How the global shipping crisis has impacted MSME traders
Global trade is a dynamic and fragile process that has been exposed to the unrelenting elements of the world economy. A lot is dependent on the shipping industry, which carries 80 percent in volume and 70 percent in value of the goods traded globally.
COVID-19 has impacted the shipping industry unlike anything before. It is not entirely correct to say that the issue was solely due to the pandemic. Still, the resultant stress on the global supply chain has exacerbated the problems that have always existed within the industry.
One of the groups impacted the most is MSMEs. Already reeling from the supply shock and slow growth in demand domestically, the global shipping crisis has deepened the impact.
We look at how this crisis came to be, the impact on the industry, and how we can expect a solution to evolve out of this situation.
The shipping crisis
The shipping crisis has been slowly evolving over the past 15 months, mainly due to the global slowdown and the varying degrees of recovery in different countries. Unsurprisingly, the two leading players involved are the US and China. Here’s a quick recap of how the crisis came about.
As COVID-19 hit last year, there were widespread shutdowns in ports alongside other industries across the globe. This was the first in a series of shocks that hit the shipping industry. The recoveries from the shutdowns differ from country to country. China bounced back relatively quickly, picking up from where they left off. It is responsible for 16 percent of the global exports, and 16.8 percent of those exports go to the US.
The US has been slow to recover, but consumption went up as people shifted to a work-from-home lifestyle. The result was that for every 100 containers shipped to the US ports, only 40 were sent back. The containers were stockpiled in US ports while China and other export-driven nations in Asia struggled to find containers.
The ports are also slower to process the incoming goods because of COVID protocols. The ever given getting grounded in the Suez Canal further added to the chaos. The net result is that shipping costs went up. The Drewry’s World Container Index, the composite indicator that shows the freight rates, shot up 300 percent to $6,727 per 40 ft container on average.
The impact on the MSME sector
The increased shipping costs have increased the burden on MSMEs in India, who are already struggling with cash flow issues and slow demand. The unavailability of containers and the increased transit time on the sea may limit an exporter’s ability to enter new markets, limiting its ability to grow, increase profits, and reinvest in the business.
Lower costs have always been the driving factor for MSME exports from emerging economies, especially to the US and Europe. Large and small retailers in the US rely on MSMEs for various supplies that stock their shelves. Increased shipping costs wipe away this cost advantage. While smaller retailers, who are more dependent on such products, are willing to share the cost, many large retailers refuse to share these costs, and the exporters are suffering. In the long run, it may be cheaper for these retailers to source locally, which might harm Indian exports.
With inflation driving up the cost of production, the failings of the internal logistics systems mean that MSMEs have to fight battles on many fronts --- from container availability to increased overheads to keep business functioning as usual.
What is the solution?
It is unclear how a solution might emerge, but there are some clear global and national policy measures required to fix the issue in the short and long term.
Fixing domestic issues is the first step and perhaps the one most in our control. The National Logistics policy, scheduled to be tabled in parliament this year, promises sweeping changes to the logistics infrastructure. The aim is to cut the logistics costs that stand at 13-14 percent of GDP to under 10 percent, in line with more developed regions. The network of terminals and ports and the infrastructure improvements will significantly increase the smoothness of the supply chain within the country.
Establishing a cold chain network, which is a requirement for vaccine supply, would aid the transport and storage of perishable goods, helping the MSMEs manage their inventories better despite the time delays. Incorporating predictive analytics and artificial intelligence (AI) would further help manage containers, trucks, and ships at various ports. This can cut down on the delays in finding containers for exports.
Other measures that provide relief for MSMEs, like duty subsidies or tax benefits, are needed if we are to see them survive the crisis. A more robust policy cover to prevent large retailers from exploiting the MSMEs is also a need of the hour.