But these days “supply chain issues” are at the top of most investors’ lexicons, and when it comes to thinking about the outlook for inflation, supply chains are viewed as one of the main forces that will help decide how quickly price pressures ease from 40-year highs.
Global supply chains are the networks connecting companies to their suppliers that are necessary to convert materials into the products they sell. Devastating supply chain shortages developed after pandemic lockdowns closed businesses globally and workers began to stay home.
Expectations for supply chain resolution for the first half of 2022 had revolved around the effects of the pandemic becoming more contained in an increasing number of countries. But other developments, like the war in Ukraine, have created new bottlenecks. And pandemic-related snarls are disrupting supply chains again, with lockdowns in Shanghai and other major cities across China.
Whether it be Tesla (TSLA) not being able to secure key materials to make its products, asset manager Aberdeen (ABVF) delaying an acquisition because it can’t get the paper it needs to print booklets, or the current shortage of baby formula across the United States supply chain issues from the rapid reopening of economies are hurting consumers at large as well as companies as the system is pushing back.
When it comes to the timing of supply chain logjams easing, companies have struggled to get a handle on when it might happen across a broad range of industries but it has been a moving target just about everywhere.
“Nobody knows,” says Michael Field, a senior equity analyst who covers shipping and logistics. “Almost every company is having supply chain issues. Few are actually doing anything to act on it.”
There are a few bright spots, Field explains. Labor availability has become more favorable in critical areas, like the ports, to help move goods around the world. Field says that in a market that used to be a buy-it-as-you-need-it one, companies have been contracting long-term with shippers for transport.
Some of the sectors hardest hit by global supply chain shortage are semiconductors, autos, industrials, retail and restaurants. Here, we’ll outline the arc for issues across each of those sectors.
Shipping
For all the troubles battering other sectors, shipping and logistic companies like Maersk (MAERSKB), supply chain issues have been a bonanza, and sent shipping rates soaring.
For customers, it’s a mixed bag, as those rates now require long-term contracts. “This pretty much indicates that we should certainly expect that input-cost inflation we’ve witnessed across consumer and industrial products for quite a while,” Field says.
While these long-term contracts should facilitate the movement of goods, major problems persist, with congestion delays averaging seven days in the first three months of the year almost double what they were in 2019. Ocean schedule reliability also hasn’t fared any better, with just 36% of cargo being delivered on time, less than half of pre pandemic levels.
Semiconductors
Semiconductors have been among the most powerful disruptors of global supply chains, impacting nearly every industry. These range from mobile phones to autos to lightbulbs.
Computer and tech companies have been trying to keep pace with explosive demand that began when workers transitioned to telecommuting. Factory shutdowns intended to quell the spread of the coronavirus smacked chipmakers, called foundries, ability to manufacture, causing an order backlog. But technology strategist Abhinav Davuluri sees at least a glimmer of hope.
“The industry turns the other way probably more than it goes the other way,” he says.
But the picture remains mixed. Companies such as Taiwan Semiconductor Manufacturing (TSM) have been focusing on higher-priced chips that are more valuable to their businesses: cutting-edge chips, which employ the most sophisticated manufacturing processes or nodes, to manufacture.
Those chips power the latest phones, computers and cloud supercomputing. Firms including Apple (AAPL), Nvidia (NVDA), and Advanced Micro Devices (AMD) have been among those dishing out billions to reserve advanced nodes with Taiwan Semiconductor to produce chips.
On the other hand, chips made in older or less advanced manufacturing nodes are generally used in autos, networking hardware and industrial machinery, which are not as profitable for foundries. Those chips are at the back end of the production line, but that is beginning to change.
“The PC market is slowing down, which unlocks foundry capacity to other semiconductor requirements,” Davuluri says.
“Foundries are also trying to ramp up production capacity, but that’s a time-consuming process to bring on line,” he says. “The industry will get better, but certain portions will remain choked.”
Even so, the long-term story is bullish, Davuluri says, with the semiconductor industry learning how to harden against shortages.
“Chipmaking is highly concentrated in Asia,” he says. Businesses have been pouring money to move supply chains to other regions of the world. Taiwan Semiconductor, Samsung and (INTC) are working to expand capacity in the US.
The government may also unveil incentives for domestic semiconductor companies to increase production within the United States. One such measure, a roughly $52 billion bipartisan plan to fund improvements to semiconductor production in the US, is being reviewed. The House of Representatives and Senate have passed competing versions of the bill, but no compromise has yet been reached.
Automobiles
Autos have been ground zero for semiconductor chip supply chain problems related to the pandemic. That has contributed to a shortage of new cars, and caused a huge jump in the price of used cars.
European automakers have been crimped as the conflict in Ukraine, a major supplier of critical wiring systems for cars, forced shutdowns for companies such as Volkswagen (VOW) and BMW (BMW). Volkswagen was forced to close two of its factories in Germany as a consequence.
US Ford (F) and General Motors (GM) still fumbled circuit break underwritten to parts shortage earlier this year. Ford was forced to shutter production at its Flat Rock, Michigan, plant in late March due to a shortage of semiconductors and manufactures Mustang vehicles at the facility. Similarly, General Motors halted output at its Lansing Grand River assembly plant due to a “temporary parts shortage,” Reuters said.
Sector strategist David Whiston says there’s not much companies can do to offset costs in the short term, other than negotiate with suppliers. A chip now takes about half a year to make and deliver to the automakers, Whiston says.
“Whatever you can, you allocate to the highest-yielding vehicles, models.” “Companies do not anticipate much relief or improvement until the second half of 2022. It’s a gradual process. I think the worst is past, but it’s still bad.”
“The situation appears to be stabilizing. Total US light-vehicle inventory available for sale has been steady in recent months at over 1 million vehicles. As shortages persist, Whiston believes the industry’s supply of inventory hit bottom in September 2021, when inventories totaled 973,000 vehicles.
Industrials
Like many other sectors, industrial companies are counting on supply chain problems to ease in the year’s second half, yet “no one really knows,” says Joshua Aguilar, a senior equity analyst with the investment research firm.
That uncertainty has prompted companies to offer a broader range on earnings this year. At its investor day in March, 3M (MMM) provided no long-term targets, an unusual move, Aguilar says.
Inflation on inputs used for production is adding another layer to concern. As input prices increase, firms must charge more to compensate for realized losses due to inflation. This has been a problem for 3M too because it has many long-term contracts, Aguilar says.
Companies that have performed well in the inflationary environment to date include niche-market operators, such as electromechanical and electronic instrument supplier Ametek (AME), and those with strong branding power, such as electrical and power component supplier Hubbell (HUBB).
Labor availability is making it even worse for several firms, and has increased the backlog for orders.
“Sherwin-Williams (SHW) and PPG Industries (PPG) are missing earnings because they just couldn’t get the materials to sale,” says equity research director for industrials, Brian Bernard.
The question for industrials with backlogs is whether those orders will translate into revenue or if customers will ultimately cancel those orders, Aguilar says. However, he thinks that orders should remain because there is typically a big cost of failure if customers utilize substitute products but thinks that cash flows on those sales will be delayed.
Retail
Retailers, like those across the rest of the sectors, have also felt the pinch of supply chain issues, and they expect such issues to persist through the first half of the year and begin to subside in the second half of the year.
Retailers generally have varied exposure to supply chain disruptions, said Jaime Katz, senior equity analyst. There are still some big-picture matters in goods and labor transportation, however some firms have had a simpler time than others.
Companies with domestic supply chains like Bath and Body Works (BBWI) and William-Sonoma (WSM) have been able to ramp up manufacturing in the US and are largely insulated from international shipping delays, Katz says.
To remedy the situation, retailers have begun ordering stock earlier and earlier, in hopes of getting a longer lead time before they need to put things on the shelf, and so far, even as shipping costs have increased, some have been able to transfer those costs on to the buyer.
“The ability to pass through those cost increases [to consumers] has been fairly strong, benefiting from the fact that consumers’ overall economic health was in pretty good shape,” analyst Zain Akbari says.
For retailers that don’t typically sell as many higher-ticket items, such as Bath and Body Works, consumers can more readily absorb higher prices. For a furniture business like RH (RH), previously identified as Restoration Hardware, a worth hike of 10% could repel clients, Katz says.
But the cost of shipping goods is likely to hit smaller retailers harder, according to Katz.
“What’s the incentive for logistics providers to pull products away from companies like RH, which has only $2 billion in sales, to get them to the front of the line now they’re doing more logistics and ocean freight? Katz says.
In an effort to address that issue, some companies have begun moving manufacturing to plants that are closer to their end customers. The toymaker Mattel (MAT) poured $50 million into a manufacturing plant in Mexico, which is now its biggest factory in the world. The move echoes others by retailers as they seek to diversify their supply chains outside China something that predates the pandemic because of rising labor costs.
Big-box retailers are also moving to shore up their supply chains. Walmart (WMT) just announced plans to hike wages for truckers (and also train current workers to become drivers to improve internal logistics). Target (TGT) has tried to grow the number of its regional distribution locations, BJ's Wholesale Club (BJ) even purchased distribution centers and trucks.
Restaurants and Food
Escalating ingredient, labor and utility costs stemming from supply chain disruptions have been putting pressure on the companies in the restaurant industry.
The price of common cooking inputs, like meat, wheat and sunflower seeds used to make cooking oil, have shot up as the Russia-Ukraine war worsened supply chain disruptions. Wheat is up 70.4% in the past year and has more than doubled in the past three years. Soybean and corn prices are nearly twice as high as they were three years ago.
