Supply chain pressures put Asia’s manufacturing recovery at risk

Hello from Seoul. Today we take a diversion from trade policy, vaccine diplomacy and international wrangling over digital services and data protection.

Instead, we’re looking under the hood of Asia’s apparently robust economic recovery from the depths of the pandemic last year.

What we find might come as a surprise. Despite the rosy picture painted by recent blockbuster export data and buoyant stock markets, the region’s supply chains are straining and fresh fissures signal risks of serious disruption ahead.

Rise in Covid cases takes shine off solid recovery

South Korea’s trade data can be a decent bellwether for the health of regional trade and economic activity.

Asia’s fourth-biggest economy is an important exporter of tech components such as electronic displays and computer chips, as well as finished products such as cars and smartphones.

Blockbuster data released earlier this month depicted South Korea’s economy cruising out of recovery mode and back to growth. 

Export values of $54.8bn were up 40 per cent on the year before and above analysts’ expectations. It also marked the best June on record and the eighth-straight month of gains. 

Happily for the chaebol companies such as Samsung, SK Group and Hyundai which dominate production, the semiconductor sector is enjoying a new supercycle, while orders for South Korean-made ships are at their highest since just before the global financial crisis.

What that data did not show, however, is a rising cacophony from factory managers across the manufacturing sector. They are highly concerned over worsening shipping delays, tightening freight capacities and shortages and price spikes in raw materials.

There are signs that these supply chain pressures are rife, and worsening, not only in South Korea, but across the region.

Usamah Bhatti, an economist at IHS Markit, said the latest manufacturing purchasing managers’ surveys showed delivery times had now lengthened for 20 consecutive months.

“Anecdotal evidence suggested that disruptions were the result of a shortage of raw materials and logistical difficulties, notably in sea freight,” he said of the situation in South Korea, adding that the input price increase in June was the sharpest on record. 

Further worrying signs are emerging from the heart of China’s manufacturing and shipping sector. 

The PMI gauge for the world’s second-biggest economy slipped to a three-month low last month as both new work and purchasing activity slowed.

“In the second half of this year, the low base effect from last year will weaken. Inflationary pressure, coupled with the economic slowdown, is still a serious challenge for China,” warned Wang Zhe, a senior economist at Caixin Insight Group.

As our FT colleagues wrote late last month, stoppages caused by worker coronavirus infections at Yantian terminal in Shenzhen, southern China, has led to congestion spilling over to other nearby ports.

Highlighting the severity of the capacity problems, container spot rates have surged to fresh all-time highs, beyond the already elevated levels we have witnessed since the second half of 2020.

Andrew Lee, a shipping sector analyst at Jefferies in Hong Kong, said the current global supply bottleneck problem had left almost one-third of the global shipping fleet “waiting at the berth”.

He warned congestion could in fact worsen. The peak season for container shipping gets under way over the coming months when many in the northern hemisphere return to school and work from their summer holidays, Lee noted. Then there’s the build-up to Christmas.

This means that ships’ delayed journeys out of Asia will only lead to longer and longer queues on arrival at key ports in the US and Europe.

Meanwhile, the storm created by the Delta variant is sending new and more infectious waves of the coronavirus pandemic across the region. 

The likes of Seoul, Tokyo and Sydney have been forced to backpedal on economic reopening plans while other countries, such as Indonesia, are in full crisis-fighting mode. 

The spread of the Delta variant is also disrupting the recoveries of other key regional manufacturing powerhouses, such as Vietnam. The latest PMI surveys for the dynamic south-east Asian economy showed companies there have been scaling back their employment and purchasing activity in response to the latest waves of transmission.

“While less severe than after the outbreak of the pandemic in early-2020, the reduction in manufacturing output in June was stronger than anything seen prior to Covid-19 since the survey began more than a decade ago,” said Andrew Harker, another economist at IHS Markit.

As a quick picture of what might lie ahead for an unlucky, perhaps unprepared, company or industry: look at the lasting damage wrought upon European carmakers by the shortages of auto chips which started a year ago.

As Bain analysts recently warned, the chip shortage was “not a ‘one and done’ event”.

Trade links

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