Friends,
Over the past two years, the art and science of supply chain management have been thrust into the international spotlight. While events like the 2021 Suez Canal blockage showed how easily a single accident can disrupt the supply chain, COVID-19 and Russia’s invasion of Ukraine have helped turn it on its head. At one point, the cost to send a container from Asia to the U.S. reached 7x its pre-pandemic level, with insurance premiums and marine fuel prices increasing significantly.
The longtime wisdom of utilizing global supply networks to take advantage of cheaper labor and manufacturing costs has run into challenges in today’s geopolitical environment. For many years, U.S. and European product companies have relied on predictable, affordable shipping options and high-availability production capacity in China and other Asian countries. The advent of aggressive trade tariffs and, more recently, disruptive Covid shutdowns, have changed this equation for many industries.
By most measures, the supply chain has become ripe for disruption, investment, and innovation. As a starting point, many companies are re-visiting the possibility of manufacturing domestically. In the critical semiconductor industry, the Chips and Science legislation is moving through Congress to provide $280 billion in support for domestic production as well as scientific research to ensure intellectual property advances at home. U.S. industries of strategic importance such as automotive and electronics will breathe a sigh of relief once additional manufacturing capacity is available in North America.
At the same time, domestic logistics industries are positioning for a revamped industry landscape. Earlier this summer, Prologis, one of the world’s largest owners of warehouses and distribution centers, announced a mammoth $26 billion acquisition to buy out rival Duke Realty and consolidate its properties. Also, this summer, Shopify chose to acquire Deliverr for $2.1 billion to bulk up its ecommerce fulfillment and enable end-to-end capabilities by adding last-mile delivery. We believe M&A activity will continue apace, and supply chain management is certain to be one of the most in demand sectors for both investors and acquirers.
As we look forward, the supply chain crisis appears to be moderating. The time it takes for goods to get from Asia to the US now stands at 90+ days – a welcome decline from the 110 days last fall. Container shipping costs pan-Pacific have fallen over 60% from the peak level of $20,000+, though are still well above pre-pandemic levels. For domestic shipping via truck, which covers most product categories, spot costs have dropped 30% as capacity constraints and driver shortages have eased.
We look for supply chain constraints to ease in the second half of 2022 based on a continuation of these trends. Following the spikes in CPI inflation in June and July, we foresee supply chain challenges declining which will help reduce consumer inflation in Q4 as well as the year ahead.