Shanghai/Beijing, Jan 19 (The Street Press) – Chinese businessman Han Changming, who runs a trading company in Fujian, is facing a serious challenge due to disruptions in Red Sea freight. Han, who exports Chinese cars to Africa and imports off-road vehicles from Europe, revealed that the shipping cost for a container to Europe has skyrocketed from $3,000 in December to around $7,000. This increase is linked to heightened shipping attacks by Yemen’s Iran-aligned Houthi movement, putting a strain on his business survival.
“The disruptions have wiped out our already thin profits,” expressed Han, highlighting the additional burden of increased shipping-insurance premiums on his company, Fuzhou Han Changming International Trade Co Ltd, established in 2016.
The breakdown in one of the world’s busiest shipping routes reveals China’s export-driven economy’s susceptibility to supply disruptions and external demand shocks. Premier Li Qiang, in a speech at the World Economic Forum in Davos, underscored the importance of maintaining “stable and smooth” global supply chains, though not specifically mentioning the Red Sea.
Certain companies, like BDI Furniture in the U.S., are increasingly turning to factories in countries like Turkey and Vietnam to lessen the effects of disruptions. This aligns with recent trends in Western nations aiming to decrease reliance on China due to geopolitical tensions.
China now faces the risk of other companies adopting a similar de-risking strategy, potentially considering “near-shoring” by moving production closer to home.
“If it’s permanent, and it could be permanent, then the whole mechanism will be readjusted,” expressed Marco Castelli, founder of IC Trade, emphasizing the potential permanence of the disruptions. He added, “Some (companies) may also consider moving more production to India, which is one week closer to Europe. Companies need to reevaluate everything.”
Continued disruptions in the Red Sea would compound challenges for the Chinese economy, already grappling with a property crisis, subdued consumer demand, a declining population, and slow global growth.
With Europe and Africa trade constituting 40% of Han’s total business, he revealed that he’s urging suppliers and customers to share the added costs, striving to sustain his company. He noted that shipping times for certain orders faced delays of several weeks.
Adding to the struggle, these disruptions coincide with a logistics challenge before the Lunar New Year in February. As around 300 million migrant workers take leave, and nearly all factories in China close, there’s a rush in the preceding weeks to ship goods, intensifying the challenges for many companies.
Mike Sagan, the vice president for supply chains and operations at KidKraft in Shenzhen, expressed that numerous European customers are hitting the brakes, instructing, “Don’t ship anything, hold it.” Sagan, whose company provides retailers like Walmart and Target, highlighted the financial strain faced by many suppliers, noting, “A lot of suppliers, they’re screaming about money today.”
He underscored a concern for larger manufacturers regarding the potential snowball effect on smaller suppliers with narrow profit margins. These smaller suppliers, critical to the supply chain, could be among the last to receive payments, creating a ripple effect in the industry.
Rerouting vessels from the Red Sea, which is the shortest route from Asia to Europe via the Suez Canal, around the Cape of Good Hope can extend shipping schedules by two weeks. This not only reduces global container capacity but also disrupts supply chains as it takes longer for vessels to return to ports for reloading.
These changes likely lead to delays for goods scheduled to reach Western shelves in April or May. Some logistics companies are already reporting a container shortage at Ningbo-Zhoushan port in China, one of the world’s busiest by cargo tonnage, according to BMI, an industry research firm.
The Suez Canal serves as a vital route for China’s westward shipments, including approximately 60% of its exports to Europe, as highlighted by the Middle East Institute, a Washington-based think tank.
‘HUGE’ IMPACT
Yang Bingben, whose company manufactures industrial-use valves in Wenzhou, eastern China, shared the significant impact of soaring freight costs. A client in Shanghai recently reduced an order for 75 valves to 15 due to these escalating expenses.
Expressing the gravity of the situation, Yang mentioned having prepared raw materials that cannot be returned because they were already processed. He likened the experience to receiving an order that results in financial losses. Now, Yang is reassessing his staffing needs for the year, expressing concern about guaranteeing salaries for his workers who are paid based on the volume of work. He fears that without sufficient work, they may struggle to make a living.
Wei Qiongfang, a freight forwarder in Guangzhou, southern China, highlighted how some suppliers are postponing shipments of lower-value goods, adding strain to manufacturers’ stockpiles. The uncertainty in trade conditions is particularly challenging for companies dependent on just-in-time deliveries or those requiring frequent stock changes.
Marco Castelli pointed out another issue, emphasizing that factories do not receive payment until goods reach their destination. This delayed payment system further complicates the financial challenges faced by manufacturers dealing with disruptions in shipping and trade.
“So if their payment is delayed, they can’t pay their suppliers, they can’t pay their workers,” remarked Marco Castelli, highlighting the vulnerability of China’s successful global market approach, which operates on slender profit margins. He emphasized that when the money stops flowing in, significant problems arise.
In Dongguan’s Pearl River Delta city, Gerhard Flatz, managing director of premium sportswear manufacturer KTC, expressed concern that companies facing shrinking margins may face closure. He noted the current struggle compounded by the logistics crisis, suggesting that many businesses might have to shut down at some point due to these challenges.
