Introduction

What’s the Story? Our Supply Chain Briefing series examines issues in the retail chain and their implications for the sector. In this report, we look at the supply chain impacts of lockdowns in China, elevated ocean freight rates and fresh government funding to bolster US ports and waterways. Why It Matters Supply chains are complex due to their interdependence and interconnectedness, and the Covid-19 pandemic put supply chain planning under greater scrutiny than ever before. Companies need to be on top of the various factors causing disruptions and understand how to mitigate their impacts. Recently, just as supply chains seemed to recover, lockdowns in China and the Russia-Ukraine conflict disrupted them further.

Lockdowns in China, New Phase of Chartered Ships and US Government Funding for Ports: Coresight Research Analysis

1. China’s Lockdowns: The Latest Challenge to Global Supply Chains Shanghai, the largest city in China with a population of 26 million, went into a two-stage lockdown on March 28, 2022. Previously, municipal authorities had placed lockdowns only on targeted neighborhoods as needed. However, as Covid-19 infections surged, authorities proceeded with a city-wide lockdown to carry out mandatory testing. The first phase of the lockdown, from March 28 to April 1, 2022, applied to the eastern part of the city, while the second phase, from April 1 to April 5, 2022, applied to the western part of the city. On April 5, 2022, authorities extended the restrictions, and, one month on, Shanghai remains under lockdown. Shanghai houses the world’s largest port, according to data from shipping research firm Alphaliner. While authorities have not closed the port, productivity has been impacted as Covid-19 controls in the city have led to some stakeholders—such as shipping firm AP Moller-Maersk—closing facilities. Meanwhile, major automobile manufacturers (including Tesla and Volkswagen), electronic components suppliers to tech firms (including Apple), domestic goods factories and furniture manufacturers all have Shanghai facilities that are affected by the restrictions. Earlier in March, Jilin City, Langfang, Changchun, Dongguan and Shenzhen—the last three of which are major trade and manufacturing hubs—were placed on lockdown for several days. Like Shanghai’s, Shenzhen’s port—the fourth largest in the world—was not closed, but the shutdown of manufacturing and warehouse facilities led to a pile-up of ships and containers. Still, data from project44, a supply chain-visibility tech firm, indicates that the 2022 lockdowns are not as disruptive as the initial 2021 lockdowns: export container dwell times (the time from when cargo arrives at the port to when it leaves the port) reached 9.8 days on March 20, 2022, at the Port of Yantian (Shenzhen), versus 20 days last year. While these recent lockdowns will not be as disruptive as last year’s, we expect that they will still significantly impact global supply chains through 2022, as international supply chains are already reeling from the effects of various other forces.

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Figure 1. Largest Container Ports Worldwide, Based on Throughput, 2021 (Million 20-Foot Equivalent Units [mTEUs]) [caption id="attachment_146731" align="aligncenter" width="700"] Source: Alphaliner[/caption]  2. Party City and Costco Charter Ships On its fourth-quarter earnings call in February 2022, retailer Party City said that it would continue to charter ships this year to mitigate ongoing supply chain disruption. Previously, at Goldman Sachs analysts’ conference in September 2021, the company reported that it had chartered vessels to ship holiday inventory and leased containers for use on the chartered vessels. Similarly, on an earnings call in September 2021, Costco announced that it had chartered three vessels for use through the current fiscal year. On the company’s latest earnings call in March 2022, Costco stated that it has chartered seven vessels for use over the next three years and has leased containers on those ships, which will travel between Asia and the US and Canada. The company said that the vessels would fulfill around one-quarter of its annual transpacific shipping and container needs. Elsewhere, European retailer Lidl has established its own shipping business and plans to buy container ships to get around the ongoing global freight disruptions. According to a filing at the European Trademark Office, Lidl’s shipping arm will be called Tailwind Shipping Line and handle air and ship cargo transport, and import and export services. Lidl operates in 32 countries globally, including in the US where it is expanding ambitiously. We predict that more large retailers will charter their own vessels and lease containers if freight rates remain elevated. The average weekly rate for a 40-foot container moving from Asia to North America was $15,764 as of April 15, 2022, up almost 167% year over year, according to data from shipping platform Freightos. And there are no signs of the cost returning to pre-pandemic levels of below $1,500 per container. Ship charter rates are at elevated levels, too. Chartering a vessel that can accommodate 1,700 20-foot containers cost $44,000 per day as of the week ended December 17, 2021, according to six-month charter rates from shipbroker Harper Petersen. The latest data from the firm indicates that the rate stood at $57,000 per day as of the week ended April 29, 2022—down from $64,000 per day as of the week ended March 25, 2022. The lack of federal stimulus and high inflation are slowing demand and prompting consumers to restrain their spending, providing some near-term respite to strained supply chains. Still, if port congestion continues and ships and containers are in short supply, freight rates will remain high. For large retailers, using chartered ships is one way to mitigate some of the ongoing supply chain challenges and avoid any additional risks this year. 3. $2.7 Billion in Federal Funds To Boost US Ports and Waterways On March 29, 2022, the US government announced that it would invest $2.7 billion through the Bipartisan Infrastructure Law in several projects that will boost supply chain infrastructure in ports and waterways. The new funds are set to strengthen the supply chain against climate challenges and reduce flood risk. Funding highlights from the announcement include the following:

• $72 million to widen and deepen the Norfolk Harbor, Virginia Federal navigation channel. According to the government's announcement, the Norfolk Harbor, Virginia, project handled 67% more containers in 2021 than it did a decade prior. The new funds will be used for projects that improve navigation, enable safer access for larger commercial and naval vessels and bring new economic opportunities to the region.
• $11 million to deepen a portion of the Galveston Harbor Channel at the Port of Galveston, Texas, to accommodate larger ships, increase capacity and improve operational safety.
• $68 million to deepen the Brazos Island Harbor Channel at the Port of Brownsville in Texas to facilitate the movement of increased cargo capacity, reduce transit times and improve operational safety.
• $77 million to construct new lock chambers at Emsworth Locks and Dams in the Upper Ohio River, Pennsylvania project, allowing large cargo ships to efficiently navigate the upper Ohio River system, relieve landside congestion and improve delivery times.

The US government released the fiscal 2023 budget of $5.8 trillion shortly after the ports and waterways investment announcement, in which President Joe Biden proposed additional funding for domestic manufacturing and supply chain infrastructure. Congress needs to approve the spending and allocate the funds before the proposals can be materialized.

What We Think

As global supply chains remain strained, any international-level shock will regress the recovery achieved so far. On the consumer end, the full impacts of the Russia-Ukraine conflict and lockdowns in China remain to be seen, as it takes time for inflationary effects to be transferred, considering that businesses tend to buy inventory several months in advance. Implications for Brands/Retailers

• We think brands and retailers will begin buying—or plan to buy—earlier than ever to accommodate unforeseen delays, increasingly seeking out local vendors and opting for incrementally nearshore sourcing.

Implications for Technology Vendors

• Brands and retailers will seek out vendors that can help improve supply chain visibility and predict instances and impacts of anomalies to increase resilience and agility.