Of the many calamities sparked by the COVID-19 pandemic, one of the toughest lessons CEOs and business leaders have learned centers around the shakiness of modern supply chains. By mid-2021, just when many businesses were putting pandemic woes behind them, the promising trends toward recovery were squashed. Supply chains quickly collapsed amid roving COVID-19 outbreaks, China’s energy crisis, logistics delays, labor issues and record supply shortages.
At the same time, consumer demand – albeit volatile and grappling with inflation – remains relatively strong and economic growth abounds. Even against record shortages, consumers in the U.S. are spending more than ever and splurged in record numbers this past holiday season, according to the National Retail Federation (NRF). However, as consumer demand grows and supply remains short, businesses that source products from abroad could be missing out on budding market opportunities.
While media headlines from late-2021 positioned shortages as a “nightmare before Christmas“, recent data from supply chain inspector QIMA signals the disruption will linger for the time being. Subsequently, CEOs must keep a strong pulse on the following supply chain trends, as they are projected to shape the business landscape in 2022 and beyond.
Proceed with caution in China
Mirroring a recovery pattern observed in 2021 throughout Asia, China touted a major rebound in the first half of the year. As China outpaced most other countries in containing the virus, buyers from the West shifted production and sourcing activity back to ‘the world’s factory.’
While the rebound stumbled in Q3 onwards in Asia at large, China continues to demonstrate resilience when compared to its neighbors. In fact, according to QIMA data, inspection and audit demand in China exploded +21.5% in 2021 over 2020. Significantly, this growth even outpaced the levels observed in pre-pandemic 2019 by a solid double digit +13%.
But CEOs must still heed caution when it comes to buying from China. The second half of 2021 proved disappointing for China’s colossal manufacturing industry, with widespread power outages shutting down factories, stymying orders and leaving buyers in a scramble. Adding salt to the wound, the September blackouts occurred at a particularly inopportune time, just as factories were looking to fill holiday orders from their buyers.
However, according to QIMA data, demand for inspection and audits in China rebounded relatively quickly in most major consumer goods categories, including textile/apparel, toys and homeware. A significant outlier was the electronics and electricals industry, which has seen inspection and audit demand greatly diminish since May 2021 due to the global semiconductor chip shortage.
QIMA data on inspections and audits indicates caution from Western buyers, with buyers still hesitant to expand sourcing to China. Rather than shift activity back to China en masse, it appears many businesses simply maintained their existing relationships with Chinese manufacturers. As a result, China’s popularity among both US- and EU-based buyers in 2021 remained at a three-year low throughout 2021.
China’s sourcing patterns in 2021 foreshadow a timid post-pandemic recovery that, while not being entirely derailed, has steered Western buyers in the wrong direction at times. Furthermore, power outrages may remain a threat in upcoming months. Accompanying this threat, the 2022 Winter Olympics in Beijing, and its aftermath, could impose further business restrictions in northern China. While CEOs should rightfully consider China for production and sourcing in 2022, they must nonetheless proceed with caution and be ready for further disruptions.
There are no ‘safe havens’
During the spars of the US-China trade war and the initial stages of the pandemic, Vietnam had been enjoying an increase in manufacturing activity and was widely regarded as a ‘safe haven’ by buyers. But the fast collapse of manufacturing in Vietnam in mid-2021 shines a bright spotlight on just how volatile the modern global supply chain landscape is, telling a cautionary tale about the compounding effects of pandemic-related disruptions.
During the first half of 2021, Vietnam flaunted a remarkable growth spurt as buyers from the West enthusiastically made their way back to a familiar manufacturing market that had been enjoying much attention pre-pandemic. In January through June 2021 – when Vietnam was conquering the spread of the virus – QIMA recorded sky-high +67% growth compared to the same period in pre-pandemic 2019.
Vietnam’s success story was overtaken in late July by the arrival of a new antagonist: the delta variant. The country then entered a stifling quarantine period, which shut some factories down. Even though the strictest of virus containment measures were lifted in October, the latest data from QIMA shows Vietnam’s manufacturing industry remained sluggish through the end 2021.
Sharp labor shortages are likely a factor in Vietnam’s slow path to recovery, as factory staff fled the densely-populated cities. This left a mammoth shortage of over 100,000 workers in the south of Vietnam. In late November, over a third of factories in Vietnam were reported to be operating at less than 80% capacity. In some cases, buyers’ orders were posting delays of more than eight weeks.
The footwear and apparel sector in Vietnam, a heavyweight industry in the country, has been among the hardest hit. Inspection and audit demand plummeted -29% year-over-year in the fourth quarter, according to QIMA data. Following this nightmarish twist of fate, Vietnam inspections and audits grew by a paltry 3% in the first half of 2021 – paling in comparison to the double digit booms it recorded during the pre-pandemic period.
Thanks to this lethargic rebound, Vietnam’s recovery is expected to be gradual and should last well into 2022. And judging by the quick reversal of fortune that Vietnam suffered, CEOs must remain wary of diversifying manufacturing too quickly into any one market. In today’s constantly manufacturing landscape, there are unfortunately no safe havens.
New horizons are expanding, particularly in South Asia
Even though India notoriously withdrew from the recently launched Regional Comprehensive Economic Partnership (RCEP) free-trade agreement, CEOs should note the world’s second largest country (by population) is nevertheless experiencing exciting new surges in manufacturing activity. Praised by experts as an increasingly attractive manufacturing market in many product categories, recent QIMA data shows buyers from the West are turning their attention from China and embracing India as their preferred alternative market.
When evaluating 2021 against pre-pandemic period, the South Asia region at large paraded double-digit growth in inspection and audit demand. But, specifically, India has emerged as the eminent winner – outpacing its neighbors and the region as a whole in three out of four quarters 2021. India’s newfound popularity is marked by surging interest from US-based brands: QIMA survey data shows the proportion of US buyers naming India among their top five sourcing regions nearly doubled in 2021 compared to 2019.
In wrapping up 2021, demand for inspection and audit demand soared by an impressive 60% compared to pre-pandemic 2019. In looking just at US-based buyers, this figure is up by an extraordinary +129%.
Now, the next obstacle for CEOs to pay attention to is whether India can combat the threat of omicron and keep the momentum going in 2022.
Don’t allow ethics to fall by the wayside
Against the turbulent headwinds blown in by the pandemic, workers around the world faced rising poverty and mass job losses around four times that experienced during the 2008-2009 global financial crisis, according to a report released by the UN International Labour Organization.
While supplier diversification allowed many businesses to navigate disruptions in the short term, 2021 also saw ethical compliance in global supply chains fall apart at an appalling rate. Factory scores registered a four-year low and nearly one-third (29%) of the factories QIMA audited were identified as being critically non-compliant and requiring immediate intervention. This accounts for the highest share since 2017.
Owing to the pandemic’s specific hygiene challenges, violations were unsurprisingly widespread in health and safety measures. In this area, 2021 scores dropped -7.5% compared to 2020. QIMA also recorded rife violations in the area of working hours and wages, with scores falling -8% in 2021 compared to 2020.
CEOs should be particularly mindful that, in terms of geography, QIMA audit data shows deteriorating ethical scores in many key sourcing markets – especially in the fast-growing markets of Southeast Asia. For instance, ethical scores in Myanmar plunged -18% in 2021 compared to 2020.
These disturbing trends in human rights and worker safety are unfortunately all too familiar and predictable. Data from recent years consistently shows human rights and ethical compliance increasingly falling by the wayside, as businesses are forced to operate in survival mode, cut costs and diversify production to less established geographies. First, QIMA saw ethical compliance crumble during the early throes of the US-China trade war. Unfortunately, the disregard for ethical compliance continues to rear its ugly head during the pandemic and the ongoing supply chain crunch.
After a disastrous 2020, CEOs were placing big bets on 2021 being a year of recovery and a return to a pre-pandemic normal. Despite early signs of optimistic, the year failed to live up to these expectations. Moreover, CEOs must now be mindful of some metrics becoming even more bleak as supply shortages sully the mood, particularly in ethical compliance.
Against a backdrop of COVID-19 variants, disparate vaccination rates and varying regional approaches to containing the virus, the pandemic continues to hamper global supply chains. When you combine this with the specters of raw material shortages, logistics hurdles, labor issues and rapidly escalating ethical risks, CEOs are sure to be mired in supply chain woes throughout 2022 and beyond.
The challenges businesses have faced thus far cannot be all for naught, as there have been many teaching moments throughout the pandemic. If CEOs keep emerging supply chain trends top of mind, businesses will be able to assert greater agility and resilience – and find their way in a continuously evolving marketplace.
Written by Sebastien Breteau.
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