- Increased consumer demand and COVID-19 lockdowns have pushed freight prices and delays to new highs.
- Since most toys and other gifts are manufactured overseas, the result will impact holiday shopping.
- Stores may not have what you want in stock, and prices will likely be higher.
- Eytan Buchman is the chief marketing officer at Freightos.com.
- This is an opinion column. The thoughts expressed are those of the author.
- See more stories on Insider’s business page.
Santa has always delivered. But this Christmas, a brewing global supply chain crisis may leave parents scrambling, and it’s because of what happened when COVID met freight.
67% of toys are manufactured in Asia – compared to only 7% in the United States. Gifts for adults are no different. In the first quarter of 2020, two-thirds of all cell phones were manufactured in China. Before Santa’s chimney visit, an intricate and unseen network of ocean liners, airlines, and trucks is responsible for delivering everything from Christmas toys to hoarded toilet paper across the ocean to the stores that bring it to your front door.
Yet due to COVID-19, this intricate network – also called the supply chain – has been put to the test. A perfect storm of unprecedentedly high demand for goods, port lockdowns, typhoons, and travel restrictions has made importing incredibly challenging for companies of all sizes. The result is looming inventory shortages and product markups as the world gears up for the holidays.
How did we get here?
Quite simply, Americans started buying more stuff. The pandemic triggered a radical increase in goods consumption as we stayed at home instead of spending on services and travel. On an individual level, this played out on most peoples’ Amazon credit card statements. On a macro level, it sparked an e-commerce explosion, while US imports spiked in the first quarter of this year, trouncing the first quarter record in 2018 by 5%. While demand increased, the infrastructure that makes everything run smoothly was absolutely pummeled.
It hit air cargo first
The airplanes we fly on also carry a third of global trade below their decks. Air cargo is key for time-sensitive or expensive goods like cellphones, computer chips, and flowers. When COVID hit, passenger travel dropped like a sack of bricks, but demand for essential goods spiked. More goods needed to be shipped, but available space dropped by 80%.
As importers scrambled to secure space on planes, air cargo prices skyrocketed 400%. Some airlines converted passenger flights into cargo flights. For example, an Israeli airlift was implemented to contend with pre-Passover egg shortages, with cartons of eggs safely buckled into seats. When air cargo demand stabilized in October, it was at a much higher baseline than before the pandemic.
Ocean cargo was next
5,000 container ships capable of moving close to 25 million containers are the backbone of global trade. Before the Ever Given propelled container shipping to the headlines, ocean cargo was already squeezed.
It started with containers in the wrong places. The consumption surge caught many by surprise, with container shortages at Asian origins making transpacific shipping harder. This got worse as demand to ship goods increased. The shortages led to congestion and delays, which aggravated the problem.
It’s a tough nut to fix; it takes years to build a container ship, making it difficult to accommodate supply and demand swings. When demand is low, balancing is done by basically parking ships at port; last year about 9% of container ships were idled to reduce operating costs. Today, nearly every ship is in use, but it’s still not enough to keep up with the current demand.
It was once a common quip that shipping a container of goods around the world for a year was cheaper than putting them in storage. In fact, rates were so low – about $1,300 per container – that just five years ago, a top ten global ocean liner went bankrupt. That’s changed.
Today, ocean freight rates are 14 times higher – $18,425 per container. Combined with trucking price increases, the cost of importing a 40-foot container from a factory in China to a warehouse in the United States increased from $8,410 to $25,334. The higher shipping costs will mean higher Christmas gift costs, especially for larger goods. For example, container price increases may account for more than a $1,000 increase for a couch.
Freightos
All sold out … at higher costs
Demand may have stretched infrastructure to its limit, but COVID shutdowns snapped it. The hits kept coming: from a COVID breakout in Vietnam that shut down manufacturing, roving shutdowns across airports and seaports in China, the Suez Canal blockage – and the months it took to loosen the congestion – all made it supremely difficult to move goods like Christmas toys.
Global trade is teetering on the brink of massive trade challenges that have extended beyond the realm of freight professionals. Epic congestion means it takes much longer to get goods, with the average ocean freight shipment from China now taking 70 days instead of the previous 44 days, stealing a month of holiday prep time from toy manufacturers. In many cases, only larger companies have the relationships or volume to book shipments, so the boutique toys you were planning on buying might not be in stock.
When those toys do make it across the Pacific, consumers will have to pay more. Larger companies are investing massively in buying their way out of the crisis; Home Depot recently chartered their own ship and Peloton famously put bikes on airplanes to meet demand. Smaller businesses don’t have that luxury; a recent Freightos Group survey of small businesses found that nearly half of small businesses plan to increase prices to compensate for rising costs. It’s gotten bad enough that it’s become a key priority for the Biden administration.
So what can the run-of-the-mill holiday shopper do? Hit the shops early, focus on homemade crafts, maybe send an ecard, or opt to buy locally this year. Either way, a (socially-distant) nod of gratitude to the next truck driver or logistics professional you see would be in order. The fact that this is the first time global freight is really hitting consumers is a testament to how well this incredibly intricate global freight machine works – even during COVID.
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