Indian shippers need stability insurers


The container shipping industry is in uncharted territory on a global scale, with rising freight rates and various supply chain disruptions wreaking havoc on global trade.

The covid pandemic has dealt a heavy blow to a sector already facing structural problems. The trigger was an unexpected increase in consumer demand for goods after the March 2020 closures, particularly in North America. Americans stuck at home have increased their online orders of everything from home improvement products to fitness equipment and face masks. This led to a 20% increase in total container demand in North America in 2021 compared to 2019. Shipping companies have struggled to find adequate capacity, creating chronic shortages of space for ships, equipment for containers, warehouses, intermodal hubs and labor.

The spillover effects of this regional development have been considerable. The capacity of the Trans-Pacific Trade Lane, which is North America’s largest trade corridor, increased 45% in November 2021 from 2019. This is more than three times the growth of the largest eastern trade lane. -West between Asia and Europe. Global container freight rates have, on average, increased four to five times from their 2019 levels.

The implication? Anyone who expects the industry to return to its old normal in 2022 should prepare for a new reality. Our research suggests that while container shipping rates moderate from today’s maximum levels, they are likely to remain higher than pre-pandemic levels. There is also enormous uncertainty about the timing of this standardization. Therefore, it is imperative that global shippers begin to incorporate these higher rates into their business plans in order to mitigate risk.

Lessons for India: Indian shippers are not immune to this commercial chaos. Congestion at major regional transshipment ports has reduced daily container shipping capacity, causing delays in export shipments. Shipping rates have also increased dramatically on some of India’s busiest sea routes. Spot rates to Europe exceed $ 8,000 / Forty Foot Equivalent Unit (FEU), a six-fold increase since January 2019, while container costs from China to India have been reduced. multiplied by 15 to reach $ 7,000 / FIRE.

If left unresolved, these supply chain issues could undermine the competitiveness of India’s booming export industry and slow the overall economic recovery. Several short- and long-term actions can help cushion the impact. Given the fragile and volatile nature of today’s maritime networks, businesses need to enhance their real-time, end-to-end visibility of supply and demand through a “global nerve center” that ideally has reliable data from their locations. international suppliers to their customers. It could also help companies identify other international multimodal solutions. For example, they could set up a storage site in Dubai or Europe, potentially transport expensive products by air freight to those markets, then ship goods to the United States, or use rail transport from those storage sites, thus speeding up delivery.

So far, however, this unique proposal has not been widely adopted. Typically, companies have individual control towers, in which logistics, manufacturing, purchasing and other divisions handle different parts of the process and there is no single source of truth about the whole. the global supply chain.

In India, a major limiting factor for companies without a global hub is the relatively low adoption of technology among supplier networks. Distributors, especially in rural and semi-urban markets, may not have access to laptops, so their inventory data is not digitized. Businesses must commit resources to provide the necessary technology and capacity building tools to their distributors and to build relationships of trust in order to gain quick access to a supplier’s inventory. They could also adopt a collaborative partnership model with suppliers.

In the short term, companies should also immediately review global inventory standards, especially for critical components such as automotive chips that depend entirely on imports or have a single supply channel outside the country, and increase buffers based on new lead time data and changes in lead time variability metrics. Although it is difficult in the short term to significantly modify the sourcing strategies towards nearby and alternative suppliers, to carry out a new exercise of optimizing the network for global trade flows, after having considered a few price stabilization scenarios , remains a useful exercise. .

Longer term, shippers need to closely monitor shipping capacity and track where capacity is deployed, once congestion eases. Actively monitor port congestion on the US West Coast in a good leading indicator at this point. From a supply perspective, shippers might consider multi-year and longer-term contracts with binding firm purchase contracts to lock in the capacity of a certain part of their business, especially raw materials, components. and finished products that have high criticality and high value and on shipping charges as a percentage of the total cost.

Logistics bottlenecks and supply-demand mismatches undeniably made 2021 a banner year for the shipping industry, as cargo owners struggled to keep their supply chains running. market.

We believe that in 2022 and beyond, companies will need to adopt innovative strategies to strengthen supply chain resilience and acquire the capacity to weather this unprecedented period.

Neelesh Mundra and Steve Saxon are partners in the Mumbai and Shenzhen offices of McKinsey & Company, respectively.

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