SCMAP Perspective is our fortnightly column on PortCalls, tackling the latest developments in the supply chain industry, as well as updates from within SCMAP. On this column, Henrik Batallones looks at a year of geopolitical uncertainty and its impact on our supply chains.
Flashpoints
One of the major discussions in last month’s SCMAP Supply Chain Conference – and in many other supply chain conferences, both here and abroad, over the past year – has been dealing with geopolitical risks and their impact on our supply chains.
We’ve always had our eyes and ears out on these disruptions, of course, but the COVID-19 pandemic has put the discussion front and center. We continue to feel the impact of the resulting “supply chain crisis” through increased logistics costs and higher shelf prices, causing most global economies to suffer from high inflation rates.
Apart from there, there have always been smaller disruptions – smaller in the sense of them being limited to a certain region, with the impact more keenly felt on certain industries or companies with a particular geographical lean. For example, the continuing conflict between Russia and Ukraine; the former’s invasion, thought to be a quick one, has now become a years-long stalemate, with the latter continuing to hold the line despite limited resources. While the threat of a wider conflict in Europe remains, the nature of the fighting means global supply chains have, for the most part, settled down around the conflict.
With that in mind, developments in the past twelve months seem poised to disrupt things similar to how COVID-19 has. It was one year ago today when members of Hamas breached the Israeli border, killing civilians and taking hostages. One wouldn’t have imagined we would end here, on the verge of a regional conflict – or are we already there? I mean, we’re watching reports of Israeli attacks on Lebanon, ostensibly to eliminate another group, Hezbollah, that it deems is a threat to its existence. Both groups’ key supporter, Iran, had launched missile attacks. By the time you read things, I wouldn’t be surprised if the headlines are different.
Armed conflicts in the Middle East would have an obvious impact on our supply chains, with oil prices poised to be shaky amidst ongoing tension. As of this writing, there are reports that Iranian oil facilities will be targeted.. Between this and the stockpiling of fuel for the imminent arrival of winter in the northern hemisphere, there will be a pressure on global oil supplies and prices, affecting shipping costs, as well as operating costs for net oil importers like the Philippines.
But the conflict has opened up another point of disruption. International shipping lines still refuse to sail through the Red Sea, unwilling to risk being targeted by missile attacks from Houthi rebels, who are also calling for a ceasefire in Gaza. That has meant higher prices and longer delivery times. Even companies that are not directly exposed to this are feeling the effects.
Companies are also feeling a reputational pinch as those who are deemed to be supportive of the Israeli cause are subjected to boycotts. While these companies have weathered the storm so far, the impact to bottom lines of global brands like Starbucks and McDonald’s are difficult to ignore. One imagines a wider conflict will trigger more intense feelings from customers who choose to make a stand with their wallets. It’s a disruption that I feel will have a longer term impact – and one that isn’t much discussed yet, because nobody is really sure where to start.
Experts are already ringing alarm bells at the potential impact of the situation in the Middle East on our supply chains, still tentatively recovering from COVID-19. Longer deliveries, higher costs, increased shelf prices. And yet there’s a second flashpoint that could pop at any moment: the South China Sea, and tensions – violent confrontations, even – between China, who claims most of the sea, and its neighboring countries. We in the Philippines are no stranger to this, with our vessels being rammed and blasted with water cannons. In fact, most Western countries have their eyes on us, with military and economic support to counter Chinese hegemony starting to trickle in. The situation remains volatile, and if conflict erupts, it will disrupt a major shipping lane – not to mention the more direct impact on the Philippines.
I suppose what makes flashpoints like these unpredictable is, unlike COVID-19, there’s really no telling how individual actors may act. One observes that the system of international cooperation is starting to break down, with world leaders more keen to appeal to a domestic audience. Understandable, but implications are wider. One hopes cooler heads will prevail… but the next question is, if things do get even more complicated, are our supply chains ready?