The sector needs to reset to a new normal that involves low greenhouse gas emissions (GHG) and clean energy, more resilient supply chains and logistics, digitalization and data-driven business models. It also has to respond to new demand and consumption patterns, and more fragmented, localized, or regionalized operating and trading environments.
1. The energy transition and decarbonization
Only about 6 per cent of the post-COVID stimulus funding was allocated to cutting GHG emissions. Now the war in Ukraine and its impacts could push decarbonization further down the priority list. Indeed, if natural gas is replaced by coal, or if biofuel usage declines, GHG emissions could increase.
In 2021, the European Union imported from the Russian Federation more than 40 per cent of its total gas consumption, 27 per cent of oil imports and 46 per cent of coal imports. Many countries in Europe are seeking alternatives to the Russian Federation and are importing from more distant locations. To do so, however, they will need to address infrastructure bottlenecks in pipelines, storage terminals and tankers. Imports of natural gas could also partly be replaced by oil, coal and nuclear energy. In East and South Asia, Russian oil and gas could also partly displace coal.
The war in Ukraine has also shaken global markets for metals such as nickel that are used for the production of clean-energy products. In the short term this could make the clean-energy transition more difficult. However, in the longer term, investment in energy-efficiency measures, renewable-energy alternatives and low-carbon technologies should ease the transition to low-carbon and cleaner energy paths.
Around 40 per cent of maritime cargo comprises fossil fuels, so the energy transition will alter the demand for shipping, as well as vessel types and sizes, and the fuels used by ports and ships. Sailing patterns and shipping networks will also need to be reorganized — as will the ports servicing such ships.
2. Supply chains are shaped by best-cost versus lowest-cost, and considerations of national security
In 2020 the pandemic induced an initial backlash against globalization. Subsequently global value chains (GVCs) adjusted to the disruption, as reflected in changes in market shares among GVC regions. Nevertheless, the pandemic exposed the limitations of the just-in-time model whose weaknesses had also been tested by other disruptors such as, earthquakes, floods, blockages of canals, trade tensions and restrictive trade measures.
In 2022, the deteriorating geopolitical environment further exposed the risk associated with heavy reliance on one single or a few suppliers — whether for food, energy or parts and components for strategic manufacturing. Over 90 per cent of the world manufacturing capacity for semiconductors is concentrated in Taiwan China, and the effects of the 2021–2022 semiconductor shortage rippled across a range of industries such as car manufacturing, electronics, and healthcare. Developing alternative sources for chip manufacturing is difficult, capital intensive and time-consuming. The crisis in Ukraine has also shaken the food, energy, automobiles and chip-making sectors.
These disruptions have reignited the debate over the future of globalization and the continued relevance of the lean supply chain model, when taking into account self-reliance and national security. Businesses looking for greater resilience and supply chain integrity and continuity are considering whether to bring production back home or closer to home — through reshoring, onshoring, nearshoring or same shoring and end-to-end supply chain management.
A June 2022 survey found that most senior logistics and supply chain executives believed that a major transformation of supply chains was underway. Less than 20 per cent agreed that globalization will lead to new supply chain configurations based on «ally-sourcing». Nearly half thought that protectionism and reshoring would make supply chains more fragmented and localized.
Nevertheless, there is no evidence of outright re-shoring or of a mass exodus from manufacturing in distant locations. A 2021 survey by the American Chamber of Commerce in China found that only 14 per cent of respondents were interested in relocating, and only half of these had acted. Only 3 per cent of companies planned to move activity to the United States. Instead, they were likely to adopt a ‘China plus one’ strategy. Asian countries remained the most popular ‘plus one’ sources, with far fewer citing destinations such as Mexico or Canada. Another survey, at around the same time, found that 84 per cent of businesses had no plans to move their manufacturing operations out of China, and 74 per cent intended to continue sourcing from China.
In many cases, reshoring may not be feasible, particularly if domestic suppliers lack the expertise and the capacity to rapidly scale up operations. In the United States in 2021, for example, despite attempts to diversify, imports of containerized goods from China hit a record high, with 42 per cent of all imports sourced from China — the same share as in 2008. China maintained a 56 per cent share of household goods imports. In 2021, imports from China increased by 25 per cent while shipments from Viet Nam grew by 19 per cent. Volumes from other countries such as Cambodia also increased, but from much smaller bases. Where China has lost market share the main beneficiaries have been Viet Nam and India.
Complete deglobalization is unlikely, though further disruptions and geopolitical concerns will probably accelerate efforts to promote resilience, security and predictability. Gradual shifts in sourcing are more likely; instead of seeking the lowest cost, companies are pursuing the ‘best cost’ — weighing manufacturing and transportation costs against factors like supply chain resilience and environmental sustainability. While there is a long-term goal to move more production out of China and into countries like Brazil and Mexico, the 2021 reshoring index has shown a greater reliance on imports from other countries in Asia.
Globalization is likely to take a step back as countries realign economic and geopolitical partnerships — building new supply chains while also enhancing efficiency. The United States, the European Union and Japan are «friend-shoring» component manufacturing. But for strategic goods such as semiconductors the goal seems to be full repatriation of production. The European Parliament’s Committee on International Trade, for example, has called for the shortening of supply chains.
There is the risk, however, that if companies do not manage to relocate production, protectionism could end up restricting trade or fragmenting the world trading system. What is needed is a gradual and flexible approach that will harness collaboration and promote concerted multilateral efforts while using multiple levers including:
Diversification — The goal should be to diversify suppliers and allow the markets to adjust, while balancing the objectives of efficiency and security.74 Diversifying supply bases can be combined with an element of localizing or regionalizing. Many firms are now dual-sourcing or multi-sourcing and some industries in Europe and India, supported by government efforts to achieve strategic autonomy, are already reinventing their business models.
Safety stocks — Strategic inputs and commodities can be retained as buffers by increasing inventory holding.
Vertical integration — This can involve taking more processes in house. Volkswagen, for example, is creating some in-house battery-making capacity. Or it can be achieved through strategic deals with suppliers. Tesla, for example, has recently struck deals with lithium miners and graphite suppliers and with the Brazilian company Vale for nickel. Other carmakers are hoping to reduce the predominance of China and the Republic of Korea in the business of battery-making and to bring production closer to home. In energy and renewables, the market is also expected to become more regional by sourcing more from allies.
Longer-term relationships — Companies are managing supplier relationships, investing in technology, and adjusting supply chain practices to remain flexible. They are building long-term, collaborative relationships with suppliers, manufacturers and other service providers who have the necessary technology, global reach and capacity.
Additional facilities and suppliers — Companies can supplement rather than replace existing production. Often this means a China-plus-one strategy. Nike, for example, has decreased lead times by transferring some production from Asia to Latin America. GoPro and Universal Electronics are shifting some production from China to Mexico.
Using digital technologies — Supply chain management can be further optimized using frontier technologies to increase capacity and improve logistics.
3. New consumption patterns as e-commerce takes hold
The pandemic accelerated shifts in consumer behaviour and preferences, with more online purchase of consumer goods, which are often transported by container. In 2019, global e-commerce was 15 per cent of total retail sales, but in 2021 had increased to 21 per cent.
It could increase from a value of $3.3 trillion in 2022 to $5.4 trillion in 2026. Shippers, retailers and supply chain managers are already reassessing their logistics, with increasing automation and digitalization. Maritime transport operators have been investing in air freight, final-mile, and e-commerce logistics. A.P- Moller Maersk, for example, acquired various e-commerce logistics companies in 2021, including a start-up for B2C warehousing for the fashion industry. Shipping and port operators can achieve service differentiation and greater competitiveness by leveraging this highly time-sensitive trade segment.
The E-commerce logistics market is also expanding. Estimated at $243 billion in 2020, it is projected to grow at an annual growth rate of 18.9 per cent over 2020–2027, reaching $819 billion by 2027.
This has implications for warehousing inventory management including for safety stocks and buffers. In the first quarter of 2022, global vacancy rates in warehouses were at record lows— averaging 3.2 per cent in the United States and 3.3 per cent in Europe. In Seoul and Tokyo, vacancy rates were less than three per cent. In a time of scarce space capacity, one cost-effective solution is multi-storey warehousing.
These trends entail a change in shipping patterns, port operations, and warehousing as well as for the entire logistics industry and supply chain participants. They also have implications for IT and digital solutions providers — for smart ports, for predictive analytics and port call optimization, and for achieving end-to-end visibility and data sharing.
Maritime transport and trade will need to adapt to greater use of technology. Digitally enabled shopping, for example, will boost trade, though other technologies such as automation may reduce the need for offshore production and diminish trade flows, or have mixed outcomes.
Maritime trade itself is also being reshaped by the digitalization of transport and logistics. In the past maritime transport has been slow to adopt digital solutions, but especially since the COVID-19 pandemic it has been playing catch up — as new technologies such as the Internet of Things (IoT), blockchain, big data, and AI start to improve efficiency, sustainability and resilience. TradeLens, for example, a data and document-sharing platform, is making more use of blockchain technology. Ports are improving their operations, security, infrastructure, and management — using smart sensors and the IoT, along with terminal automation, port community systems, and traffic management systems. Between 2022 and 2027, the global smart ports market is projected to increase from $1.9 billion to $5.7 billion. Throughout this process the sector will need to attend to the associated threats to security in the use of IT.
It is also important to address the digital divide between countries. Most developing countries entered the pandemic with relatively low digital capabilities, so found it difficult to mitigate the economic disruption. Many still have low levels of adoption and connectivity, and inadequate trade logistics. Often, they lack entrepreneurs with digital skills or the confidence to use digital payments. Poor countries tend to have limited financing mechanisms to support start-ups and small and medium enterprises.
5. Shipping and ports are redefining their roles and adjusting to cope with change
In a fast-evolving operating landscape, maritime transport stakeholders need to strike new balances between competing objectives and priorities. Some carriers have, for example, been expanding their fleets while also offering air freight services and e-commerce, aiming to become logistics service integrators that have end-to-end control over supply chains. Others have altered their networks and opened up new routes — switching from the United States West Coast to the East Coast, or from China to East Asian countries, or incorporating rail transport from China to Europe.
This has resulted in some consolidation. To offer one-stop solutions, shipping carriers such as Maersk and port operators such as DP World are extending into the wider logistics through mergers and acquisitions spanning port terminals, warehouses, freight forwarding, air freight, e-commerce, other logistics services and IT businesses. Governments too have been reacting to this rapidly changing environment. High freight rates and the profits realized by the liner shipping industry are creating pressures for greater regulatory oversight, as through the United States Federal Maritime Commission. Shippers have also been adapting to this disrupted environment — negotiating long-term contracts, for example, and securing sufficient space and capacity at good prices. At the same time, they have been considering alternative modes such as air freight which have become more competitive. Between 2019 and 2022, demand for air cargo increased by around 8 per cent and is expected to have increased by 13 per cent in 2022. This trend should continue as disruptions linger and the e-commerce boom demands near-real-time deliveries.
6. Building resilience
To spread risks and reduce exposure of their primary business to disruptions, companies are now diversifying operations, while integrating risk management and preparedness into their operations. In these efforts, they need to look beyond immediate crises and short-term solutions to «resilience by design». This requires strategic thinking to find new opportunities and business models. Supply chains and their underlying transport and logistics networks should integrate long-term resilience criteria in their plans and structures. For ports, for example, resilience-building should be seen as a strategy and an ongoing process that can gradually be implemented and fine-tuned to each port’s governance, managerial, commercial, and infrastructural context.
Success depends on effective collaboration among all players, at the national and international levels when tackling bottlenecks in ports and along the hinterlands, especially in landlocked, transit and coastal countries. This will require more support to developing countries, in particular the most vulnerable economies — through financial support, technical cooperation and capacity-building.