More than three-quarters of supply chains disrupted by war in Ukraine
By Sara Seddon Kilbinger, Senior Reporter, REFIRE
As the manufacturing footprint shifts, should organizations establish new supply chains or simply divert production to other markets with existing capacity?
More than three-quarters of supply chains are being disrupted by the war in Ukraine, according to the latest study by JLL and Reuters Events titled "The state of European Supply Chains 2023".
Around 68% of supply chain managers expect Europe's supply chains to continue to be disrupted by the war in Ukraine this year, citing indirect consequences such as supply problems affecting energy and fuel costs (66%) and the impact of inflation on consumers (55%).
‘Despite the uncertainties, demand for logistics space in Germany remains stable at a high level, although requirements have changed,’ said Sarina Schekahn, head of Industrial Leasing JLL Germany. ‘Users are now focusing on energy-efficient properties in good locations, which enable better competitiveness and lower transport costs. However, due to the lack of space, users often have to make compromises when choosing a location.’
Logistics continues to weather Germany’s economic downturn, ending 2022 on a record high. In total, more than €10 billion was invested in warehouses and distribution centres last year, an increase of 3% y-o-y, despite a slight slowdown towards the end of the year, according to BNP Paribas Real Estate.
Russia’s war on Ukraine is having an impact on a broad range of goods into Europe and beyond. Prior to the war, Ukraine’s top export was agricultural products (46%) followed by manufactures (42%), according to the University of Florida. Manufactures are essentially semi-finished products which are then exported. Ukraine’s primary export destinations were the EU (39%); China (12.1%); Turkey (6.1%); and Russia (5.1%). Russia’s top exports were fuels and energy products (63%), followed by metals (10% percent), machinery and equipment (7.4%), and chemical products (7.4 %) with top export destinations being the China (12%), Germany (9%), and the Netherlands. Russia, for its part, produces about 25% of the world’s nitrogen fertilizer and is a major supplier of energy to the European Union. Wheat exports from Russia and Ukraine accounted for 28% of global wheat exports, according to the University of Florida.
Trend towards moving warehouses closer to transport hubs; uptick in using renewables
Understandably, given increased disruption in supply chains, logistics service providers are now trying to find better workarounds, with 72% of logistics service providers, retailers and manufacturers saying they are looking to optimise their transport networks and 51% plan to move their warehousing closer to transport hubs and end markets. In addition, 63% plan to reduce their energy consumption in production and to up their share of renewable energies such as photovoltaic systems (43%), while the renovation of facilities to promote energy efficiency is on the agenda for 46% of respondents.
‘In the existing stock, users are investing in new technologies to help carry out and automate processes more efficiently in order to better manage potential disruptions in the future,’ Schekahn said. ‘In addition, automation helps to counteract the shortage of skilled workers, in part.’
The majority of respondents want to invest more in supply chain monitoring and tracking solutions (68%), while demand forecasting solutions (48%) and process automation (47%) are hot topics for almost half of respondents. With 37% each, plant automation, robotics as well as digitalisation and data analysis also play important roles for supply chain managers.
Despite initial signs of relief, inflationary pressure continues to be a concern for the logistics sector, with 81% of respondents saying they would have to pass on higher costs to customers. However, only 15% expect significant cost increases. Nonetheless, 45% of supply chain managers expect demand for goods to continue to deteriorate. Still, 31% are more bullish, predicting that high inflation will end and demand will rise again as a result.
JLL, in collaboration with Reuters Events, surveyed 171 users, including logistics service providers, manufacturers and retailers, on their expectations for demand trends over the next six to 12 months. Questions range from top priorities and concerns for 2023 to demand for goods, operating costs, inventory planning, storage needs, sustainability and more.
Logistics is second most popular asset class
Ultimately, logistics has weathered Germany’s economic storm better than many asset classes, taking the number two spot in the asset class ranking for the second time in a row last year, ahead of retail (17%) but behind offices (41%), with a 19% share of turnover in the overall market, according to Christopher Raabe, managing director and head of Logistics & Industrial at BNP Paribas Real Estate.
As a result, logistics, along with student housing and city centre offices, is one of the most important sectors in which investors intend to invest over the next twelve months, according to a Savills survey last November, which asked selected real estate investors with total AUM of more than €500 billion in Europe and the Middle East about their current investment sentiment. Germany and France are attractive investment targets, with 76% of respondents saying they plan to become active there within the next twelve months. The Netherlands, the UK and Spain were also mentioned as interesting investment locations. Berlin, Frankfurt, London, Madrid and Paris provide particular investment incentives for investors in the countries.
As Alexander Hoff, managing partner of Palmira Capital Partners told REFIRE last month: ‘Since we started with troubling inflation and the war in Ukraine, I’ve never seen the market correct itself at such speed,’ he said. ‘Yields went from 4% to around 5.5% in just 9 months. You can still find attractive investments, it’s the most adaptive asset class and demand is still high.’
Geopolitical instability decimating supply chains
Still, for now, supply chain problems are here to stay, whether due to existing or new geopolitical conflicts, inflationary pressures and the recessionary environment, climate change weather events, or other issues yet to emerge. They can all impact access to goods and how they flow to their final destination, create port holdups, reduce container and ocean freight availability and cause prices to rocket. According to KPMG, retail and distribution supply chains will continue to be affected this year and ‘nations will be skeptical about cross-border trade cooperation, cyber criminals will ramp up activity, there will be key material access turmoil and manufacturing footprints will change shape’.
Interestingly, more than 6 out of 10 global organizations expect geopolitical instability to potentially have a detrimental impact on their supply chains in the next three years, according to KPMG. One trend that is starting to gain traction is more customization, on both the manufacturing and real estate side. Given increased energy costs, some companies are looking to move away from big manufacturing plants and then shipping goods around the world in favour of producing more goods in smaller facilities for local markets. Such a shift could significantly transform the future manufacturing footprint and how supply chains operate, begging the question: Should organization establish new supply chains or simply divert production to other markets with existing capacity?
Over the last three years, there has been massive investment in supply chain technology, following several high-profile supply chain disasters. One that made the headlines was US retail giant Target, which was left with stock it had to mark down considerably after products it bought during the pandemic were no longer popular when they finally arrived several months later. Supply chains that don’t work efficiently make companies vulnerable: whatever happens next, supply chains are in need of a real shake-up.
