Daily Management Review

Attacks On Red Sea Shipping Put Stress On China's Exporters As Expenses And Delays Rise


Attacks On Red Sea Shipping Put Stress On China's Exporters As Expenses And Delays Rise
The viability of Chinese businessman Han Changming's trade operation in the eastern province of Fujian is in jeopardy due to disruptions to Red Sea freight.
Han, who buys off-road vehicles from Europe and exports Chinese-made automobiles to Africa, told Reuters that the cost of transporting a container to Europe has increased to almost $7,000 from $3,000 in December, when attacks on ships by Yemen's Houthi movement, which is associated with Iran, escalated.
"The disruptions have wiped out our already thin profits," said Han, adding that higher shipping-insurance premiums are also taking a toll on Fuzhou Han Changming International Trade Co Ltd, the company he founded in 2016.
The disruption of one of the busiest shipping routes globally has revealed how susceptible China's export-driven economy is to supply bottlenecks and external demand shocks. Premier Li Qiang stressed the need of maintaining "stable and smooth" global supply chains in a speech on Tuesday at the World Economic Forum in Davos, without making any explicit mention of the Red Sea.
In an effort to lessen the effects of the interruptions, some businesses, including the American company BDI Furniture, have stated they are depending more on factories in nations like Vietnam and Turkey. This is in addition to recent efforts by Western nations to lessen their reliance on China in the face of geopolitical unrest.
The risk that other businesses would reevaluate their de-risking plans and perhaps decide to move production closer to home—a practice known as "near-shoring"—is what China is currently facing.
"If it's permanent, and it could be permanent, then the whole mechanism will be readjusted," said Marco Castelli, founder of IC Trade, which exports Chinese-made mechanical components to Europe. "Some (companies) may also consider moving more production to India, which is one week closer to Europe. Companies need to reevaluate everything."
Additional interruptions in the Red Sea would put additional strain on China's already fragile economy, which is battling a housing crisis, feeble consumer demand, a declining population, and slow global development.
Han stated that 40% of his total business comes from trading with Europe and Africa, and that in order to keep his company solvent, he has been pleading with suppliers and customers to pick up part of the extra costs. According to him, several orders had shipping delays of up to several weeks.
For some businesses, the interruptions are made worse by the fact that many are juggling logistics in the lead-up to Lunar New Year in February, when nearly all Chinese factories close and 300 million migrant workers take time off, leading to a mad rush in the weeks before to purchase supplies.
Vice President for Supply Chains and Operations Mike Sagan of KidKraft, a manufacturer of wooden toys and outdoor play equipment located in Shenzhen, claimed that many of his European customers are slamming on the brakes and telling him to "hold it, don't ship anything."
"A lot of suppliers, they're screaming about money today," said Sagan, whose company supplies retailers including Walmart and Target.
The snowball impact on smaller suppliers with narrow margins, who would be among the last to receive payments but are essential to the supply chain, is a concern for larger firms, he said.
Due to attacks by militants from Yemen's Houthi group on ships in the Red Sea, some ships are rerouting to a considerably longer East-West route along the southern tip of Africa, interrupting maritime trade through the Suez Canal.
Due to attacks by militants from Yemen's Houthi group on ships in the Red Sea, some ships are rerouting to a considerably longer East-West route along the southern tip of Africa, interrupting maritime trade through the Suez Canal.
Rerouting ships around the Cape of Good Hope from the Red Sea, the fastest route from Asia to Europe via the Suez Canal, can add two weeks to shipping timetables. This reduces the capacity of containers globally and disrupts supply chains since it takes longer for ships to return to ports to reload.
This most likely indicates delays for products that were supposed to hit Western markets in April or May. According to BMI, an industry research group, some logistics companies have already reported a container shortfall at China's Ningbo-Zhoushan port, which is among the busiest in the world by cargo volume.
China mostly ships its commodities westward via the Suez Canal, accounting for about 60% of its exports to Europe, according to the Middle East Institute, a think group with headquarters in Washington.
Yang Bingben, whose company, based in Wenzhou, the industrial capital of eastern China, manufactures industrial-use valves, reported this week that a client in Shanghai reduced an order for 75 valves, which were to be assembled into huge machinery and shipped overseas, to 15 due to rising freight costs.
"The impact is huge," said Yang, adding that he had prepared raw materials that could not be returned because they had been processed. "It's like I received an order that makes me lose money."
Yang says he can't promise pay because his employees are paid according to the quantity of work they complete, so he is now reevaluating his staffing needs for this year.
"If I don't have enough work to give them, I'm afraid they won't be able to make a living."
Guangzhou-based commodities forwarder Wei Qiongfang reported that certain suppliers in southern China were squeezing manufacturers' stocks by postponing shipments of lower-value items.
Businesses that depend on just-in-time delivery or that must frequently replace their inventory are particularly affected as once-predictable trade conditions grow more uncertain.
Castelli added that another problem is that factories aren't paid until the products are delivered to their intended location.
"So if their payment is delayed, they can't pay their suppliers, they can't pay their workers," he said. "China is so successful in the global market because they work with tiny margins: when you have volume, the money rolls in; when the money stops coming, you have a big problem."
Gerhard Flatz, managing director of luxury sportswear company KTC, is worried that some businesses struggling with declining margins may fail in Dongguan, a city in the Pearl River Delta.
"So, they are struggling, and now there is another logistics crisis. You know, at some point many will have to shut down," said Flatz.