BY KAZUAKI NAGATA, STAFF WRITER
The Ukraine crisis has presented a fresh blow to global supply chains already reeling from the coronavirus pandemic, with the war between Russia and Ukraine further inflating transportation costs and disrupting logistics networks.
Shipping rates were high even before Russia began its invasion late last month, but freight forwarders are now demanding higher payment to deliver goods, which will result in rising costs for manufacturers.
Japanese manufacturing firms tend not to directly procure goods from Russia or Ukraine. According to government data, on a value basis trade with Russia only accounted for 1.4% of the country’s total last year. But Japanese firms have been affected by the conflict, and will continue to be hit by its far-reaching knock-on effects.
Rising logistics costs “will be a quite huge blow (for businesses). The impact is already being reflected, as transportation costs are trending upward,” said Kazuhiro Terasaka, a consultant and expert in supply chains at the Nomura Research Institute.
The Russia-Ukraine war has forced airlines to reroute flight paths to avoid Russia, which has barred them from its airspace in retaliation for sanctions imposed by many European nations.
Russia has not restricted Japanese carriers, but they have already changed flight routes or canceled flights to Europe.
In terms of trips between Japan and Europe, Japan Airlines Co. said it is only able to operate commercial and cargo flights between Japan and London, with the airline having had to reroute their path to avoid flying over Russian airspace. A JAL spokesperson said it is unclear when the airline will resume other flights to and from Europe.
All Nippon Airways Co. said that for safety reasons its flights bound for Europe are also taking a detour.
Nippon Cargo Airlines Co. had canceled shipping flights to Europe but resumed operations on Sunday using a different flight plan.
As for delivery by sea, shipping giants such as Denmark’s A.P. Moller-Maersk and Switzerland-based MSC Mediterranean Shipping Company S.A. have halted bookings to and from Russia. Ocean Network Express Pte., which is jointly owned by three major Japanese shipping firms, stopped shipping cargo to and from Russia and Ukraine late last month.
“Companies are worried that transportation costs will increase, while production lead times will also be longer” if the disruption to logistics networks lingers, said Terasaka.
Soaring delivery costs will inflict additional damage to a wide range of industries already suffering from rising commodity and raw material prices, ranging from crude oil to steel and grains.
As for securing parts, Russia and Ukraine are not major suppliers to Japanese companies, but if the war becomes protracted, the impact on some key items, including semiconductors, could become serious. Manufacturers around the world have already been struggling with a global chip shortage during the pandemic.
According to TrendForce Corp., a Taiwan-based consulting firm, Ukraine is a major supplier of some raw gases that are essential for chip manufacturing, such as neon and krypton.
TrendForce says that Ukraine provides about 70% of the world’s neon gas, which is commonly used in a chip production process called lithography.
Because chipmakers and gas distributors have enough stock and could also procure the gases from other countries, the Ukraine crisis won’t affect chip manufacturing in the short term. However, the reduced supply is expected to eventually result in increased production costs, the consulting firm said in a report released before Russia launched its invasion.
Reuters reported last week that Ukraine’s two major neon producing firms, Ingas LLC and Cryoin Engineering Ltd., shut down production due to Russia’s advance. Reuters estimates that the two firms supply about 45% to 54% of the neon for chip production globally, posing the risk that the semiconductor shortage will go on even longer.
At this point, chipmakers and the companies that make up their supply chains are monitoring the situation and evaluating the scale of the impact.
Hidetoshi Shibata, CEO of Renesas Electronics Corp., Japan’s main chipmaker, said the firm has already seen some impact on its supply chain.
“It is our hope that things won’t be exacerbated and the situation won’t last much longer,” Shibata said during a news conference on March 3, adding that he believes “we can somehow keep the impact under control.”
Renesas, which also has a research and development facility in Ukraine, is a key chip supplier for automakers, and Shibata said the firm will carefully assess how the Ukraine crisis will affect the production of its clients as well.
On top of the possibility that the chip shortage could worsen, automakers might face other supply chain problems, as Russia is a primary supplier of palladium, which is used in catalytic converters to curb pollution from gasoline vehicles.
According to U.S.-based market research firm Techcet, Russia meets 33% of the world’s demand for palladium.
While supply chain disruptions stemming from the pandemic have prompted numerous companies to rethink their procurement strategies, the further upheaval caused by the Ukraine crisis will likely accelerate such moves.
Terasaka of the Nomura Research Institute said more companies are looking to improve supply chain management systems through digital transformation, enabling them to track the whereabouts of goods and when they will arrive in a more detailed and real-time manner.
Foreign firms are generally ahead of Japanese firms in terms of efficiently overseeing their supply chains, he said, adding that digitalization efforts at Japanese firms are slow.
As supply chains have stretched across the world, increasing their chance of facing an unpredictable event at any moment, the importance of digital management has grown.
“From recent talks with our clients, they want to strengthen proactive and flexible management functions,” so that they can have a better grasp of the status of their stock and when they will get new supplies, Terasaka said.