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Written by: Sanjiv Tumkur
20/10/2021
From semiconductors to HGV drivers and CO2, supply-chain disruption has met an explosion in demand as the world emerges from the pandemic and pent-up household savings are unleashed.

After a period of earnings upgrades, as companies saw better-than-expected demand for their products, suddenly there are doubts as to whether they can even meet this demand.

That leaves earnings forecasts uncertain and share prices vulnerable. It’s complicated and the impact will vary widely between businesses and sectors. What should investors be looking out for?

Deficiencies in the availability of labour, transportation and components all seem to be contributing to a perfect storm for global supply chains.

Shortages of gas, chemicals, metals, lumber and semiconductors, among other products and components, are having a significant knock-on effect on other industries.

Freight rates have also risen sharply amid port congestion and labour shortages, while there is a lack of truck drivers across the US and Europe, leading to delays and higher transport costs. Companies are also struggling to hire, with job vacancies at record levels in both the US and UK.

Production challenges

Evaluating the risk to companies from supply shortages is complex and challenging — there are a number of factors to consider.

Some sectors seem to be harder hit than others. Shortages in semiconductors are particularly acute, which is making it difficult for companies in other sectors to produce their end products.

In the US, inventories relative to sales are at historically low levels. The sharp fall in the production of new cars, which remain stuck on the assembly line with no semiconductors to run them, is a notable example.

Location of supply chains has been an important factor, for reasons that would’ve been impossible to predict.

Supplies have been disrupted for Apple and Samsung because of factory closures in Vietnam, which is also where about 40%—50% of footwear sold by Nike and Adidas comes from. Nike recently lowered its revenue forecasts due to supply chain issues.

Companies with local suppliers may be less likely to be hit with higher transportation costs and Covid disruptions, although they do face the challenge of finding drivers. So, supply of lorry drivers aside, this may be one example of the benefits of reshoring.

Size can also be important. Larger companies are likely to have more purchasing clout and deeper or better relationships with suppliers. UK housebuilders are a good example. Whereas small and medium-sized builders are struggling to source key materials, such as roof tiles, cement and timber, the larger housebuilders have so far been able to manage the situation.

Self-sufficiency wins the day

Vertical integration has also proved to be an advantage in some instances. For example, some housebuilders produce their own tiles, bricks and timber, giving them greater security of supply. This operating model may not have been popular in the heyday of globalisation and free trade, but it’s proving to be good insurance against global supply disruption today.

Some of the businesses that continued to invest through the crisis also seem to be reaping rewards from the capital they spent by being better positioned to meet demand.

Companies who treat their employees better, for example by paying in full through the pandemic, may find it easier to recruit and retain staff and therefore manage labour pressures.

Lastly, a key consideration is how easy it is for companies to manage the higher costs they are facing due to supply constraints. The ones who can do this through operating efficiencies and their ability to raise prices without crimping demand will be better able to weather this supply disruption.

Some companies have contracts with customers that automatically enable them to pass on higher costs and some will be able to due to the strength of their products and competitive position. However, others may not have the same level of pricing power.

We will be keeping an eye on all of these factors as we navigate through this uncertain period of global supply chain disruption and look to the risks and opportunities that lie ahead.

Sanjiv Tumkur is head of equity research at Rathbones

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