For companies sourcing products and materials from Asia, the last two years have been some of the most challenging in recent memory. Shortages, backlogs, inflation and COVID lockdowns have made it extremely difficult for companies to deliver products on time and on budget.
Blackford Capital Operating Partner Steve Feniger has been based in Hong Kong for the last 25 years, and his expertise has helped Blackford portfolio companies like Aqua-Leisure, Mopec and Burgaflex navigate the supply chain challenges of the last two years. He recently shared his thoughts on the current state of the global supply chain and provided some advice for companies looking to stay ahead of future challenges.
Q: What are some of the positive trends you have noticed in recent weeks?
A: The good news is that freight costs have been coming down fast in recent weeks, with prices from China to Los Angeles under the $10,000 mark and China to Boston approaching $15,000. These huge drops are likely caused by impending recessions in the EU and U.S., as well as the impact of inflation slowing down retailer expectations and the ongoing war in Ukraine.
The RMB has weakened by 5% since April 1 and we expect it to stay at these levels. This is extremely helpful for companies negotiating prices using USD.
Q: Does this mean that we will seeing fewer shortages and backlogs in the rest of 2022?
A: Unfortunately, we don’t expect these positive drops to continue. Oil has climbed to $110/barrel, and looming Longshoremen Union negotiations are heading to a climax at the Port of Los Angeles. The shutdowns in areas of China are also having an impact. These issues, among others, will likely lead to continued delays throughout the rest of the year.
Q: How are the COVID shutdowns in Shanghai impacting the supply chain?
A: The “Zero COVID” strategy isn’t working against the Omicron variant, but China’s leadership is not changing tactics. Even though China’s full vaccination rate is at 89%, the country is using vaccines that are not as effective as the mRNA from Pfizer and Moderna. This leaves China much less protected when compared with the West.
As my team in Shanghai recently reminded me, China’s traditional Confucian respect for the elderly prevents them from adopting the “living with COVID” mindset we see in the U.S. and other western countries.
In the case of Shanghai, many companies are in their 8th or 9th week of working from home – and there is no clear end in sight!
Q: How should companies respond to this latest wave of challenges?
A: In terms of the shutdowns in China, companies must start by looking after their staff in affected areas. They are under a great deal of pressure, and companies should be connecting with employees on a regular basis and providing psychological and financial support as needed. Beyond that, companies must retain their focus on tracking price negotiations for 2023, as well as order placement and current shipments.
Keeping a close eye on things will pay dividends when you are able to pivot to a better solution. For example, we’ve been delighted by the success our Blackford team in Asia has had in switching shipments from Shanghai to Ningbo port to avoid delays.
Q: How can companies stay ahead of these challenges? What should they be doing to ensure they are prepared?
A: Whenever possible, make sure you have “boots on the ground.” Having in-country operations in Asia is still the best way to safeguard your supply chain and ensure that you receive the capacities you need when factories and ports resume work.
Diversification is always a solid strategy, but companies should be striving for balance in the supply chain. Wholesale relocation may not always make sense, especially when you consider China’s ability to flex and find solutions to challenges. This has enabled the country to respond better in times of crisis, unlike Vietnam where our production has suffered due to COVID hammering their workforce.
Finally, it is important to re-evaluate your long-term sourcing and supply chain strategy. A recent Harvard Business Review article analyzed the importance of keeping suppliers and the supply chain at the center of your business.
We have been practicing this for a while at Blackford Capital, and we believe that supply chain can no longer be relegated to the back burner. This mindset has helped us see sourcing as a strategic weapon, and is a large part of what makes our portfolio companies successful.
For the last 18 months, we have been investing in our Blackford Asia platform and curating vendor relationships. This paid off recently when, even amid a semiconductor shortage, Blackford Asia was able to procure PCB components for Mopec.
Steve Feniger has been an Operating Partner at Blackford Capital since 2020. He’s an internationally experienced CEO who’s led an IPO on the HK Stock Exchange and works with western brands and retailers to professionalize their buying and sourcing operations in Asia.