As you happily fill your shopping cart (actual or virtual) with holiday gifts this year, you may want to brace yourself for a bit of sticker shock. You may be paying more for holiday gifts than you have budgeted. The reason for the higher prices is turmoil in a part of the economy that most consumers never think about: global shipping.
I admit that until a few years ago, I never thought about the global shipping industry or how the goods that I bought arrived on store shelves. When I started a physical goods company that manufactures products overseas though, I learned how the health of the consumer goods industry, including the prices we pay at checkout, is closely linked to the health of international shipping.
Global shipping companies own and operate the enormous ships that pick up containers full of cargo at one port and deliver them to ports on the other side of the world. Recently the health of this industry has been looking very poor. On August 31, the seventh-largest shipping company in the world, Hanjin Shipping, declared bankruptcy. The bankruptcy filing instantly placed 85 to 90 ships in an industry-changing limbo. On those ships were approximately 500,000 containers full of goods worth an estimated $14 billion. For several weeks now, most of those containers have been floating in the ocean both because Hanjin does not want to have its boats seized upon docking and because ports do not want to do business with a company that cannot pay its bills.
For many businesses, this means not having products they already paid for and were planning to start selling in early September. Businesses that deal in physical goods constantly walk a tightrope between inventory and cash flow. Even a two-week delay in the delivery of goods can have serious, negative consequences on a company’s balance sheet. While the largest retailers can absorb these occasional losses, small and medium businesses are the ones that truly can take a hit, and sometimes do not survive to write about lessons learned.
Hanjin since has been given protection from U.S. creditors and a line of credit to allow it off load its ships. The ramifications though are far from over. With Hanjin ships out of commission, space on container ships will be at a premium. Importers could be paying higher prices to ensure their products get on a ship for the holiday season. Some industry experts already are reporting the cost of shipping a 40-foot container to have risen 50% in the wake of the Hanjin bankruptcy. If business cannot pay that premium, they will be left waiting weeks to ship their products.
Businesses also will be competing for truck space once goods are unloaded at port - whether goods that were on a Hanjin or another company’s ship. The race will be on at the port to get the containers unloaded and onto trucks. Currently there are more goods being unloaded than there is truck capacity to move them out of the port area, however. The ratio of goods to truck space nearly doubled after the Hanjin filing, and is expected to rise more given that the holiday season is near. The higher ration means that trucking companies can charge more for their space as well.
A similar disruption in the shipping world occurred in the fall of 2014 when port authority workers a the Long Beach port went on strike. Without workers to move the offloading process along, containers backed up and could not be moved out of the port. Many small and medium-sized businesses, including my own, experienced delays in receiving merchandise. Even after the strike was resolved, the delays continued for months as the port worked off the backlog.
As happened during the port strike, businesses now are incurring higher costs while not having goods to sell as they had planned. To the extent that businesses cannot absorb those costs, you may see the costs reflected on the price tag for your favorite holiday gifts. Those higher prices might make us all more aware of just how interconnected the global economy can be.