Why Global Supply Chains Have Become So Snarled

crowded parties again, or the movies. We stopped living eight of our lives online at least for over sixteen But when you go to that restaurant, you might find it's open shorter hours, there's a smaller menu, or you're told that machine part you need is going to take six months. Here in Britain, we're even seeing empty shelves for some goods in the supermarkets. And as I record this, I don't actually know where I'm going to get my next tank of fuel. Our local station in West London hasn't

had any for a week. In short demand has come roaring back, but supply has not. What that means for the shape of the global recovery and inflation will probably be talking about a lot in the weeks to come. But first I wanted to get up close and personal with this great supply chain snarl up, get a sense of what it looks like feels like in different parts of the world. So later we have a report from Lizzie Burden in London with angry drivers lining up for

petrol in the street where she lives. And a chat about staff shortages with restaurant our and TV star Willie Dagel, and an expert take from a trade economist Chanela remya jam. But to kick things off, here's Bloomberg senior reporter and a current in Hong Kong. What was supposed to be a temporary shortage of goods has morphed into something much bigger, with warnings that supply chain disruption will now last well

into next year. That's why I've come back to the waterfront of Hong Kong's Port, one of the world's biggest. Across from me are stacks of containers that will bring goods to every corner of the globe. Since I last visited here in January, costs for shipping containers and raw materials have continued to soar and energy crunch in China is just the latest complication. I caught up with manufacturing and shipping executives to gauge where things go from here.

For my first visit, I went to meet Daniel Yip, managing director of gew International Corporation, who makes electronics products like coffee machines, coffee grinders and toasters from major markets in Europe as actually Germany. Shortages of integrated circuits or i C, along with expensive shipping, have hit YIPS operations hard. Even if he can get the integrated circuits and other components,

he will pay several times with their ordinary price. Yip explained to me that the cost to make a household coffee machine is up ten percent over pre pandemic times. The single biggest problem that we are facing this year is the shortage of IC. Before you know, we when we buy the I see it, we only need about three months orderly time. Now we are facing from changing from six to nine months of orderly time, you know.

And then because the supply of the i C is not very stable, so now we will keep a bit more infantry than normal, you know, So we are keeping free four months of icy you know, of supply you know inside my factory. But it's not just chips that are in short supply. The other area is that all the copper past. You know, as you can agent in a coffee machine in the boiler area, in the in all these accessory and the components area, we use a

lot of copper. And the copper price has been up significantly because again you can imagine, you know, most of the copper is coming from South America. The shipping cause and the availability of the shipment has driven the cause up dramatically. The shortage of semiconductors is hurting a range of manufacturers. The work from home Boom is part of

that story. So I went along to the launch of new headphones by Sole Nation, a company whose products in the past have been promoted by celebrities such as athletes Usain Bolt and the rapper Ludicrous. Today at our events here today we're launching one of our latest products called the Ocean Series. That's Gary so, chief executive of Sole Nation. The main design concept um behind this series is that

they're able to handle calls very well. Um it's got very good microphones inside, so you can actually just take conference calls zoom calls with these headphones. The company is adapting to the supply chain issues by making sure it has enough inventory. We have the play safe. Um. So what what we have to do is we do have to risk by certain long lead time materials such as chip sets and semi conductors, just in case. But we won't necessarily over purchase the entire the product. That that's

kind of how we control the cost. Even when products are made, getting them to a shelf near you has become an expensive endeavor. While the cost of shipping containers has soared. The alternative of air freight isn't cheap either. You just get pushed back, right, it's as a domino effect. If they're behind on one shipment, then yours is going to be behind as well. Right. There is only a certain amount of production mines in the in the at

the factory. So I would say that this year, um, more so than ever, we have been doing a lot of air freight, which is not ideal. Next, I met Tim Huxley, the chief executive of Mandarin Shipping, who has been in the industry for over forty years. Well, here are on the waterfront at the entrance to Hong Kong Harbor near Green Islands, Lama Channel in front of us, and the Lama Channel is really the access point for

all of shipping that comes into Hong Kong. We can see that over to our right, uh, and that is absolutely running flat out at the moment it's running. It's one of the most efficient ports in the world. A lot of cargo comes in here from around the region and then gets unloaded and put on onto bigger ships that then go across the cific. So this is a crucial artery for world trade. Ships waiting to unloaded ports have not gone consequences delaying goods getting to your local

shopping center. While Hong Kong has avoided those delays, other ports are log jammed. The cost of moving a container from Asia to the US, I mean a year or so ago, when COVID first struck and there was the economy ground to halt, that cost dropped to about just over two thousand U S dollars. Now it is over twenty tho U S dollars to move that container. Now that's all going to feed through with ultimately inflation to consumers. So that's really where we are. It's not just shipping.

It's not just that we've got a shortage of ships. We have that we will probably resolve. I mean there's been a huge raft of new ships ordered. I mean, and you've now got about of the world to container fleet is actually sitting in shipyards being built, but they won't come out until five. In a sign of how far this crunch has to run, chartered chips are now

being rented for years at a time. According to Huxley, that there doesn't really seem to be any any prospect of at easing much into first half the next year, which is about as far ahead as I can look. I mean, you've got a sort of peak season Christmas season. We're now well into that, and that has really compounded the problem. But even when that easy is around Chinese New Year time, it doesn't look like there's much chance of there being a surplus of capacity. I think this

is with us for quite a while to come. For the final award on this, here's Daniel yep Agan, who hopes for a circuit breaker in the supply crunch. Soon, when you're during a couple of coffee, think about you know what happened to the supply chain in in Asia and the current Bloomberg news. Now I promised to bring you a sense of what this bumpy road to recovery looks like from different parts of the world. So that's why we're heading from Hong Kong to the US now

to talk to Willie Davil. You may have seen him on the Food Network. He's the owner of the Uncle Jack Steakhouse chain, which has four restaurants in Georgia and two in New York, as well as being a TV star. Mr Daviel, Uh, Willie, you've asked me to call you. Thanks very much for joining us on stephonomics. But we hear a lot about shortages and supply chain issues. How difficult are you finding it to get the stuff you need? You know, New York and Georgia, great States. We're getting things.

A lot of stuff is back ordered, a lot of stuff is out. We're building a new restaurant right now in Lawrenceville. It's a small city in Georgia. Walking boxes, different pieces of equipment, furniture, tables, chairs, you name it. Things have extended lead times. What's you have to adapt? If you thought you were gonna go with this chair and it was a special order, maybe you gotta go with a simple chair that's in the States and it's simplified and it's a bulk style chair. You have to

keep adapting. You have to keep adjusting. You can't quit. You gotta do. What you can do is get open and execute. But it's hard. And what about getting people to what about people getting to work in the restaurants. So during COVID, the restaurant industry got really hurt because so many staff members found other jobs. So many kitchen staff members found other type of jobs, whether it be landscaping, construction. A lot of people moved out of the state of

New York to find new jobs, new careers. So it was like I call it the life changing moment. Everyone had to look in the mirror. They had to say, what am I doing? This is an opportunity now for me to rethink. So a lot of people think they're gonna be a boss, and they're gonna become entrepreneurs and they're going to go to start their own business. There's nothing wrong with that, but you're gonna go through this process. Then now in September, a lot more people are looking

to come back. And then people are coming back and wanting these huge packages like oh my god, I'm worth way more, show me the money, show me how you're gonna set me up thinking they're like NBA players. And are you paying people more? What kind of wage growth of you know, yes, in all in steady positions, in management and chef and salary employees, people across the board

got more money in the last two years. In you know, in New York, all the labor rates got increased in the last five years, which it's almost put us out of business. So food prices are up, menu prices are up. What's available, what's not. But to keep the business open when you're or to open this the new restaurant that you're talking about, are you having to you know, is your sort of start starter base pay as a waiter? How much higher is that now than it would have been,

say a year ago? So just the COVID effect you no, for where's with tipped employees and my restaurants, the base pay in New York is ten dollars an hour. In Georgia it's almost three dollars an hour, big difference. But if you're really good in Georgia, we give you five hours an hour base and we move you up from there.

So yes, all the base past have gone up a little bit, not too much in New York for tipped employees because our restaurants running with a minimal staff and control in the hours, Actually the staff is making more money right now than they ever did before. So every state is a little different, every operation is a little different. And just I guess finally we're all wondering whether these kind of supply chair in issues are going to get better.

I mean, if you step back, you know, forget about COVID for a minute, there's just a sort of feeling that we're recovering. We the sort of our social lives are recovering faster than the real economy, you know, and there's this sort of catch up process where the supply everywhere and the container ships and all of that has to kind of catch up with where people are in terms of how much they want to go back out

to restaurants and things like that. So I just if we think of it in that kind of economist type way that we've got too much demand and not enough supply, does it feel to you like some of those kinks are getting worked out, that things are getting smoother, or with the fuel prices going up, do you feel like, actually we could be in for quite a difficult winter. You know, I feel it's going to get caught up.

We know that all the supply lines and everything got backed up because they didn't have a lot of employees. Trucking went through the roof. I built houses in Anton's are bring up from North Carolina, Georgia, Florida, trees and plants and direct and all of your trucking tripled. Why because they were in such demand. There wasn't that many truckers.

So as everyone comes back to the workforce and you have the manpower to regulate, it's it's it's capitalism and it's fine, is right if it's what people are willing to pay. So it will slowly trickle down. The more people come back to work, we will catch up. Will it take time? Yes, you know you've got You've given us such an interesting perspective and quite a lot of economic theories in there, which we're going to be testing

out with an economist later in the show. But Willie Dago, thanks very much, so I want to move quickly to our next item. If only for the change of accent. The UK has had its own special cocktail of supply chain snarl ups, made all the more challenging by Brexit. Here's Lizzie Burn outside my window in London. A line of angry drivers is queuing for the gas station a mile away. Across the country, grocery staples are out of stock.

Charities are warning that a million households will have to rely on extra blankets to keep warm this winter as heating bills double. This was supposed to be the year the UK broke free of the European Union and forged ahead as a buccaneering free trader. Instead, a confluence of crises has forced the government to deploy soldiers to drive fuel trucks, energy suppliers to go bust, and panicked shoppers

to stockpile, all while COVID nineteen is still rife. Governor of the Bank of England Andrew Bailey jokes that perhaps next he should expect a plague of locusts. The immediate challenges facing the UK stem from the loss of a vital pool of labor after Brexit. A dearth of truckers is raising fears not just about toys or turkeys for Christmas, but whether people have enough food and fuel this winter.

At the route of the UK's troubles, though, is its dependence on trade an asset before the pandemic that now magnifies the damage from leaving the EU and COVID disruption. Here's Shane Brennan, chief executive of the Cold Chain Federation,

which represents businesses along the UK's food supply chain. We spent too much time worrying about who's to blame, and not enough just accepting the reality that our supply chain does not have the capacity that it needs to do the job right now, and it won't for some weeks, if not months to come. As we think about that, we need to be thinking how do we take the pressure off the people trying to do the job today, because if we don't, we're just gonna make the problem

worse as more and more people leave the industry. So, whether it's the Brexit red tape, whether it's the pandemic, ending a furlough, whether it's the issue of immigration visa as, we need to be thinking about how we relieve the pressure in the short term to give business the time to readjust for the next phase of our economy. The narrative in the first half of one was how the UK's world beating vaccination program allowed the government to unshackle

the economy from COVID restrictions. Since then, though, Britain's vulnerabilities have become clearer with fewer people to choose from. Wages have already risen. Supermarkets such as Waitrose have hiked pay for new hauliers and are dangling bonuses to lure recruits, but the structural changes in the economy approving more painful than expected. I spoke to James Withers, chief executive of

Scottish Food and Drink. We've now got a crisis of labor shortages right through our food supply chain, from gaps and jobs on farm through to the manufacturing sector, whether that is seafood or red meat or deer re We are seeing shortages in retail and the hospitality genera. Obviously we're seeing a shortage and drivers the wheels that we need to get our products from farms and factories onto

supermarket shells and onto into restaurants and hotels. So huge amount of pressure and I don't think anything that's been done thus far is going to make any real difference to the crisis that we've got. And we're heading towards peak Christmas trading period and the fear is that some of the gaps, who've seen the supermarket shells that just

aren't going to get any better. To be sure, pockets of workers shortages are cropping up across Europe, and the whole continent will feel the pinch of record energy prices, But Britain's also paying for its exceptionalism. Take the truckers. A quarter of Europe's estimated four hundred thousand shortfall for lorry drivers affects the UK alone. That's partly because tougher visa rules have meant that those who left during the

pandemic have struggled to return after Brexit. In response, the Department for Transport pulled a U turn after months of pressure from lobby groups. It made five thousand visas available to EU drivers of food and fuel for three months. Ruby McGregor smith, president of the British Chambers of Commerce, says that's a feeble solution. The supply of EU labor was turned off with no clear roadmap as to how this transition would be managed without any disruption to services

and to supply chains. The government's announcement of temporary visas for lorry drivers and food workers is the equivalent of throwing a thimble of water on a bonfire. With food and energy prices climbing, the Bank of England's Andrew Bailey has the unenviable task of figuring out how to keep a lid on inflation without choking off the recovery. Here's Bloomberg Economics Dan Hansen. I think it's fair to say that bank has a really tough balancing act over the

next few months. On the one hand, the economy faces a number of headwinds from ongoing supply disruption and reduce fiscal support, and on the other inflation is surprised almost everyone with how quickly it's picked up. Now, the key thing for the timing of any rate rise will be how the labor market responds to the end of the furlough scheme. If the unemployment rate stays steady, then a

rate hike is likely to follow quite quickly. But if there are signs the jobless rates on the rise, then expect the bank's cool expectations around any tightening in the near term. But now that leaves the Brexit dream looking more like a nightmare. So we're going to pull all the different pieces of this supply chain disaster together now with Shanella Rajanaya jam a trade economist who keeps close tabs on all of us for HSBC in London. Shanella,

welcome to Stephanois. We've we've had a taste of what's happening in practice in different parts of the world, what's

happening in theory. I mean, how do you explain these supply chain issues apparently getting worse at a time And we might have all thought, you know, we've becoming out of the wood by now, yeah, well, thank you for having me, and yes, over the past year, there's been a lot of issues around container availability, around port congestions, surging freight rates, and this is due to a combination

of factors. First, there was really strong demand from Western economies for goods during the pandemic and that's still continuing today. And then that's coupled with all the movement and lockdown restrictions due to COVID, which is leading to the congestion at major ports. And so the key issue at the moment is that we're in the midst of peak container shipping season, so demand for goods still remains elevated. Plus there's limited capacity, so containers are not really in the

right place. Air freight capacity is quite restricted, and so all of these are really contributing to ongoing supply chain disruptions. People who listen to seconomics a lot, God help them, would have heard quite a lot of conversations at various times about supply chain issues and certainly about containers waiting in line outside l A port and other ports. I just would have thought maybe that this would have been starting to decline. So so why is it getting worse?

Why is it still going on? So previously the volume of goods trade was quite high. This has been exacerbated by the current peak container shipping season. But as you mentioned that rotation away from spending on goods and to spending on services is well underway. There's evidence to suggest in the UK and also in the US that consumers are starting to spend a little bit more on services

and including on services exports and imports. But really the issue remains the COVID restrictions and the factors restricting the movement off workers, but also the labor and equipment shortages. And when you think of the mean inflation effect, we're certainly seeing it in the cost of freight and shipping. Costs just seem to keep going up. And that will I'm sure feed into I mean that we can see it's already feeding into input prices and maybe ultimately the

prices that we pay in the shots. Is that something that you'd expect to last. Yes, So, supply chains challenges are certainly impacting the price of consumer goods. However, the conventional view, and largely our view as well, is that inflation will prove to be transitory, because if you think about some of these supply chain disruptions, it's unlikely that they will continue to keep prices high and say one or two years time, so that certainly should come off

the boiler a little bit. The issue really is if these high spot rates start to feed through into the longer term contain a contract rates, end of supply chain disruptions persis, then we might see a bit more inflationary

pressure and that could last for a while. Yet. So, right at the beginning of the Panda, when businesses were discovering that it was actually quite bad news to be heavily dependent on China for their production, we had lots of conversations about people bringing production back home, about how this was going to change supply chains forever, and then that kind of went away a bit because I we

certainly talked to a lot of business. As you said, you know, we've invested so much in our supply chain in Asia, We're not going to go anywhere anytime soon. Do you think that these the kind of frictions we're seeing and the delays we're seeing at the ports, is going to reopen that debate and we are maybe going to see some permanent change in the way the global economy works as a result of this. Well, I think the point in is that supply chains were already reconfiguring.

So even prior to COVID, even prior to you, as China trade tensains escalating supply chains, particularly in the ASA Pacific, we're rejigging, and so China was already moving up the value chain. You saw the rise of emerging Asian economies in China was increasingly outsourcing its production to the these countries.

COVID could certainly accelerate that trend, but I think it still takes a lot for a business to actually decide whether to lift and shift production, and so they really have to consider all these other factors like the availability of workers, the access to raw materials before they can

actually change their supply chains permanently. So when you're looking forward to next year, I guess just in terms of, you know, the conversations that you're having around the forecast, when you think of the role of supply chain issues and the effect on growth in two how much are you still expecting it to figure in twenty two or how much do you think is going to be just it will have disappeared by that, So we don't expect it to play as larger role as it did this year,

particularly because many of these supply chain shocks are expected to be temporary. And also, even though global goods trade has performed remarkably well in the wake of the pandemic, there is science that the best of the global goods trade rebound is hind Us, so exports might not necessarily be the same driver it was next year as it was in the recovery from the pandemic. Okay, final question

and most important of all, is Christmas canceled? Definitely not, but I will say it probably is worth looking to buy your Christmas presents a little bit earlier this year. That is bad news for many of us. Shanella Rod and Iya Jam thank you very much. Thank you So that is it for this episode of Stephanomics. We'll be back next week to tell you who had the better response to the COVID jobs crisis, Europe or the US.

In the meantime, please rate the program or re rate it if you need to, and follow US Economics on Twitter for more news and analysis from Bloomberg Economics. This episode was produced by Magnus Hendrickson, with special thanks to Lizzie Burden End the Current, Willie Dagle, and Shanella and Iya Jam. Mike Sassa is executive producer of Stephonomics and the head of Bloomberg Podcast is Francesco Leading m h