Supply chain disruption in Europe, UK and US: How businesses can mitigate risk

First in a series of six episodes exploring some of the issues companies face when doing business in a global landscape, this episode covers issues in the supply chain and how business can mitigate associated risks.

Read the full article:
https://www.womblebonddickinson.com/us/insights/articles-and-briefings/supply-chain-disruption-europe-uk-and-us-how-businesses-can

More insights from our Growing Global series:
http://explore.womblebonddickinson.com/growing-global

Learn more about the authoring attorneys:
James Ignotus (bio)
Jeff Golimowski (bio)

Transcript

Welcome to Womble Perspectives, where we explore a wide range of topics, from the latest legal updates to industry trends to the business of law. Our team of lawyers, professionals and occasional outside guests will take you through the most pressing issues facing businesses today and provide practical and actionable advice to help you navigate the ever changing legal landscape.

With a focus on innovation, collaboration and client service. We are committed to delivering exceptional value to our clients and to the communities we serve. And now our latest episode.

In today’s episode, we’re sharing a few observations from an article published as part of our growing global thought leadership series. Businesses today face tremendous uncertainties brought on by a number of dynamic factors and, for the next six Saturdays, we’ll share insights and practical legal guidance for business leaders navigating global business challenges.

You can learn more about our growing global series in the show notes but, for now, let’s zero in on some of the factors contributing to the global supply chain issues of the last few years.

After a long period of economic and political stability, the world entered an era of relative turmoil with the onset of Covid-19. Ripples caused by this and subsequent events have been acutely felt by businesses, especially where supply chains are concerned.

With the unexpected closure of ports and the scarcity of crucial materials, a chain reaction of issues has emerged, posing complex problems for businesses.

From the war in Ukraine to the energy crisis to natural disasters, we’ll break down some of the issues businesses are facing and how companies can adjust to these challenges and find new ways to adapt.

While the worst days of lockdowns and COVID-related supply chain disruptions seem to have passed, the enduring effects of the pandemic continue to impact businesses in Europe and the United States. China's relaxation of its "zero Covid" policy has eased some of the disruption in Europe, but challenges persist.

In Europe, the pandemic's aftermath includes a reduced workforce due to "long Covid" affecting workers and early retirements that have strained supply chains, leading to a decrease in the productive capacity of European economies.

China's "zero Covid" policy caused significant disruptions in supply chains across the globe. The early closure of factories disrupted the flow of finished goods and components. Even three years later, a third of supply chain leaders still identify a shortage of critical parts as a major issue affecting their businesses.

A lesser known but equally important consequence of the initial Chinese shutdowns is the global shortage of shipping containers. As goods stopped moving during the shutdowns, ocean shippers reduced the number of vessels at sea. When China reopened, containers headed for Europe and the US but, due to ongoing restrictions, containers bean accumulating at destination ports instead of returning to manufacturing sites. This shortage has further hindered supply chains from getting back on track and created a lasting impact that many supply chains are still struggling to recover from.

Just as it seemed things were calming down, the supply chain was again disrupted on February 24th, twenty twenty two with Russia’s invasion of Ukraine. The conflict has caused substantial reverberations across supply chains in Europe with manufacturing and construction sectors bearing the brunt of the impact. 

Indeed, prior to the war, Ukraine was a significant industrial player with strong steel production capabilities. Now, the destruction of critical infrastructure and redirection of resources for military purposes have led to a sharp decline in Ukrainian exports. Steel exports alone saw a staggering 60% drop in January twenty twenty three compared to the previous year. 

The war has also caused significant disruption in Russia, triggering shortages across a variety sectors. Commodities like softwood, copper, aluminum, bitumen, and asphalt, all of which rely heavily on Russian output, have been affected. Additionally, key metals such as platinum, nickel, and titanium, heavily imported from Russia by the US, are in short supply due to international sanctions. 

One unexpected impact of the war is seafarer shortages. Considering that Ukrainians constitute around 4% of global seafarers, the conflict has prevented many Ukrainians from fulfilling contracts, subsequently reducing the availability of seafarers. Moreover, around 94 vessels, including cargo and grain ships, became trapped in Ukrainian ports at the war's onset. This situation has exacerbated the scarcity of merchant shipping capacity.

In this complex and evolving scenario, the war's influence on supply chains across Europe has been profound. The challenges stemming from Ukraine's reduced productive capacity, commodity shortages due to sanctions, and seafarer deficits have become defining aspects of the post-war supply chain landscape.

Yet another link in the chain: the energy crisis.

Europe's energy policy over recent years has left it vulnerable to shocks. For example, Germany relied on natural gas for 27 percent of its energy, of which more than half was sourced from Russia. Not only that, but across the continent as a whole, Russia supplied approximately a third of Europe's oil and 35 percent of its natural gas.

When the war in Ukraine started and Russia was hit by sanctions, energy prices in Europe skyrocketed. Combined with the fact that other oil-producing nations decided to not increase supply to fill the gap, the result was huge cost inflation. Coupled with supply chain issues, some producers suspended production or went out of business altogether.

Hopefully, the worst of the energy shock may be passing. That said, given the levels of geopolitical uncertainty, future shocks cannot be ruled out.

A series of natural disasters has also exacerbated supply chain tensions in recent years. By way of example, the European summer of 2022 saw record breaking temperatures and very little rain. In Germany this led to the closure of the Rhine River, a key transport conduit, because its water level was so low. As climate change accelerates, it is anticipated that such events will become more common and will need to be factored into businesses' planning.

And finally: Brexit. After nearly 50 years of membership, the UK's supply chains were deeply intertwined with the European Union's. For example, the EU provides around 60 percent of imported materials in the UK construction sector and, conversely, the UK construction sector was reliant on the EU for skilled labor.

When the UK left the EU, and with it its single market and customs union, goods and services became subject to trade barriers. It’s not yet clear what the long-term impact of Brexit will be on supply chains but in the short term, it compounded some of the problems highlighted above.

Unfortunately, these supply chain issues, combined with generally challenging economic conditions, have increased the risk of insolvency, which has the potential to exacerbate already strained supply chains.

Despite what we’ve explored so far, it’s not all doom and gloom. With so many shocks and uncertainty in recent years it is impressive that so many businesses have managed to maintain the flow of goods and services that we rely on. If anything, these issues have exposed how quickly the supply chain can be affected, encouraging businesses to think about their strategies when it comes to reducing their exposure to risk.

For a more detailed exploration of the issues discussed in today’s episode, along with suggestions on how to manage supply chain risks from a legal perspective, follow the link in the show notes. We’ve also provided a link to the Growing Global section of our website, which features articles on all facets of doing business in the global marketplace.

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Thank you for listening to Womble Perspectives. If you want to learn more about the topics discussed in this episode, please visit The Show Notes, where you can find links to related resources mentioned today. The Show Notes also have more information about our attorneys who provided today's insights, including ways to reach out to them.

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