Why the supply issue isn’t going away

Hearing words like bottleneck, disruption and crisis in connection with global supply chains isn’t exactly big news but the fact those words are still being used by company bosses during Q3 2022’s earnings is worth considering when it comes to your investments.

Supply problems equal a premium cost that has to come out of somebody’s pocket, and after months of big brands being able to pass those hikes onto their consumer there are now questions about exactly how far that pricing power can stretch.

And it’s not sector specific, it’s not just about those semi-conductors – though that’s still a big issue for Renault – Nestlé, Lockhead Martin and McCormick are just a few of the multi-nationals citing a “choppy” supply chain when delivering their earnings updates.

EV production has been one of the biggest casualties, with would-be owners waiting up to 18 months for high-end brands like Porsche’s Taycan, but data out last month from Electrifying.com shows the average wait time for all drivers wanting to make the switch today is nine months.

Supply problems equal a premium cost that has to come out of somebody’s pocket, and after months of big brands being able to pass those hikes onto their consumer there are now questions about exactly how far that pricing power can stretch – or in the case of EVs how long motorists are prepared to wait before ditching their green move entirely.

Global Supply Chain Pressure Index (GSCPI)

Source: Federal Reserve Bank of New York

Whilst the New York Fed’s Global Supply Chain Pressure Index shows a five-month decline, and both European tech behemoth ASML and BMW mentioned that supply chains had begun to stabilize, bringing improved margins, there’s still a long way to go to get back to historical levels and a whole host of issues to consider.

Issues to consider

Top of the list has to be China’s zero-Covid policy which looks likely to see more cities locked down and factories silenced. Apple’s already facing renewed problems with production of its latest iPhone, after a fresh Covid scare garnered headlines with reports of workers fleeing the Foxconn factory in Zhengzhou City, after public transport was suspended as part of new controls.

There’s also the ratcheting up of tensions in Ukraine as Russia battles to hold ground ahead of a brutal winter. The Kremlin’s decision to pull out of the Black Sea export deal, which had ensured critical supplies made it out of Ukraine, has already sent the price of some wholesale foods soaring, adding to concerns about the impact of inflation on the most vulnerable. Wheat has been in short supply since the invasion began in February and the price of animal feed and items like sunflower oil have shot up in price, heaping more misery on households right around the world.

Pad too much and get stuck with the cost of storing merchandise or worse still get stuck with excess merchandise you can only get rid of at a loss.

Then there’s the potential fallout from US measures to curb China’s chip sector. The White House has put export measures in place that limit the sale of advanced chips and chip-making tools to the region in a bid to hamper China’s technology ambitions. And they won’t just impact China’s chip companies: there are also plenty of discussions taking place in boardrooms right around the world about how the restrictions will impact future production, although Netherlands-based ASML said in its latest earnings update its shipments next year would only be impacted in a small way because it primarily provides more mature chip technology to China which isn’t affected by the moves.

Navigating the challenges

One method of navigating supply challenges has been to up the amount of inventory held but that’s ended up causing its own issues. Pad too much and get stuck with the cost of storing merchandise or worse still get stuck with excess merchandise you can only get rid of at a loss. Walmart and Asos know all about that particular quandary. The US retailer had to slash prices in the summer after it was stuck with an oversupply of clothing and Asos is turning to the high street to flog off its glut of out-of-season apparel.

Both businesses have unsettled investors with their predicament, caught out by the toxic mix of supply chain concerns and a consumer focused on cutting discretionary spend, an issue which is only expected to increase as the cost-of-living crisis erodes people’s purchasing power.

And even for companies that managed to gracefully navigate last year’s supply issues, like Tesla, are now having to face up to the fact that a huge chunk of people simply won’t have the ability to spend the way they’ve been able to in future years. The electric car maker had been sitting fairly pretty as competitors struggled with long lead times to get EVs to market, giving them a significant window to corner an even bigger share of the market. But the costs associated with smooth, integrated supply chains are great, something that consumers have paid for up until now. But inflation is squeezing consumers’ budgets right around the globe and Tesla’s had to resort to lowering prices in order to secure sales in Asian markets.

And longer term that’s something that all businesses need to think about. Globalisation took a big hit post Covid and many producers have thought about those expensive and potentially disruptive trading miles and decided to take the uncertainty out of the equation by onshoring manufacturing or sourcing suppliers closer to home. But Asia became a big part of the puzzle because it was simply cheaper. Cheaper to make and import from all those miles away than to pay western rates for labour.

Past performance is not a guide to future performance and some investments need to be held for the long term.