Impact of Covid - 19 Crisis on Logistics Sector



Sector Background

Logistics companies by providing various services which includes multi - modal transportation, freight forwarding, warehousing and inventory management, connect firms to markets. These firms are important for global manufacturing that is both complex and multilocational, for example Apple's iPhone, that uses components from 200 suppliers in more than 40 countries. As a result of which, today's global value chains require greater efficiencies in the flow of goods among various countries. This can be achieved by outsourcing the logistics functions to third - party service providers which provide end-to-end solutions.

Better efficiency in this sector can stimulate economic growth in emerging markets as the cost of logistics as a percentage of GDP could be up to 25% in some developing countries.


Impact of Pandemic (Covid - 19) on the Sector

China (with Wuhan being the epicenter of the pandemic) was the first country that felt the impact of Covid - 19 pandemic due to the role it plays in global manufacturing. The impact of disruptions to manufacturing in China rippled through global supply chains. Shortage of truck drivers to pick up containers due to travel restrictions, Cargo being backlogged at China's major ports and cancelled sailings by ocean carriers. As a result of shortage of components from China, global manufacturing operations overseas too got impacted. Major industries around the world were affected.

Although by the end of February 2020, manufacturing picked back up, around 70% of large-scale industries started operations - a return to full production capacity seems to be unlikely in short term due to the spread of Covid - 19 to the trading partners of China. The trucking sector that carries more than 80% of country's goods signifies the effect of lockdown on Chinese logistics.

img

Covid - 19 pandemic, has led to lockdowns and border closures that restricted the movement of goods, to the rest of the world. Additional protocols that were introduced to ensure safety of workers contributed to bottlenecks of freight. For example, in India, there was shortage of truck drivers due to lockdown which resulted in over 50000 containers piling up in the ports of Kattupalli, Chennai and Kamajarar.

The impact on freight capacity can be seen in 3 key global transportation segments - land, ocean and air.

Ocean freight -

Chinese ports experienced a drop in total container volumes by 10.1% in the first five months of 2020. According to DHL, routes between Asia and Europe, the United States will continue to be affected due to weak demand. Also, additional blank sailings are expected to be faced by many ports.

img

Land freight -

Land transport has remained partially available globally due to roads being in operation, except for countries which had severe lockdowns. The capacity of trucking sector is strained due to additional demand for their services - especially for medical and food supply transportation - during lockdown and reduced employee availability which led to higher rates. Other sectors such as manufacturing, which require land transport, is generally not at full capacity due to lockdowns. Due to higher air cargo freight rates, blank sailings and longer transit time for trucks, the demand for rail services has grown.

Air freight -

Although, the volumes fell to 19% due to sharp reduction in passenger flights and drop in manufacturing in China, shippers and governments across the world turned to air cargo for essential goods. As a result of which, air freights rates have increased - some carriers are seeing delays too with increased congestion at airports. Higher air freight rates are supported by overall reduction capacity which is greater than the net reduction in demand.

img

The second demand shock would be economic recession. The complete effect of pandemic on global supply chains is not yet known. As per the IMF's prediction there would be a 3% contraction for global economy in 2020 and the expected recession will provide a second hit to the demand, thereby affecting logistics companies and demand for goods.

Already, supply chain disruptions and lockdowns are affecting logistics companies. Deliver delays, congestions and higher freight rates are expected due to operational constraints. But all segments won't get impacted equally. E-commerce companies are experiencing increased activities as consumers opt for online shopping of essentials, while those that serve other sectors would experience a downturn. The uncertainty would exert downward pressure on revenues.

* Severe impact on small players - Due to no backup, recovery plans or intermittent operational plan, small trucking businesses are being severely hit. This is further complicated by lack of technology combined with tools to follow health guidelines.

* Strong impact on top players - DHL and CEVA logistics declared Force majeure on all their contracts - a clause that allows contracts to be declared null due to acts of God or unexpected circumstances due to Covid - 19.

Air freight -

Although, the volumes fell to 19% due to sharp reduction in passenger flights and drop in manufacturing in China, shippers and governments across the world turned to air cargo for essential goods. As a result of which, air freights rates have increased - some carriers are seeing delays too with increased congestion at airports. Higher air freight rates are supported by overall reduction capacity which is greater than the net reduction in demand.

img


Response to the crisis

For the most part of the period, governments across the world have responded to the crisis by declaring ports, shipping and trucking services as essential - thereby exempting them from lockdown measures. For example, Exemption to movement of cargo, supply chains and transportation of essential commodities from lockdown rules was given by Indian Government. Most airports are open to cargo and closed for passenger flights which can be essential to the pandemic response. To address supply chain bottlenecks and facilitate clearances, closer collaboration between governments and third - party logistics have been essential.


img

* Alternative modes of transport - Creative alternatives are being used by many companies since the reduction of passenger flights has reduced airplane cargo capacity too. Charter flights to transport shipments have been used by companies such as DHL. Even repurposing of passenger aircraft for cargo has been done by some airlines

* New safety protocols - Some companies have introduced new safety protocols on social distancing in warehouses, disinfecting work places or providing protection equipment's in order to protect staff's health. These efforts come at a higher financial cost hence cannot guarantee outbreaks in warehouses.


Looking Forward

The recovery combined with long term impact of the pandemic on logistics may be affected by following factors -

* Increased dedicated air cargo capacity

* Technology and rise of E-commerce - Logistics is a sector that has been largely driven by technology. Firms with digital capabilities, that allow businesses to carry their functions online, provide cargo visibility and hence are at an advantage. This would require investments in technology such as Internet of Things (IOT), Cloud Computing, Automation and Data Analytics. In longer run, labor shortages may get reduced by robotics, drones and autonomous vehicles.

* Global value chains being reconfigured

* Increase in cargo inspections and cross border control protocols - Due to transmission of diseases, in longer run, logistics cost may increase due to tighter cross border protocols and controls.

* Prospects of recovery will vary by country - Logistics being diverse sector, the prospects of recovery will vary based on length of lockdowns and duration of economic crisis. Larger companies with better diversified businesses will be in a better condition to weather the storm.

By - Shivang Jitendra Khare

Copyright 2020, TJ Tyres. All rights reserved.

TJ Tyre...