October hit the financial markets like the Sichuan earthquake and many firms have proved just as vulnerable as the numerous buildings that crumbled across the cities of Sichuan. But unlike those buildings, the financial networks that these firms have built and/or utilize stretches across multiple borders as part of what is now a tightly woven, and yet expansive, mesh of highly integrated market economies. The Wall Street Journal illustrated this with the below map showing the impact on markets around the world:
Interestingly, and as Tom Barnett highlights, the impact has been focused primarily in countries that have "plugged-in" to globalization and world capital markets, developing their own idexes. The BRIC countries--Brazil, Russia, India and China--having been latest to the party, are arguably less resilient to such dramatic market fluctuations and this map shows the impact on them was greater. Those countries in gray obviously will feel the indirect, ripple effects to the degree with which they, their businesses, and their people had either invested in the impacted markets or received investment from the impacted markets.
The financial architecture that feeds supply chains is obviously tied into this woven mesh of integrated markets, so it is no surprise that businesses large and small would feel the impact of this dramatic system perturbation, as Tom Barnett would call it. During October, I discussed how this disruption may impact supply chains here and here, and specifically investments in supply chain technology. As tangible stories of these impacts have become public, online writers at other blogs have begun to comment and I want to point them out here.
On October 21, at the Trade and Logistics Asia blog, a post reports from a Bloomberg article on the impact to Asia ports and shipping lanes, noting that:
"...the arteries of world trade through which goods and commodities surged in the boom times, are starting to seize up as the financial crisis strangles demand. The Baltic Dry Index, a signpost of economic trends which tracks the cost of moving goods across the oceans, has set off alarm bells by plummeting 85 percent from its peak in May to a six-year low.
"Share prices of some major shipping companies, which haul bulk freight such as iron ore, coal and grains destined to be turned into manufactured goods, have fallen 50-70 percent in the past few months. "The global economic slowdown will push some shipping lines into bankruptcy," Marc Faber, a famed investor and editor of the "Gloom Boom & Doom" report, told AFP.
"Standard & Poor's also said this week that the Asian shipping market has suffered double-digit declines on the US-Asia route in June and July, as well as being hit with higher operating costs. The industry had been expecting an upturn after the Beijing Olympic Games ended and factories chugged back to life, after an enforced holiday to help improve air quality. But instead disaster struck on global markets.
"There are reports of idle vessels being put to anchor, and question marks over the many orders for new ships that were placed in brighter times, years ahead of expected completion dates. "Pain levels could be high for companies that agreed to pay 2007 top-dollar prices for dry bulk ships, or who agreed to pay high long-term charters," said an article in the Far Eastern Economic Review this month."
Later, on October 24, the same blog has cited more The Edge Financial Daily on the spread of the crisis:
"The intensifying credit crisis has spread to international trade with reports emerging of banks refusing to honour letters of credit from other banks, said Moody's Economy.com's economist Matt Robinson. "With reports of sellers' banks deciding they don't trust the financial institutions named in buyers' letters of credit have come alarming anecdotes of cargo ships being stuck in home ports.
""With ships not moving, stocks have been piling up and exporters have grown desperate for income from idle inventory. Importers of raw materials for production are also feeling the pinch as supplies dwindle," he said in a statement yesterday. Robinson suggested that this could lead to price distortions as demand - despite being subdued by slowing economic conditions - outstripped supply as shipments were delayed, while consumers also faced potential supply shortages as shipments of foodstuffs and grain lay stranded overseas."
As for specific countries, each has felt the impact:
"Robinson said Japan recorded its first-ever seasonally adjusted monthly trade deficit in August, as demand for high-tech electronics and motor vehicles by US and European consumers plummeted. He said South Korea had recorded a string of trade deficits this year - a sharp turnaround from historical results - while the trade ledger in neighbouring Taiwan had been in deficit for two of the past three months.
""Singapore has slipped into recession. Its monthly exports have fallen by double digits compared with shipments a year earlier. Declining commodity prices for some of Asia's key commodity exporters, including Malaysia and Indonesia, aren't helping their trade balances either. "Meanwhile, growth of the giant Chinese economy has been humbled by the deteriorating external environment," Robinson said. "Most worrisome for Asia's export-oriented economies, global shipping has been hit as exporters and importers struggle to secure letters of credit," he said."
As the report states, the letter of credit (L/C) system (financial architecture) is crucial to the entire balance of trade:
""With the credit crisis causing banks to shy away from lending to one another for much longer than overnight, there have been reports of banks refusing to honour letters of credit from other banks. Banks have also tightened lending conditions considerably by imposing more onerous requirements on importers and exporters before issuing letters of credit," Robinson said, adding that this seemingly esoteric issue could have serious implications for global trade.
""The whole global trade production line relies on letters of credit. No letters of credit, no transactions - and no transactions mean no international trade.""
The Asia Business Blog preceded the above articles with some great questions:
"Companies completely dependent upon product purchased overseas by means of letters of credit could be badly affected if L/Cs will not issue. Very few will purchase product from China T/T and who will ship D/P? Primarily self financed manufactured goods (not many of those, one expects) and domestic manufacturers may be somewhat better off.
"One would expect effects to be seen at American and EU factories dependent upon foreign parts and retail stores within a matter of weeks. What possible effects? fewer imported products? increased difficulty of obtaining product? Higher prices, if demand remained steady? Production ramped up in the US and scaled down in China?"
In the meantime, 3PLWire notes that shipping companies are trying to slash capacity to bring operating costs down to current demand levels. Of course, the entire breadth of a company's supply chain architecture is going to be put under pressure as each architecture is interdependent with each other. Companies will rely on the experience and wisdom of their supply chain managers to know where to make sacrifices, cut back and at the same time build for the future. The worst of the financial storm may have passed, but like the tsunami of 2004, its after-effects will be felt for at least the next few years to different degrees around the world.
UPDATE: For more, see the below sites:
- All Roads Lead to China: Ripples of the Global Financial Crisis in China
- Far East Economic Review: How Low Will Asia Go?
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