Trade and supply chains: rough waters ahead – how can banks support their customers?

Global supply chains have seen disruption, shortages, and delays already for a couple of years. First, former US president Donald Trump's trade war with China changed the established rules of global trade. Then came the disruptions to production and shipping due to the Covid-19 pandemic and lockdowns, causing shortages and consequently inflation around the world. And finally came the war in Ukraine which will lead to structural changes to trade as we knew it.

Although supply chain bottlenecks are slowly improving, they remain fragile in their current state, and an interrupted weak link can easily lead to new setbacks. Stringent Covid-19-related lockdown measures adopted in China are keeping supply chains under pressure. The transportation industry is still suffering from a lack of equipment and personnel. Semiconductor shortage remains a problem, especially for the automotive industry. Additionally, high inflation has led to increased worker strikes for better wages and working conditions, exacerbating the current situation. Then, extreme weather events have also left their marks on supply chains and will continue to do so over the next couple of years. With less energy supply from Russia, especially European companies face a tough winter season.

While the supply side is slowly improving, the demand side is losing steam. The extreme rise in energy and food prices has worsened purchasing power and pushed consumer confidence numbers back to levels last seen during the depths of the Covid-19 and financial crises. Pent-up demand for travelling and other services has kept consumers spending so far, but that is likely to change over autumn. New Covid waves could strain activity and weigh further on demand. While the current backlog is enough to keep supply chains strained throughout the year, oversupply could re-emerge as an issue once demand drops off to more regular levels. With demand for goods retreating, transportation companies could face an oversupply of containers and fleet capacity next year.

Furthermore, trade flows would need to be significantly reshaped as market players that previously purchased commodities and goods from Russia look for alternatives, while other countries step in to benefit from discounts. This results in a new world economic order, being characterised by more ‘friend-shoring’ – trading relationships with countries that have long-standing relationships, cooperation and share similar values might become more valuable. Ethics may also become a more important consideration in trading. Rerouting, diversification in suppliers and or regions, more stockpiling, and inventory building will shape trade relations in the years to come.

What can companies do to increase resilience in their supply chain? And how can banks support their customers in this?

The automotive sector is a good example for the changes happening in supply chains since the sector has faced large setbacks because of the supply chain problems. The automotive value chain has been characterized by a strict just-in-sequence or just-in-time production. Although this has its benefits, e.g., by keeping inventory and thus costs low, it also has disadvantages since buffers are eliminated. In times when the supply chain is experiencing problems, manufacturers have trouble delivering on time. The semiconductor crisis has made this clearly visible. The high dependency on just a few companies producing the chips (foundries) has intensified problems for the automotive sector.

In these challenging times, companies can diversify their network of suppliers to increase resilience and to avoid single source dependency. Automotive companies, for example, are becoming creative to ensure delivery. Measures reach from prioritizing production of high margin vehicles, dynamic alteration of chosen extras to slightly increasing inventories and a reallocation to more local production. Yet, making changes in the supply chain is a time-consuming task. Here, a bank can help to secure at least the financing. Alternative ways of financing can offer solutions. Providing supply chain finance to support in times of recession can relieve business models and help companies bridge difficult times. Another way of helping companies is capital financing, by giving companies access to liquidity. For a bank it is important to understand and think along these client processes in order to find new solutions and create synergies together.

Authors: Inga Fechner, Senior Economist ING Deutschland, Jens Brokate, Vice President, Sector Coverage Automotive ING Wholesale Banking and Tom Groenewoud