Manufacturers Eye Red Sea Supply Chain Disruptions
- Jan 22, 2024
For manufacturers in the U.S., navigating challenges with transportation and logistics has always been a key part of optimizing business operations. Further exacerbated due to COVID-19, geopolitical instability, and economic uncertainty over the past five years, having a clear understanding of the global supply chain has become a crucial factor in business survivability and success.
Early this year, businesses across the globe began experiencing additional stress on their own supply chains because of ongoing turmoil in the Red Sea. Due to declining security conditions and recent attacks on commercial vessels by Houthi rebels based in Yemen, once one of the world’s highest-trafficked maritime shipping routes has been made especially vulnerable.
Impact on U.S. Businesses
The Red Sea shipping lanes are responsible for more than 10% of global trade. With the increased risk to sailors and loss of product, many companies—including Maersk, BP, and Shell—are even electing to temporarily pause their own supply chain operations throughout this area.
The divergence of shipping routes around this area after the December shipping attacks has caused the second largest drop in vessel capacity over the last 10 years. The recent drop in capacity is greater than the onset of the COVID-19 pandemic-related closures and second only to the Ever Given’s 2021 grounding in the Suez Canal. These recent events have caused heightened sensitivity to their impact on the supply chain and ultimately consumers. Coupled with increased political instability and the inability to predict the timing and availability of products, this has led to a tremendous uncertainly and is one of the hardest challenges for businesses across various sectors.
This also comes at a time when global shipping is feeling the impact of reduced flow through the Panama Canal due to the drought conditions in that area. When ships are diverged around the Rea Sea, necessitating a significantly further route, U.S. and global companies alike are further exposed to risks related to:
- Increased freight and fuel costs.
- Increased war-risk insurance premiums, up to five times the standard amount.
- Delays and shortages in the availability of goods, which in turn disrupt the supply and demand balances adding to increases in prices.
- Cascading effects in manufacturing process, availability of cargo containers, and port delays.
- An increase in volume at U.S. West Coast ports and a decrease in East Coast port activity.
Some of the world’s leading producers, including companies such as Tesla and Volvo, have recently stated they have had to halt certain manufacturing activities as a result.
The most common alternative to navigating the Red Sea for freight shippers looking to move from Asia to Europe entails sailing around the southern tip Africa. While less risky than the former options, the distance of travel between Tiwan and Europe is increased by more than 30%, along with surging fuel costs and the loss of valuable time. Another alternative, shipping over land, is largely off limits to many carriers as this would mean crossing Russia, which includes various embargos and a war zone. Over the long-term, companies may continue to explore bringing production activities back to the U.S. or neighboring geographies to reduce the potential impact of continued geopolitical risk, tariffs, shipping delays, and security risks.
Both the freight industry and businesses across the globe face a myriad of ongoing macro- and micro-level challenges, and instability in the Red Sea region doesn’t seem to be abating anytime soon. To best adapt, protect employees, and mitigate business loss, leaders must remain agile and stay informed on new developments and critically access how those impact their unique operations. Manufactures and distributors need to maintain a sharp focus on supply chain management to minimize disruption to both the timing and cost of bringing goods to market.
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Blair Robbins is an Audit Partner with more than 20 years of public accounting experience.
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