The Economist: Why supply chain problems won’t go away

Supply chains have rarely featured on company earnings reports in the three decades since globalization took off in earnest, save for the occasional mention of the benefits of low costs and reduced inventories. However, this earnings season, COVID-induced shortages are among the first issues mentioned by many companies.

The omicron variant has worsened gridlock by forcing workers, in many industries and the logistics business that unites them, to quarantine. And shortages of both staff and materials are contributing to inflation, driving up costs across the board.

On January 25, disappointed investors caused the stock price of GE fell 6% after Larry Culp, the head of the industrial icon, said that the “headwinds” from the supply chain had particularly affected its healthcare business. Fourth quarter revenue decreased 3.5% year over year. The same day, Gregory Hayes, boss Raytheon, presented mixed results, noting that the defense company had “experienced its share of supply interruptions”.

Others predict problems to come. On January 26, boeing said that supply chains were not a “restriction” because its commercial aircraft production was low and inventories were full. But, he added, raw materials, labor and logistical challenges were a “observation item”. Hours later, Tesla it said problems in the supply chain had forced it to operate factories below capacity.

European companies are not immune. On January 21, Siemens Gamesa, a wind turbine giant, blamed supply chain problems for poor results and a profit warning. vestas, its rival, has expressed similar concerns. hey, a consultancy, estimates that UK-listed companies issued 19% more profit warnings in the final quarter of 2021 than a year earlier. A record number blamed supply chain disruption and rising costs.

The scarcity is unlike anything seen before. A chip crisis wiped out nearly 10 million units, or more than 10%, of annual car production in 2021, as companies slashed orders at the start of the pandemic and fell to the back of the queue when demand he recovered.

Signs of improvement are rare. This month, Toyota it said it would cut production by 150,000 vehicles, or about 18%, in February due to a lack of chips. GE blamed some of the problems in its health care arm on the chip crisis. Large US companies surveyed by the US Commerce Department reported that their chip inventories had fallen from 40 days in 2019 to less than five days in 2021, and they did not expect any improvement for at least the next six months. The department has warned that continuing shortages could force factories to close.

Freight transport isn’t getting much freer, either. Container shipping rates are returning to last summer’s record levels. Analysts don’t expect much relief before the second half of the year.

The shortage of workers is making life even more difficult. IHS Markit, a consultancy, notes that the US workforce is 4 million below pre-pandemic levels, Europe’s has been disrupted by reduced movement of migrant workers and Asia’s by strict new lockdowns.

Raytheon blamed the shortage of qualified welders for the shortage of “castings”, vital for jet engine turbine blades. American Trucking Associations, a trade body, said last year that the industry was facing a shortage of 80,000 truckers.

All of these restrictions increase the costs of parts, materials, and wages. Add in higher energy prices and industrial businesses everywhere are facing a rocky start to 2022. With all of these hurdles showing little sign of going away, supply chains may well be high on the list of excuses. if companies reveal disappointing quarterly results in a few months.