While 2021 was a bust for many who hoped that supply chain disruptions would abate, it appears the trend will continue well into 2022 says QIMA's Sébastien Breteau. He shares recent data that sheds light on sourcing diversification activities in China, Vietnam and India, as well as troubling data on human rights and worker safety.
Sourcing Disruption to Continue In 2022
A volatile 2021 taught businesses a tough lesson about the fragility of supply chains. Just when many thought we were out of the woods, the promising trends toward recovery reversed. Supply chains quickly snapped amid the resurgence of COVID-19 outbreaks, China’s utility crisis, logistics woes, labor issues, and mass supply shortages.
In more positive news, consumer demand is strong. Even against records shortages, consumers splurged during the holiday season, and spending hit an all-time high in the United States according to the National Retail Federation (NRF). After predicting a year-on-year increase of 8.5% to 10.5%, NRF revised this figure to a whopping 11.5%, affirming consumer appetite to spend.
However, with supply still short, this means unprepared businesses are missing out on a big opportunity to seize consumer demand.
While some of the media headlines positioned the supply chains’ issues as a “nightmare before Christmas,” recent data from QIMA suggests that the disruption is poised to linger long into 2022. Businesses should take note of the following trends, as they are projected to shape the sourcing landscape this year.
China Sourcing Veers Off Track, but Recovery in 2022 is Still Possible
Reflecting a pattern observed in many of Asia’s sourcing markets in 2021, China flaunted a remarkable rebound in the first half of the year as it outpaced most other countries in containing the virus.
While this success stuttered in Q3 onwards in Asia at large, the world’s leading manufacturing market is showing itself to be even more resilient compared to its regional competition. Notably, inspection and audit demand in China exploded +21.5% in 2021 over 2020. This growth even trounced pre-pandemic 2019 by +13%.
Unfortunately for China, though, the second half of 2021 proved disappointing for its giant manufacturing industry as widespread power outages shut down factories and stymied orders. Adding salt to the wound, the blackouts happened in September – just as factories were looking to fill holiday orders from their buyers.
However, demand for inspection and audits in China rebounded relatively quickly in most major consumer goods categories, including textile/apparel, toys and homeware. An important exception was the electronics and electricals industry, which has seen inspection and audit demand diminish steadily since May 2021. This is happening as more electronic manufacturers feel the pain of the global semiconductor chip shortage.
QIMA data on inspections and audits reflects caution from Western buyers, with buyers being hesitant to expand sourcing in China throughout 2021. Instead of returning to China in droves, the data suggests many buyers simply maintained their existing business relationships with Chinese manufacturers. Subsequently, China’s share among the top-five sourcing regions of both U.S.- and EU-based buyers in 2021 remained at a three-year low.
China’s sourcing patterns in 2021 foreshadow a post-pandemic recovery that, while not being derailed completely, has veered off track. In addition, power outrages may remain a threat in upcoming months. Accompanying this threat, the upcoming Winter Olympics in Beijing may impose further manufacturing restrictions in northern China. Subsequently, while there is reason to be optimistic for China’s sourcing footprint in 2022, buyers should nonetheless heed caution and be prepared for further disruption.
Vietnam’s Boom and Bust Reflects Buyer Hesitation
The collapse of sourcing in Vietnam in 2021 sheds light on how volatile the modern global sourcing landscape is, revealing the compounding effects of pandemic-related disruptions.
In the first half of 2021, Vietnam experienced a tremendous growth spurt as enthusiastic buyers from the West eagerly flocked back to a familiar sourcing market that had been enjoying much attention pre-pandemic. In January through June 2021 – a period where Vietnam was successfully containing the spread of the virus – QIMA recorded a robust +67% growth versus pre-pandemic 2019.
This rosy success story was interrupted in late July by the arrival of the Delta variant, when the country entered a stifling lockdown period. The latest data from QIMA shows Vietnam's manufacturing industry remained sluggish through the end of the year, even though the virus containment measures were lifted in October.
Sharp labor shortages are likely a factor in Vietnam’s slow path to recovery, as factory staff left the cities en masse. This left a shocking shortage of over 100,000 workers in the south of Vietnam. As a result, in late November, over a third of factories in Vietnam were reported to be operating below 80% capacity. In many cases, orders were even being delayed by more than eight weeks.
The footwear and apparel sector in Vietnam has been among the hardest hit by the lockdowns and accompanying labor shortages, with inspection and audit demand plummeting -29% year-over-year in the fourth quarter. As a result of this dramatic reversal of fortune, Vietnam inspections and audits grew by a modest 3% in the first half of 2021 compared to the double digit booms it tracked during the pre-pandemic period. Based on this lethargic rebound, Vietnam's recovery is expected to be gradual and should last well into 2022.
India Enjoys the Benefit of Sourcing Diversification
Even though India infamously bowed out of the recently launched Regional Comprehensive Economic Partnership (RCEP) free-trade agreement, it’s nonetheless experiencing exciting new surges in sourcing. Acclaimed by experts as an increasingly attractive sourcing market among many product categories, recent QIMA data shows buyers are shifting their gaze from China and making India a preferred alternative sourcing market.
When comparing 2021 to the pre-pandemic period, the South Asia region at large flaunted double-digit expansion in inspection and audit demand. But India, specifically, has emerged as the conclusive favorite – outperforming its neighbors and the region as a whole in three out of four quarters of the year.
India's newfound success can be attributed to surging interest among U.S.-based brands by and large: QIMA survey data shows the share of buyers naming India among their top-five sourcing regions nearly doubled in 2021 compared to 2019.
After crossing the 2021 finish line with an impressive overall +60% spike in inspection and audit demand compared to pre-pandemic 2019, this figure astoundingly jumped +129% among U.S.-based buyers. Now, the next test for India is whether it can combat the threat of Omicron and keep the momentum going in 2022.
Sourcing Volatility is Wreaking Havoc on Human Rights and Worker Safety
Against the turbulent headwinds of the pandemic, workers around the world face rising poverty and mass job losses estimated to be around four times that seen during the 2008-2009 global financial crisis, according to a report released last year by the UN International Labour Organization.
Even though diversification helped many buyers navigate disruptions in the short term, 2021 saw ethical compliance in global supply chains crumble at an alarming rate. Factory scores clocked in at a four-year low and nearly a third (29%) of the factories QIMA audited were identified as being critically non-compliant and in need of immediate intervention. This represents the highest share since 2017.
Due to specific challenges presented by the pandemic, violations were unsurprisingly extensive in areas related to health and safety. In this area, 2021 scores dropped -7.5% compared to 2020. QIMA also tracked rampant violations in the area of working hours and wages, with scores dropping -8% in 2021 compared to 2020.
By geography, QIMA audit data indeed shows deteriorating ethical scores in many key sourcing markets – especially in Southeast Asia. For example, Myanmar is among the worst offenders in the world: its 2021 ethical scores plunged -18% compared to 2020.
These disheartening trends in human rights and worker safety are perhaps all too unsurprising and familiar. Unfortunately, data from recent years have shown human rights and ethical compliance falling by the wayside more and more as businesses are forced to operate in survival mode, prioritize cost concerns and diversify sourcing to less familiar geographies.
We saw ethical compliance drop first during the throes of the U.S.-China trade war. Now the decline in ethical compliance continues to rear its ugly head during the pandemic and the ongoing supply chain crunch.
After a devastating 2020, many had placed their bets on 2021 being a year of recovery and a return to the pre-pandemic normal. Despite some glimmers of hope, the year did not live up to these expectations. Moreover, by some measures of sourcing metrics – such as ethical compliance – the situation became even more bleak.
Amid new COVID-19 variants, disparate vaccination rates and varying regional approaches to virus containment, the pandemic continues to burden global supply chains. When you combine this with the woes of raw material shortages, logistics hurdles, labor issues and rapidly escalating ethical risks, global supply chains are expected to remain volatile throughout 2022.
The struggles businesses have faced thus far do not have to be all for naught, as there have been many teaching moments throughout the pandemic. If emerging supply chain trends are kept top of mind, businesses will be able to exercise higher levels of agility and resilience – and nimbly adapt to the everchanging sourcing landscape.