FRAGILE DIVERSITY

Sometimes it comes down to just four millimeters. That’s about the diameter of a spoke nipple, an inconspicuous screw that holds together the spoke and rim of a bicycle wheel. Konrad Irlbacher, Managing Director of the bicycle manufacturer Corratec, rolls the tiny silver part between his thumb and index finger. “It’s small,” he says, “but woe to you if it’s missing.”

When the tiny screws get held up on the journey from their production facility in China to Corratec’s headquarters in Raubling, Upper Bavaria, Konrad Irlbacher can’t sell the company’s almost fully assembled bikes. The same holds true for the aluminum frames from Taiwan, gear shifts from Japan and e-bike motors that aren’t completely assembled because a cable from Asia hasn’t made it to a factory in Hungary. Corratec sources components for its bikes from all around the globe—and that’s not always a good thing.

Amid record demand, with lockdown sufferers scrambling to buy mountain bikes, electric bikes and gravel bikes, Corratec was forced to temporarily pause production. “When the container ship Ever Given got stuck in the Suez Canal in March, that was really the straw that broke the camel’s back,” says Corratec Managing Director Konrad Irlbacher. Of the nearly 20,000 containers aboard the ship, ten hold stacks of bicycle components for Corratec—and still have not been unloaded from the ship due to legal disputes in Egypt. “We currently can’t finish manufacturing around two thousand bicycles due to the missing parts,” he complains.

Situations like these are affecting companies around the world. According to the Ifo Institute, an economic think tank based in Munich, almost half the companies in Germany alone are suffering from supply shortages. Despite full order books, employees are on reduced hours or sent home and in some factories, robots and assembly lines are at a standstill. Half-finished vehicles are piling up at automobile manufacturers because electronic parts fail to arrive. Building contractors are warning of shortages and construction stoppages due to a lack of plastics and lumber, not to mention high steel prices. Private households are also affected and must practice patience—waiting months for bicycles or pieces of furniture.

Globalization, with its regional division of labor and highly specialized production, has brought unimaginable prosperity to the world and an almost infinite variety of products. Thanks to closely integrated supply chains, we can choose from dozens of smartphone models, jeans brands and bicycle equipment. According to a study published in the Quarterly Journal of Economics in 2006, product variants in the US alone more than tripled from around 71,400 in 1972 to 259,000 in 2001.
 

But the close trade relationships upon which product diversity is based also harbor risks, as the current shortages reveal. An entire cascade of unfortunate events has caused the global exchange of goods to falter. Along with the pandemic and the blockage of the Suez Canal, a winter storm in Texas exacerbated the situation with power outages that paralyzed semiconductor production there. On top of this, there was a fire in a Japanese microchip factory. Above all, however, it’s the coronavirus that has relentlessly ­exposed the vulnerabilities of a tightly interwoven global economy—and continues to do so.

This all begs the question: how secure is the supply of raw materials and foodstuffs, consumer goods and services in the event of a global catastrophe like COVID-19? How much can a pandemic disrupt a global economic system—and how can shortages be avoided in the future?

Konrad Irlabcher gives a tour of the Corratec facility using his smartphone camera. There are employees here and there, tightening screws and assembling parts along the production lines, but many of the hooks from which bicycles would usually dangle are empty. “Normally we’ve got three times as much to do here,” he says. Due to the congestion on the seven seas, Konrad Irlabcher and his co-workers have only been able to cobble together leftover bits and pieces. They’ve had to throw out plans and allocate the remaining bicycles as fairly as possible among the retailers so that they don’t start “floundering around,” as Konrad Irlbacher puts it. “We’re trying to work out good solutions for our customers despite everything, but we have to charge for the increased ocean freight costs on a prorated basis.” He explains that trading in container slots currently resembles gambling on the stock market.

Deputy Director General André Schwarz of the Federation of German Wholesale, Foreign Trade and Services (BGA) represents the interests of companies in those sectors and is familiar with problems like these. Companies regularly complain to the BGA about the current high freight prices. Schwarz says, “The price trends are extremely troublesome, turning the entire logistics and costing on its head.” This leaves the impression that shipping companies are taking advantage of the current imbalances on the market, he remarks.

In fact, Ifo Institute calculations show that average freight costs between China and northern Europe tripled to quadrupled from November 2020 to mid-April 2021. According to shipping expert Alexander Nowroth of the Lebenswerk Consulting Group, the prices of some standard ocean freight rates, which usually ranged between 1,500 and 2,000 euros, have even risen to 10,000 euros per 40-foot container.

That is why Lisandra Flach, head of the Ifo Center for International Economics, calls container shipping the “Achilles’ heel of international trade.” Because the largest shipping companies have formed three global alliances, there is currently a lack of flexibility on the world’s sea routes. To save on costs, the alliances are increasingly relying on larger, more profitable ships and are focusing on certain principal routes with major ports. This results in fewer and fewer shipping companies calling on a smaller number of ports and neglecting routes to less profitable destinations. As Flach explains, transport with gigantic container ships is normally cheaper—but also slower and more inflexible, which, in the midst of a pandemic, is shaking world trade to its core.

When the first waves of the corona pandemic swept across the globe and governments shut down factories as a safety measure, shipping companies took their ships out of service as a precaution. However, unlike in previous crises, this time the demand for specific, specialized goods picked up again—quickly and unexpectedly strongly. Industrialized Western countries suddenly began ordering equipment and electronics for working at home and remote learning, “like crazy,” as one logistics expert put it. People who couldn’t go on vacation began to putter around their homes and gardens, to order new bicycles or game consoles that contained the same microchips that carmakers would soon run out of. As Flach describes, the shipping companies weren’t able to anticipate these problems; as the demand for flat-screen monitors, smart televisions and garden furniture from Asia’s factories exploded, the shipping companies couldn’t get their colossal vessels back into operation quickly enough.

An analysis by the United Nations Conference on Trade and Development shows that maritime trade accounts for more than 80 percent of the total volume of traffic for international goods. If there are disruptions to container shipping, it affects the global traffic of goods—and can change entire trade flows. “In light of the prices containers are currently fetching in Asia, shipping companies are even sending empty containers on freighters back to Asia without first loading them with export goods,” Flach explains. This means they arrive more quickly in Asia to load sought-after consumer goods, but the flow of goods becomes one-sided. On routes that are less frequented anyway, traffic ceases almost entirely.

So that desperate customers like Konrad Irlbacher can still receive important components for their production lines, route managers at freight forwarders and shipping companies are currently working overtime. One of them is Lars Mikael Jensen, from Denmark, who manages the global Ocean Network for Maersk, the world’s largest container shipping company. “We’ve been facing incredible headwinds over the past eight months,” he says during a video conference from his office in Copenhagen, where a little blue and white Maersk flag is visible on the filing cabinet over his shoulder. The man with the horn-rimmed glasses and a shock of white hair pushes back against criticism that shipping companies helped cause the crisis and are now raking in the profits. Prices are determined solely by supply and demand. Furthermore, customers with fixed-price contracts continue to pay the agreed-upon prices; it is only with short-term orders that the costs are currently higher, quite naturally.

“Fortunately, we don’t have accidents in the Suez Canal every day,” Jensen says. Around 20,000 ships pass through this bottleneck annually. Jensen, who’s worked for the Maersk for forty years, was responsible for the ships’ schedules and routes when the Ever Given ran aground. Thirty Maersk ships were suddenly brought to a dramatic halt. “In the first twenty-four hours, you just hoped things would quickly get moving again,” he recalls. As the hours turned into days, Maersk decided to divert some ships around the Cape of Good Hope at the southern tip of Africa, while others would sail full speed ahead through the canal when it reopened. The idea was to get the ships as quickly as possible back into their loops, their very closely timed cycles at sea. Delays can be very expensive. According to calculations made by Allianz Insurance, one week of blockage in the Suez Canal caused losses of up to 10 billion dollars in world trade.

For Jensen this meant balancing pros and cons, improvising, sending some ships not first to ­Korea as planned but instead directly to Hong Kong so they could get right back into the return loop to Europe more quickly. At the same time, he and his team were looking for alternate transport routes. Goods that were “super urgent” for customers were loaded onto airplanes. “Semi-urgent” goods, Jensen explained, were sent by train along the New Silk Road (see ABOUT TRUST 3-19) or by truck. What customers described only as “important but not urgent” continued to be sent via ship. “At some point, all that still matters for many customers is that the deliveries get made, whatever the price,” says logistics specialist Thorsten Koch. Konrad Irlbacher also opted to have new bicycle prototypes flown in for the upcoming Eurobike trade show.

For globalization experts like Hartmut Egger from Bayreuth University and Ifo economist Flach, this shows how flexibly markets can react and adjust to even multiple external shocks. The supply of goods was never truly jeopardized, particularly not in countries like Germany, which Flach says has “extremely diversified” and thus robust supply chains. As Egger describes it, the fact that global trade didn’t completely collapse wasn’t thanks to government intervention, but instead to the “charm of the market.” For all parties involved it is worth making the effort to quickly eliminate bottlenecks, look for alternate routes or find alternative suppliers.

Nevertheless, companies like bicycle manufacturer Corratec that rely on just-in-time deliveries are still planning to reduce their dependency on producers from Asia in the future and to diversify their supply chains. Instead of focusing on individual suppliers, they will have several dealers from different locations to ensure stability.

Konrad Irlbacher, who has finished the smartphone-tour of the Corratec production halls and returned to his office, says the company is planning on increasing its stock of sensitive components such as tires, brakes and forks in the future. The company is also increasingly looking for European alternatives. E-bikes in particular, however, are high-tech devices and rely on batteries, microchips and motors. “Stocking these in large quantities would simply be more expensive.”

And the bicycle specialist already has his eye on the next area for improvement. Although the eagerly awaited components for the 2021 spring season are still stuck on the Ever Given, he’s already ordering new parts for 2024. “The market,” he explains, “waits for no one.”
“When in March, along with corona, the container ship Ever Given got stuck in the Suez Canal, that was really the straw that broke the camel’s back.”