Author: Glenn Argenbright (Quake Capital)

Numerous factors have converged to place enormous pressure on the supply chain and the specific role it plays within the business ecosystem. These four have had the most significant impact:

Shipping – Logistics, Capacity, and Ports

The most visible supply chain issues revolve around shipping delays and port congestion. It’s important to understand that containerized shipping to the U.S. west coast was 30% higher in Q1 2021 than the same period last year. Shipping rates from Asia to the U.S. east coast were five times higher than in 2020. The disruption has been further aggravated by an imbalance between where the containers are versus where they need to be.

Much of the modern global supply chain is tied to the worldwide fleet of container ships (just over 5K in total), which carry roughly 20 million containers, filled with just about every product you can imagine. Most of these goods come from parts of Asia, with China managing seven of the ten largest container ports.

The COVID-19 pandemic had a massive impact on global shipping. In early 2020, China shut down for two months, effectively cutting off shipping capacity for half to three-quarters of all goods sold. Compounding matters, as China recovered, the U.S.,

Europe and other parts of the globe began implementing shutdowns of their own. Further, with lockdowns in place across much of the planet, spending on electronics, home furnishings, and other consumer goods skyrocketed. Those realities, coupled with the need to source medical supplies and equipment to fight the pandemic, meant an increased demand for container ships to deliver goods.

As you might imagine, this created a backlog of container vessels headed to ports in the U.S. and Europe which, in turn, created a serious logistical challenge. As an example, the Southern California ports of Los Angeles and Long Beach handle roughly half of all U.S. imports from Asia. Despite their capacity, these ports have been overwhelmed – struggling to balance unprecedented volumes alongside mounting restrictions, social distancing regulations, and a workforce heavily impacted by COVID-19. This continues to create issues, as container ships are still backed up at these ports waiting for berths to open.

Government Stimulus and Consumer Spending

As shipping slowed, so too have global economies. In response, governments around the world have attempted to use stimulus payments to promote economic growth and accelerate recovery. Without delving into the broader implications of such policies, it’s clear they have impacted consumer spending, particularly when combined with lockdowns and other regulations. As noted above, electronics, home furnishings, and other consumer goods were in high demand throughout 2020 and 2021, as people stayed close to home.

Now, as stimulus dollars hit the market and as lockdown restrictions ease, consumer spending will likely increase, putting even more pressure on the global supply chain. Consider that the current household savings rate was estimated at roughly 18% in Q3 of 2021 (as compared to 7% in 2019), further indicating a high degree of liquidity.

Semiconductor shortage

Another area of obvious disruption is in the production and distribution of computer chips. If you’ve been following this issue, you are probably aware of the impact it’s having on the automobile industry, with GM and Ford slowing production and closing facilities. However, it’s important to understand the depth of the shortage and the implications for other markets and sectors.

The primary issue is one of demand, specifically competing for demand within consumer electronics, mobile devices, 5G expansion, and the auto industry. While demand was increasing, supply was simultaneously being disrupted by three disparate events – COVID, a major fire at the Renasas chip factory in Japan (provider of roughly 30% of the world’s automotive chips), and a drought in Taiwan (you need water to produce chips – and they make 60% of the world’s supply). Couple historic demand with three “Acts of God” severely impacting supply and you have the makings of a real shortfall.

Even with some chip manufacturers announcing new investments in capacity, it is expected that this shortage will carry well into 2022.  Shortages of electronic components are leading to higher prices, and a decrease in supply. As an example, light vehicle production was down nearly one million units in the first quarter of 2021 because of semiconductor shortages.

Plastics

Just when you thought it was safe to go out again, a massive cold wave hit Texas, causing serious disruption to the state’s power grid. Unfortunately, this also impacted the supply chain, as Texas petrochemical plants produce over 40% of all fossil fuels in the U.S., and fossil fuels are needed to make plastic. The result has been a global shortage of raw materials and plastics used in countless industries (from car seats to clothing) and limited supplies are also hindering the production of larger, more complex items like appliances and automobiles.

Worse yet, the supply chain feeds on itself.  As chip shortages take hold, automakers and distributors prioritize their best customers and their hottest selling units. This means there are fewer large trucks being manufactured, despite the fact that we are seeing increased demand at the ports. With fewer trucks being produced, fewer containers are getting moved, adding to the overall pressure on existing systems.

From my vantage point (running a venture fund), I’m seeing renewed interest in local production, with teams weighing the increased costs against the reduced risks of finding partners close to home. This is definitely an area to watch closely, as we’ve witnessed a rather significant shift in this regard among our 200+ startups. Looking at those teams that were previously relying entirely on offshore fabrication and production, I would say that roughly 1/3rd have either shifted to local (in country) production or have augmented existing capacity with additional local relationships.