The end of ‘just in time’? Asia rejigs supply chains post-Hormuz

How many crises does it take to change the way the world trades? For Asia, the answer appears to be three. First Covid closed the factories that fed the logistics networks, then Russia’s invasion of Ukraine choked off Black Sea grain exports and sent energy prices spiralling. Now, the US-Israel war on Iran may have hammered the final nail in the coffin of “just in time” supply chains that some economists say are no longer fit for purpose. “Taken together, they show that serious disruption is now a regular event,” said Jakir Ahmed, an economist and research analyst at industrial data firm IbisWorld. For governments and businesses once wedded to the mechanics of frictionless globalisation, who saw Covid as a once-in-a-generation anomaly and the Ukraine conflict as someone else’s problem, Hormuz left little room for denial. “The lesson has sunk in,” agreed Shay Wester, director of Asian economic affairs at the Asia Society Policy Institute. “Disruption is a recurring feature of the trade landscape rather than an exception.” Each of the three shocks struck slightly differently, but their effects compounded, Ahmed said. While Covid delivered a supply-side hammer blow, closing factories, causing container shortages and sending shipping rates surging, Ukraine was an energy and food shock. The Iran war, meanwhile, not only disrupted Gulf energy flows but also reignited Houthi attacks in the Red Sea – first launched in response to Israel’s war in Gaza – threatening two of the world’s most important maritime chokepoints at the same time. “One of the biggest takeaways” from the past half decade, according to Shay, is that energy security and supply-chain security are “closely intertwined and cannot be treated as separate issues”. As a result, analysts say businesses can no longer presume that commercial cargoes will be able to traverse key maritime chokepoints unmolested. “What moves through the Strait of Hormuz is not only oil and gas, but also inputs for plastics, fertiliser, petrochemicals and other critical supplies used across Asian production networks,” Shay said. And Hormuz is not alone. The Bab el-Mandeb Strait at the mouth of the Red Sea – the gateway between the Indian Ocean and Europe via the Suez Canal – is similarly exposed to geopolitical instability. So, too, are the straits of Malacca and Taiwan. The uncomfortable truth emerging is that Asia, a region “optimised for efficiency and lowest cost” as Wester puts it, may have to give up on business as usual. Dealmaking time The dawning realisation that instability and conflict were becoming the new normal of geopolitics has led to a “wave of cooperation efforts”, according to Wester. Japan unveiled its US$10 billion Partnership on Wide Energy and Resources Resilience in April to bolster energy security and protect regional supply chains. In May, Singapore and New Zealand signed a binding pact to sustain essential goods flows. Later that same month, Asean moved to finalise a long-stalled fuel-sharing framework. Also in May, Japan and South Korea agreed to deepen cooperation on crude oil and liquefied natural gas stockpiling and product swaps. Australia, meanwhile, has sought to position itself as both a renewables leader and a critical minerals supplier to a region desperate to diversify. These are not one-off measures. Even after the recent US-Iran ceasefire, Malaysia and Indonesia have moved to lock in Russian oil supplies, spotlighting how the recalibration has taken on a momentum of its own. Across the region, “logistics security will increasingly be managed in capitals and boardrooms”, said Luyi Geng, senior analyst at IbisWorld. “Companies are expected to carry higher inventory, qualify more regional suppliers and accept elevated freight and insurance costs as the price of stability,” while governments were “moving to treat logistics and energy security as strategic infrastructure”, he said – a formulation that might well have seemed alarmist just a decade ago. The end of efficiency? For businesses, the shift away from “just in time” supply chains was already under way. Companies had been diversifying supply chains away from single-source dependencies, expanding warehousing capacity at key transshipment hubs like Singapore, pre-positioning stockpiles of manufactured goods in locations closer to destination markets such as Turkey, and accelerating “China plus one” manufacturing strategies into Vietnam, the Philippines and beyond for some time now. Meanwhile, containership operators are widely expected to continue routing around Africa rather than risk Hormuz or Bab el-Mandeb until the Middle East stabilises – a decision that adds cost, time and carbon output to every shipment. The US-Iran conflict is thus expected to “lock in a more costly but more resilient logistics model for Asia and the rest of the world”, according to Geng, one in which backup routes, alternative suppliers and reserve stocks become default assumptions rather than contingency plans. He said the Hormuz crisis had pushed carriers, shippers and insurers to treat single-chokepoint exposure as “a structural risk rather than a temporary shock”. Such a reclassification carries with it lasting consequences for how global trade is priced and planned. Yet the just-in-time model is not about to be abandoned entirely and those predicting its imminent demise may be overstating the case. Kathy Liu, vice-president of global sales and marketing at Taipei-based logistics provider DimercoExpressGroup, points out that many retailers are still resisting inventory build-up, wary of storage costs and uncertain consumer demand. In the sectors that matter most to Asia’s economic future, such as AI infrastructure, semiconductor equipment and pharmaceuticals, she said the operative logic was neither “just in time” nor “just in case”, but what Liu called “just as soon as possible”. This was the priority, she said, “because supply remains constrained and delays can have significant business consequences”. The ambition, in other words, is a hybrid form of supply chain that can retain lean economics in stable conditions while carrying enough redundancy to absorb shocks. The goal is not to replace just in time entirely, but to make supply chains more resilient Shay Wester, trade and foreign policy analyst “Firms can’t abandon efficiency and price will always matter,” Wester said. “The goal is not to replace just in time entirely, but to make supply chains more resilient when the next disruption comes.” Finding new suppliers, renegotiating contracts, adjusting shipping schedules – none of this would be cheap or easy, said IbisWorld lead finance analyst Joseph Maher. “Companies can’t switch routes overnight,” Maher emphasised. Until new supply chains bed in, businesses are likely to face higher transport costs, slower deliveries and operational disruption. But after Covid, Ukraine and Hormuz, few executives or policymakers are still asking whether the disruption will come again. The question now is only when.

The end of ‘just in time’? Asia rejigs supply chains post-Hormuz

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Covid, Ukraine, Iran: three shocks in six years appear to have ended Asia’s love affair with efficiency no matter the cost

Covid, Ukraine, Iran: three shocks in six years appear to have ended Asia’s love affair with efficiency no matter the cost