Export/Import Updates!
November 25, 2021

MAERSK Announces Record Earnings: What does this mean for the goal of inclusive trade?

Global shipping giant Maersk has turned every early earning forecast on its head with today’s announcement of its Q3 interim results. Buoyed by booming consumer demand and rising freight costs, the company is on track to deliver a yearly EBITDA of $1 Billion for 2021 in logistics and services, the highest ever in Maersk’s history.

Earlier this year, seven of the world’s largest shipping carriers recorded an EBIT of $1 billion for Q1, while three recorded an EBIT of $2 billion. Although staggering in themselves, what makes these numbers even more remarkable is that this is only the third time since 2010 that a shipping carrier has reported an EBIT of over $500 million in the first quarter. If this trajectory continues, major container lines could make a collective operating profit of $100 billion. To put this in perspective, this is what Apple Inc., the second most valuable company in the world, makes in a year.

Indeed, this is a time of exceptional demand for the big players in shipping and logistics. However, the shipping industry has been in ‘crisis mode’ for the last year and half. Last month, backlogs at ports in Los Angeles and Long Beach broke records of a different kind – average wait times exceeded 8 days and there were 65 cargo ships waiting to dock and unload. As of October 25, 77 ships wait outside the two ports carrying $24 billion worth of goods. Consequently, prices for consumer goods have soared and inflation rates are rapidly increasing. These congestions are unlikely to ease anytime soon and smaller players and service providers as well as SME customers are suffering the brunt of this crisis. This perfect storm is a result of several inter-related global phenomena.  

In 2019, as restrictions linked to COVID-19 pandemic escalated, consumer demand slowed drastically, and global trade plummeted. Shipping lines were forced to cancel trips and dock ships. The shipping industry, which carries 80% (by volume) of the goods traded globally, stagnated. By May 2020, close to 2.7 million TEUs of capacity was lying idle. To put this is perspective, if these containers were loaded on to lorries, they would cover the motorway between Paris and Amsterdam, not once, but 135 times.  

However, things changed rapidly as people, stuck at home, soon began spending money on manufactured goods. Consumer spending in the U.S was further fueled by the $1.9 trillion stimulus package. By the third quarter of 2020, the world economy had rebounded largely because a shift in spending patterns, and shipping lines scrambled to find containers and redeploy vessels. However, they were faced with major disruptions in the global value chain because of COVID-19 protocols and factory shutdowns. The industry also faced COVID-19 related port closures and shortages in staff, which slowed return to business. Not enough containers and ships were available to meet worldwide demand, driving up freight costs significantly. For instance, if a garment exporter from India paid $2,000 for a shipment to the U.S before the crisis, he now pays $10,000 for transporting the same goods.1 Ports are also slower to process incoming goods because of COVID-19 related measures. Congestions mean longer wait and offloading times, which in turn means ships take longer to get back to exporting countries like Vietnam, China, and India, to reload. The ripple effect created by slow redeployment, container shortages, and port congestions, has led to poor schedule reliability. In fact, during July and August on-time performance was down to 35%. On average, more than 70% of global container shipping vessels are unable to keep to their planned schedules.

Big importers are somewhat insured against drastic increases in shipping rates, at least in the short-term, as a result of pre-existing contracts.  However, delays and lack of availability have spurred companies like companies like Walmart and Home Depot to purchase their own containers and charter ships.2 These options are not available to end customers like small and medium enterprises, who are bearing the burden of these global occurrences. The shipping crisis is driving an even bigger gap in global inclusive trade. According to the WTO, “SMEs are over-represented in economic sectors that have been disproportionately affected by the massive shocks to demand and supply resulting from COVID-19. Moreover, MSMEs have less resilience and flexibility in dealing with the costs these shocks entail because of their size, which makes it more challenging for them to survive the crisis than larger firms.”

SME participation in global trade is largely driven by cost advantages, especially for exports from emerging economies to developed countries like the U.S. A significant increase in shipping rates negates this overall cost advantage, irrespective of whether the retailer or exporter bears the transport cost.3 Further, low cost-visibility, unpredictability resulting from the reduced availability of containers and increased transit times affects SMEs disproportionately. SMES are characterized by limited resources and cash flow buffers, and global supply chain disruptions have a direct impact on a small exporter’s profitability, cash flow, inventory and in turn their ability to reinvest and expand.

While exacerbated by the current Covid-19 related global supply chain crisis, these challenges are not new.  SME’s have always faced several barriers to trade such as lack of access to finance, information, skills, and technology, which reduce their international competitiveness. The Facebook-OECD-World Bank Future of Business Survey found that SMEs with a digital presence cited finding business partners (63%) as their biggest barrier to trade, followed by market access limitations (41%), different regulations in other countries (38%), customs regulations (35%), language and/or cultural gap (33%), securing export finance (31%), poor online payment alternatives to sell online (29%), large geographical distance from home country (26%), and poor internet connection to sell online (18%). Data from other surveys indicate that access to information about foreign distribution networks as well as border regulations and standards are some of the main hurdles to participation in international trade.

As a result, SMEs contribute to just 20%-40% of overall exports for OECD countries despite accounting for 95% of all firms. This trends holds good in most other economies and on average just 10% to 25% of SME’s export goods and services as compared to 90% large industrial firms. Given SMEs power the world economy - they contribute over 40% to the national income in emerging economies and account for over 60% of the world’s total employment - their exclusion from international trade has deep implications for inclusive economic growth.  

Looked at another way, increasing trade participation is one way of unlocking SME potential to spur growth and job creation. In fact, participation in cross-border trade will enhance SMEs’  abilities to not only survive this extraordinary time but also scale and grow, leading to increases in skills and profitability, boosts in consumption and therefore the economy. Growth underpinned by global trade has enabled nearly a million people to lift themselves out of poverty since 1990. In fact, the 2030 Agenda for Sustainable Development recognizes international trade as an engine for inclusive economic growth and poverty reduction, and an important means to achieve the Sustainable Development Goals (SDGs). Inclusive global trade offers the world a chance to accelerate its progress towards achieving SDGs.  

However, in order to achieve more inclusive trade, several barriers need to be dismantled. We need to design solutions that are built on a foundation of deep understanding, and that create long-term gains for SMEs. This will not be possible until all the ecosystem actors – multilateral agencies, exporters, importers, individual nations and logistics players, come together to create enabling policies and infrastructure which level the field for SME participation in international trade.  

We have undertake an in-depth discussion of some key challenges faced by SMEs in the next article on Decoding Trade Knowledge and Execution Gap.

Editorial Team
Editorial Team
Customer success manager
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