, a dearth of shipping containers, trucking constraints and myriad other bottlenecks. The underlying cause, of course, is the uncertainty wrought by COVID-19 and the succession of variants that have followed. Omicron is the latest wild card forcing businesses to revise operating plans on the fly.
“Most of the issues come back to COVID,” says Nate Burggraf, a Capital Group analyst who covers industrial companies. “It’s a lot of different reasons, but a lot of those things are driven by COVID.”
The good news is that supply chain issues will eventually be ironed out as manufacturers, shippers, distributors and businesses of all kinds untangle the kinks. Though the results have yet to show up broadly, there has been progress under the surface as manufacturers and customers adapt.
“As long as the COVID disruption lasts, it’ll be a moving target,” says Anne Vandenabeele, a Capital Group economist. “We’ve met with freight company managers who told us that some supply chain bottlenecks at ports predate COVID, but that the coronavirus really put these issues in the spotlight. So it will take a while for supply chain disruptions to resolve even once COVID restrictions ease.”
Shortages are expected to linger well into 2022 as snags in one area aggravate shortfalls in another. “Managers at a couple of shipping companies predict that transportation issues won’t improve until late 2022 or 2023,” says Vandenabeele.
In the meantime, the key is understanding the potential impact on individual businesses in the near-term, as well as potential shifts that could be in store as industries seek to avert future shocks. Capital Group analysts across the globe are paying close attention to these dynamics for clues about which companies are well-positioned, as well as which ones face near-term challenges.
“I think it’s going to be a slow grind, because I think COVID is going to be a slow grind,” Burggraf says. “But I’m hopeful and optimistic that it will improve from here, given the amount of money that can be made for people who can come up with solutions.”
The semiconductor industry has been the epicenter of sorts in the supply chain turbulence because of the ubiquity of chips in everything from computers to TVs to new cars. The auto industry, in particular, was walloped when car makers canceled chip orders in the early days of COVID — only to be caught flat-footed when demand recovered strongly.
Many chip makers have ramped up supply to the degree possible, says Mihir Mehta, a Capital Group analyst who follows semiconductor and tech hardware companies. “Because there is strong demand coupled with COVID-related supply disruptions, supply is being added at most parts of the value chain. But it takes time,” Mehta says. “Making a chip can be a three- to six-month process, and getting equipment to make those chips can be a 12-month process.”
Looking longer term, supply chain snarls may cause chip makers and their customers to rethink their reliance on the once-venerated “just in time” manufacturing strategy. In this approach, manufacturers ordered materials with short leads times in the belief that stockpiling pallets of goods in warehouses was financially and logistically inefficient.
“We’re seeing the drawbacks of having an efficiency-focused supply chain that’s now moving to a ‘just in case’ approach and a more resilient, more geographically distributed supply chain,” Mehta observes.
In the near term, it’s important to identify companies that may be vulnerable to supply chain turbulence and to assess how nimble they might be in devising work-arounds.
Burggraf has always paid close attention to logistics and distribution issues given their importance to the industrial companies he covers. A well-calibrated supply chain can boost confidence in a business. Recently, however, concerns about potential obstacles dissuaded him from taking a position in an otherwise promising company.
“It has an amazing growth outlook, it’s a very profitable business and it was a pretty attractive valuation,” Burggraf recalls.
But the bulk of the company’s manufacturing operation is centered in Asia, where health scares have caused intermittent factory shutdowns. Beyond that, management had trouble securing adequate container space to ship its products just as rising labor costs were cutting into profit margins. Burggraf decided to hold off on the stock, which soon after lost about half its value. He’s tracking the situation because he believes it could represent a good value.
“The question is: At what point do these companies become appealing again?” Burggraf notes. “If we think that supply chains will gradually get better, some of the headwinds that are hurting margins hopefully will ease. If we can get it at a really good valuation, there may be a time to start nibbling at these companies.”