Uncontainable: The Great Supply Chain Meltdown

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OK, consider this situation: You’re going to the supermarket to pick up a few things but there are problems. You can’t find your car keys and when you do, the car is blocked in by a large truck on the street and you can’t move. You finally get to the store but there are no shopping carts. However, an enterprising fellow at the entrance is raffling off the few carts that show up to the highest bidder. You eventually pay him through the nose to get one and fill it up to the brim. But the checkout lanes are stacked up to the back of the store and you basically wait…and wait…and wait. Finally, you check out, load the stuff in your car but when you get home there’s no place to park and you end up circling the block for hours trying to find a spot. You are exhausted.

[callout]Prior to the pandemic, the cost of leasing a container was generally in the $2500 to $3500 range; by the end of 2020 prices were approaching $10,000 and rising. As recently as the early spring 2021, importers were screaming about prices in the $12,000 to $15,000 range.[/callout]

Multiply that by about a million times and you pretty much have the situation that is happening in trying to get goods out of factories in Asia through the supply chain and into U.S. stores and eventually homes. It is beyond exhausting.

With demand for many consumer products at high levels and the American economy clicking along better than anyone dared to predict this time last year, the global supply chain has become a nightmare with no let-up expected until at least the end of the year.
How in the world — literally — did we get here?

Holy Modal

For those of you who missed out on some history, the container shipping business is more accurately called the Intermodal Transportation System. It was put into place in the early 1960s when companies started putting goods into 20- and 40-foot containers at the place of manufacturing — increasingly in Asia — and sending those containers on flatbed trucks to ports. There, they were loaded into ginormous ships — which only got evermore ginormous in the six decades since — where they were stacked up and then shipped across the ocean to U.S. ports, usually in California, South Carolina and Georgia. The containers were then unloaded by giant cranes and placed on another set of flatbed trucks or on railcars and transported to warehouses, distribution centers and retail store loading docks. And this happened thousands of times a day, every day, every week and every month for the past 75 years.

Incidentally, if you were wondering why not dock in New York City, once the nation’s leading shipping port, it’s because with fewer workers needed to unload these ships, labor unions and others fought putting container ports in the city because it required too few workers. So, the business went to Port Newark across the river and eventually elsewhere.

The dominance of Asia as the source of supply further solidified Long Beach and Oakland, CA as the preferred choice for Pacific shippers. The Panama Canal was widened several years ago to allow Asian-based ships to service the East Coast hubs of Charleston, SC, Savannah, GA and to a lesser extent, Norfolk, VA — and yes, even, Newark, NJ. Manhattan piers became urban parks, golf driving ranges, bowling alleys and tourist attractions with the Circle Line, Hudson riverside bars and restaurants and the Beast speedboat thriller ride,

Transport Retort

And it all worked beautifully…for the most part. There were occasional strikes at the ports (In the U.S., never China). Weather caused problems from time to time. Epidemics in Asia slowed things down, if you remember the Bird Flu and Swine Flu. And sometimes politics would rear its ugly head and muck up the works.

But generally, as an efficient, universally adapted and productive system, the container-based supply chain allowed for massive amounts of goods to be moved around the world and enable giant American mass merchants and others to sell merchandise at prices that often bordered on the ridiculous.

Then came the pandemic, a once-in-a-business-lifetime (at least we hope) occurrence that turned the entire system not just upside down but spinning around and around as it never had before. First, Covid hit the factories in China, shutting them down and cutting off the supply addiction the American economy was based on. Then the disease turned up in the U.S. and by mid-March 2020, the nation came to a virtual halt, outside a few isolated places like 1600 Pennsylvania Avenue.

American importers and retailers cut off their orders and American businesses stopped paying for goods already in the supply chain, refusing acceptance of merchandise already on their loading docks and canceling any new buying for the foreseeable future.

In Asia, where the pandemic was starting to get under control by the spring of 2020 – at least according to the Chinese government — this was not welcome news since factories were starting to fire up again, albeit at reduced capacity. Too much stuff with no place to go became the overriding concern.

But then the American consumer said, wait, we can’t buy anymore? The government just gave us a whole bunch of money, we’re not traveling anymore or spending big bucks on eating out, seeing Taylor Swift in concert or buying clothing since we’re now stuck at home. What’s a shopper to do?

Home Sweet Home

And thus, was born the incredible home run. Americans began spending exorbitant amounts of money on fixing up, redecorating and generally just making where they live nicer. They bought kitchen appliances since they were doing a lot more cooking. They bought new furniture and big TVs since they were glued to Netflix. They bought barbecues and outdoor dining sets since they headed for their backyards and patios rather than resorts and beach clubs.

It wasn’t just home products either. Cars, food, CPG products and drugs that came from overseas, precious metals, computer chips and sweatpants were getting scooped up faster than anyone could have imagined.

But remember those factories back in Asia? And the ports on both sides of the oceans? And the out of work truck drivers, train engineers and crane operators? Workers were calling in Covid-sick by the hundreds of thousands and it didn’t take long for demand to start outstripping supply in increasingly bigger numbers. Too little stuff with too many places it was supposed to go was now the overriding concern
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As much as the ports had reduced capacity, labor shortages were rampant throughout the supply chain and factories were still not back up to speed as 2020 began to wrap up, the true bottleneck became those big metal boxes, the containers…remember the containers? Prior to the pandemic, the cost of leasing a container was generally in the $2500 to $3500 range depending on how many you committed to and who you knew. Prices had always zigzagged over the years, even doubling — and more — at times but they were generally able to be managed.

Not anymore. The number of containers had been controlled for years by big shipping companies and they often ended up in junk yards in this country because of our pathetic exporting record. It was cheaper to just build another container over there than ship an empty one back from here. Fewer containers on fewer ships with less capacity to handle them: You do the math. Prices for individual containers began to climb…and then they really began to climb. By the end of 2020 prices were approaching $10,000 and rising. As recently as the early spring importers were screaming about prices in the $12,000 to $15,000 range. If only they knew how good that was. A big mother ship blocking the Suez Canal and severe weather causing havoc in the Panama Canal didn’t help. And oh yeah, one more price factor: three Chinese companies supply 80 percent of the world’s shipping containers, and we know those Chinese communists are the best capitalists on the planet.

Ships of Fools

At a recent industry trade show for the gift and home furnishings sectors, vendors who bring in product from China said, almost matter-of-factly, that they were now paying between $18,000 and $20,000 per container. (India was a little less but not by much.) Some were buying them through back channels and connections nobody wanted to talk about for even more…and that still didn’t guarantee you’d actually get one if somebody came along and outbid you.

What were retailers doing about it? Home Depot said it took possession of a container ship that it would use exclusively, although it wasn’t clear if they actually bought it or just leased it. And even owning your own ship doesn’t do you much good if the thing is sitting 50 miles out at sea because it can’t get an unloading slot at overloaded ports.
Some companies were raising prices, generally in the mid-single-digit range, which is one of those things that is scaring those concerned about inflation. Others were putting surcharges on shipments, also generally in the three to eight percent range, which had the same effect though might be easier to swallow by buyers hoping these were one-time charges rather than permanent increases. (Spoiler alert: they are not.)

Of course, a lot depended on what you were selling. If you were bringing in big hunks of furniture, you might only get 100 living room sets in a container so it could mean a sofa price would be jacked up $100 by the time it hit retail shelves. A company selling knives and forks could have tens of thousands of pieces in a container and the pricing premiums might work out to 25 cents a spoon. Generally, most companies were saying they would need to raise prices up to 10 percent to cover increased freight costs.

Alternatives? Not so much. Smaller, more expensive items like iPhones and jewelry are often air shipped. But with international flights cut back, so too was freight capacity, usually in the soft underbelly of all those 787s and Airbuses. Domestic manufacturing, the great cure-all of some politicians, is very much a pipedream…without the pipe. Few if any other investors are willing to invest the capital needed to build massive manufacturing facilities that won’t come online for 18 to 24 months… when the supply chain mess may be just a memory. A few smaller-scale production operations have started up over the past year or two — often triggered by the disastrous Trump-era tariffs that failed to achieve any of their goals — but they are tiny in comparison to the bigger picture.

The Answer My Friends…

It’s not blowing in the wind. It’s more likely blowing up purchasing patterns. In the laws of supply and demand, one side has to budge to balance the other. Nobody is expecting any real meaningful return of a sufficient supply-side until at least the first quarter of 2022. And even that is based on a mix of possibly flawed assumptions and wing-and-a-prayer wishful thinking.

So, that leaves demand to get the balance right. And we’re already starting to see some slight ticks down in demand for some consumer products like home furnishings, though it’s marginal and certainly not yet a trend. Demand for apparel, beauty, travel and vacation goods, and the other trappings of the return to semi-normalcy is going to take up any slack caused by a slowdown on the home side so, any overall relief is suspect.

But this is the one thing clear about the supply chain quagmire: It will take a softening in the overall American economy for the balance to start to right itself. And that’s not likely until at least next year most people say. In the meantime, forget about investing in Bitcoin, following Reddit for stock tips or cashing in those bonds you’ve been hoarding under the bed. Get out your metalworking tools, fire up the acetylene torch and get to work…building containers.

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