How shortages are shaking up the world of industry

It’s a temporary disorder of which there is no end in sight. Nothing like it has been seen since the end of World War II. It’s chaos! An unspeakable bazaar! », summarized a few days ago in the World Michelin boss Florent Menegaux. For almost two years, manufacturers have been living to the rhythm of shortages, delivery delays and price increases. Never had so many of them said that supply problems are hampering their production, while demand is not lacking. Nearly half in France and more than three quarters in Germany are in this case.

These shortages have a significant impact on production capacities…and on the final prices paid by the consumer. The automobile is particularly affected: in April, registrations of new cars in Europe fell by 20% compared to last year.

In 2021, “bottlenecks” slowed down industrial production in the euro zone by 6% and reduced GDP by 2%, calculate the IMF, also increasing the prices of industrial products. Inflation could accelerate, with more and more companies passing on their rising costs. In France, nearly half of manufacturers increased their selling prices in Aprilwhich is much more than in previous months.

From covid to war

So where does this “unspeakable bazaar” come from? First there were the first confinements, at the start of 2020, leading to supply shortages and tensions. Then an unbalanced recovery. On the one hand, very strong demand for manufactured goods, especially in the United States. On the other, a slowed offer that was struggling to follow. From the end of 2020, raw materials and components were lacking: copper, wood, steel, aluminum, and of course semiconductors. The shortage of chips could last until 2024, recently estimated the boss of Intel. It takes time to increase 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.

Disruptions that China’s “zero Covid” policy risks prolonging. The reconfinement of several cities, including Shanghai from March to May 2022, complicates logistics within the country. The port of Shanghai, the largest in the world, remained in operation but with reduced volumes, as goods for export did not arrive. This could lead to further delays and traffic jams this summer.

Multiple risks

The war in Ukraine has further complicated this puzzle. Firstly because Russia is a major source of energy but also of metals: titanium, used in aeronautics; palladium, platinum, or nickel, used in the automobile. Uncertainty caused their price to soar even before the adoption of sanctions aimed at these sectors. Even soaring for steel, especially semi-finished products (bars or blocks of steel not yet rolled), for which Europe is largely supplied in Russia and Ukraine. Aluminum is not spared either. Its price has jumped, in particular because the main supplier of alumina in Europe is the Russian giant Rusal.

Another striking example: before the war, Ukraine provided 70% of world exports of purified neon, a gas used in particular to manufacture semi-conductors. The country is also a leading supplier of wiring, parts that are labor intensive to manufacture. A blow for the German automotive industry, “very dependent on Ukrainian production”, according to the consulting firm AlixPartners. The conflict thus reminds us how much certain stages of production depend on a small number of countries or players.

“Global value chains”, as economists call them, have reduced costs but have weaknesses

This endless crisis calls into question the organization of international production that has been in place for several decades. The fragmentation of the productive process into a multitude of stages, carried out in different countries, was at the heart of the “hyper-globalization” set in motion in the 1990s.

These “global value chains”, as economists call them, have reduced costs but have weaknesses. For products like neon gas, “the concentration of production in the same place endangers the whole chain”, explains Vincent Vicard, economist at Cepii. And all the more so as the geopolitical but also environmental risks increase, highlights a WTO report.

A breathless model?

Manufacturers are also becoming aware of the limits of geographic fragmentation and ” just in time “, strategies designed in a world where the flow of goods was generally very fluid and almost free. Since the 1980s, inspired by the car manufacturer Toyota, they had hunted for inventory, bringing in components when they needed them, sometimes from very far away, points out Willy Shih, professor at Harvard Business School in the United States. . A risky policy: “when maritime transport is no longer as reliable and predictable, there are supply disruptions”. Toyota, however, has always taken care to provide ” near “, he recalls. Since the Fukushima accident, the Japanese manufacturer has also tried to get to know not only its direct suppliers but its entire supply chain. A task that its competitors undertake ten years late.

Tesla is considering opening a lithium mine

“For key parts, you have to review the just-in-time”, confirms Alexandre Marian consultant at AlixPartners. Similarly, diversify the suppliers of strategic components “is entirely possible and planned” among car manufacturers, even if it does not have to be done for all parts, because this anticipation work requires a lot of effort.

Manufacturers could also make greater use of long-term contracts and partnerships to guarantee their supplies. Trends that the energy transition and the risk of shortage of critical materials were already promoting, notes this specialist in the sector. BMW signed three contracts between 2019 and 2021 to cover its cobalt and lithium needs. Tesla, meanwhile, is actually considering opening a lithium mine.

Less global globalization

In a survey McKinsey, in the spring of 2021, a majority of large firms said they had already increased their stocks of critical products and diversified their sources of supply of raw materials. A quarter said they had moved part of their supply chain to their region of the world. Regionalization and diversification not yet massive in the statistics, tempers Vincent Vicard. No more than relocation to the country of origin, an option not often mentioned by manufacturers.

So far, global value chains have been rather ” resilience “, recalls the economist. As of 2021, international trade in goods has exceeded its pre-pandemic level. However, “It is possible that the multiplication of shocks and the geopolitical risk that appears with the war in Ukraine will bring about deeper, more lasting changes”.

The United States, after having imposed customs duties on Chinese products, promotes the idea of ​​globalization between ” friends “ (friendshoring). New activities could thus leave China for closer countries, from a political or geographical point of view. “‘Global’ value chains have always been primarily regional”, recalls Vincent Vicard: European, North American or Asian. They could become even more so.

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How shortages are shaking up the world of industry

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