Recent attacks on commercial ships in the Red Sea by the Iran-backed Houthi militia have forced companies to pay higher insurance rates or reroute goods to Africa, increasing costs and delays which could reduce companies’ profit margins and ultimately drive them up. price for consumers.
Many executives whose companies ship goods through the Red Sea and Suez Canal said the impact so far has been limited, in part because of lessons they have learned from the most severe disruptions in the global supply chain at the height of the Covid pandemic.
“In the future, disruption will affect businesses,” said David Simchi-Levi, a professor at the Massachusetts Institute of Technology. “Today it’s the Red Sea, tomorrow it will be something else.”
The attacks in the Red Sea, where around 12% of global trade passes, have forced companies to make difficult decisions. Crossing the Red Sea would mean risking an air strike and paying more for insurance. Avoiding the route adds costly delays.
Ocean freight prices have soared since mid-December, more than tripling on the Asia-Europe route and more than doubling between Asia and the U.S. East Coast. according to the analysis company Xeneta.
For now, analysts expect the impact on consumers to remain limited. Shipping costs represent only a small portion of a product’s total cost, Goldman Sachs analysts noted. They estimate that the disruptions will add only a tenth of a percentage point to the global inflation rate this year.
Still, it remains a concern for analysts and investors, who have raised questions about earnings calls with company executives. Here’s what business leaders are saying.
European companies will feel it first.
The Red Sea is a particularly important route for companies transporting goods from Asia to Europe. These goods now cost more to ship and take longer to arrive.
This could also affect the region’s manufacturing sector. These disruptions pushed Tesla and Volvo to suspend production in Europe. Automakers rely on just-in-time production, in which parts arrive on an assembly line shortly before they are needed, leaving little room for shipping delays.
The British shoe maker’s chief executive, Kenny Wilson, said it experienced significant delays in Europe but felt virtually no impact in Asia or the United States. British businesses were hit hardest by delivery delays in January, according to S&P Global.
“It obviously has a cost impact,” Mr. Wilson told analysts on a Jan. 24 earnings conference call. “And then I think, really, it’s more about what the impact would be next year if this were to continue.”
Bang & Olufsen
Nikolaj Wendelboe, chief financial officer of the Danish audio equipment company, told analysts in a Jan. 10 call that the company was shifting some transportation to air or rail.
“There will be a slight increase in costs and longer delivery times, but that is nothing compared to what we saw during the Covid crisis, at least not what we are seeing now,” Mr. .Wendelboe.
Chuck Boynton, chief financial officer of Logitech, a Swiss maker of keyboards, mice and other computer accessories, said the company would ship more of its products made in Asia by air rather than by sea. Although it costs more and could cut into profits, it’s better than running out of inventory, he said.
“We’re going to eat into some margin to ensure customer satisfaction,” Mr. Boynton told analysts on Jan. 23.
American companies are less exposed.
Goods imported into the United States are not as dependent on crossing the Red Sea, but American businesses and consumers are nonetheless subject to generally rising global transportation rates.
Not all sectors are affected in the same way. Bank of America analysts said retailers were particularly exposed, with companies like Target and Dollar Tree facing a higher risk of falling profits than their main competitors as they buy more of their products in Asia. These retailers have not yet released their quarterly results, but other consumer-focused companies have discussed the impact on their financial results.
Brian T. Olsavsky, Amazon’s chief financial officer, said the disruptions had not yet had a “material impact” on the e-commerce giant’s profit forecast for the current quarter.
“We are vigilant on this matter and will endeavor to take the necessary measures to ensure that the customer experience is not affected,” he said.
Bill Shea, chief financial officer of 1-800-Flowers, said the company won’t begin to feel the effects unless the disruptions continue through the summer.
“The biggest unknown is how long the problems in the Red Sea will persist and whether it will affect future negotiations and next year’s holiday season,” Mr. Shea told analysts on Thursday.
Farooq Kathwari, chief executive of Ethan Allen Interiors, told analysts the furniture maker was not as exposed to unrest as others because most of its products were made in North America.
“But if most of our products came from overseas, that would be a problem,” he said during a Jan. 24 earnings conference call.