As the pandemic becomes endemic, restoring order to the world’s prices and supply chains will take time and won’t be easy.
As we all adjust to the reality that Covid and its derivatives are here to stay, communities around the world are beginning to rebuild economically: returning to work, reviving businesses where possible and making new plans if not.
It is no surprise materials, inventory and shipping are in short supply and are often stuck in the wrong places. In some cases, services that companies used to rely on are no longer available because the suppliers have gone out of business. Workforces are depleted, and some knowhow, skills and experience have been lost. Rebuilding is not as straightforward as opening the factory doors, picking up the tools that were put down at the beginning of 2020 and getting on with it. Even now governments are still mandating measures such as the sudden full lockdown of Shanghai, which has severely impacted road and air transport. We must still expect the unexpected!
There certainly is the opportunity to build back better, but let’s not be simplistic. The world we built was highly sophisticated and interconnected – an ecosystem of ecosystems. It won’t be easy. It will take time. New leaders and innovators need to acquire the skills required to replace those we’ve lost. And we have other challenges too, like protecting the environment and transitioning to more sustainable ways of living. As if that wasn’t enough, further new tensions are adding to the pressure on resources and, as a result, prices.
As we work to restore order, established supply chains remain disrupted or broken. Even without material shortages, the shortage of transportation creates the same effect. Companies are struggling to arrange the supplies they need to fulfill orders received from their own customers. The disruption is transmitted through the entire chain, changing the balance of supply and demand.
The effect on the automotive industry is a highly visible case. It affects everyone making, selling and buying cars. Over the past three decades or so, the electrification of mobility has provided many growth opportunities for our industry and has delivered increasingly efficient and intelligent vehicles that are more satisfying to drive, safer, more comfortable and more economical. The electrification of the drivetrain is the ultimate stage of evolution when passenger cars become, in essence, consumer electronic products.
Today’s latest models are full of chips controlling everything from mirror dimming and mood lighting to internet connectivity, high-voltage battery management and autonomous driving. Except they are not. Supply shortages mean carmakers are struggling to fulfill orders for new cars. Major manufacturers are producing fewer vehicles and prioritizing their most in-demand models because they cannot source all the electronic components needed.
On the other hand, pressures such as increasing fuel prices, legislation on emissions, and the prospects for restrictions on new combustion-engine vehicles should buoy demand for the latest most efficient vehicles. And, while customers wait, demand for used cars is increasing, driving market prices upward.
In the longer-term, semiconductor makers are working to increase capacity to service the demand. However, that takes time, and semiconductor demand will continue to grow as the leading markets reach government-imposed deadlines outlawing sales of combustion-engine vehicles.
Some of the worldwide supply problems resulting from the pandemic are short-term issues. As acceptable prices are negotiated (or alternative solutions are imagined and enacted), output resumes, and shipping returns to more normal routines, problems will subside; inflationary pressure should ease, and availability of goods and services should improve. Other changes to the established order are here to stay, some part of the new post-pandemic reality and others due to strengthening environmental protection, including an emphasis on carbon offsetting and the switch to green energy.
I’ve commented on the dynamics of supply-chain management before, and there is an even clearer justification and more urgent demand for closer collaboration between suppliers and customers to ensure the greatest possible efficiency. Sharing production plans enables partners to guarantee materials arrive in the right places at the right time. While “too little, too late” is as disastrous as always, “too much, too soon” is a luxury that, in the current economic climate, adds to costs considerably. Saving these costs through better plan and data sharing is one of the many changes we need to make as we adjust to the situation we find ourselves in. It is worth remembering the highest cost a manufacturer can experience is that of having no materials to process.
It will be difficult to definitively declare the pandemic “over.” That may be best left to the World Health Organization. We cannot beat Covid. It’s in the world, and we must live with it, but we can be encouraged we are finding ways to do this, and, as we restart economic activities, we can only be bullish, adopt the spirit of “build back better,” and strive to realize the cleaner world we want to inhabit, make use of the experiences we have gained and continue to work to make all our lives healthier, more secure, safer and happier.