2021, the year that was: 'Glocal' pandemic shocks, just as demand revived

The third of the year-ender series focuses on how Indian businesses suffered two global supply dislocations

The first year of the pandemic brought home the downside of globalisation as country after country went into lockdown and companies struggled to cope with crashing demand by paring costs every which way. The second year, 2021, offered an unexpectedly different perspective in terms of disrupted supply chains across the world just as demand started reviving. Three categories of businesses have been impacted by this global demand-driven dislocation: Exports, automobiles, and electronics.

For Indian exporters, FY22 has been a year of mixed feelings. Exports grew strongly for seven straight months, touching $369.39 billion in the April-to-October period, a tad away from the $400-billion target the commerce ministry has set, before slowing sharply in November to its lowest level in the fiscal year as the holiday season slowed the momentum. But if exporters are not cheering the buoyancy of the first seven months, it is mostly because of their struggles with container shortages, which resulted in delayed shipments and rocketing freight rates -- between three and eight times over March 2020 -- that have crimped margins.

This shipping crisis is a direct result of the dislocations caused by the pandemic and the uneven pace of economic recovery around the world. Put simply, western economies recovered faster -- with greater proportions of their populations vaccinated, thanks to the robust “vaccine nationalism” of leaders in the US and Europe. This recovery spurred demand for a range of goods that come mostly from the developing world, where the pace of economic recovery has been slower (though this is slowly changing, as India’s growing trade deficit suggests).

Two factors converged to create the container shortage and a concomitant rise in freight rates as shipping companies cashed in. The first is the paucity of dock labour in western ports owing to lockdowns and continuing quarantine rules. This increased the time taken to unload containers and lengthened turnaround times. The second is subdued domestic demand in supplier countries (such as India), which meant that it took longer to fill containers with cargo for the return trip. Had the global trade recovery been more balanced, it is worth wondering whether Indian export growth would have been even more robust.

Some prominent western shipping companies suggest the shortage could last into 2023. Some Indian shippers think this has major opportunities for Indian exporters because freight rates to Europe and the US ex-India are far lower than ex-China, where the container shortage is the most acute. The trajectory of the Omicron variant of Coronavirus will play a role in determining those issues

If shipping insufficiency has thrown global trade into turmoil, another pandemic-related supply dislocation -- for semiconductor chips -- has severely affected automobile companies and electronic companies globally and in India. This came out of the blue, that too just as companies were starting to see glimmerings of revival. Much of it was the result of a pre-pandemic shift towards higher-cost semiconductor chips in readiness for the impending 5G telecom revolution.

The worldwide lockdowns, however, saw a surge in demand for smartphones, laptops, webcams, smart TVs, gaming consoles, washing machines, and other labour-saving household electronics, which require lower-cost, lower-tech chips. Manufacturers that spotted the problem early began stockpiling supplies. But a closure of a major semiconductor facility in Texas and a fire in a Japanese plant added to the supply problems compounded by logistics headaches (more than half the global supply comes from just one company, Taiwan Semiconductor Manufacturing Company).

As with global automakers, automobile sales in India felt the impact. In November, car sales hit an 11-month low, falling 19 per cent of the already low November 2020 figures. Maruti Suzuki, India’s largest carmaker, sold 26,000 fewer cars in November than it did in April. Sales of two-wheelers dropped even more sharply at 34 per cent year-on-year. CRISIL anticipates a loss of over Rs 20,000 crore for the industry, given that the chip shortage is more evident in high-end variants.

The irony is that decelerating sales do not reflect demand but supply constraints. Maruti Suzuki, for instance, has a backlog of over 500,000 cars and Hyundai 100,000. Meanwhile, the domestic appliances and consumer electronics industry, which has been hit by rising raw material costs as well, reckons the chip scarcity will last well into 2023.