Chain Reactions: The Global Supply Chain Crisis
​
By Beatrice Kang​


The Story

With the rollout of successful vaccination programmes, the roadmap towards a post-pandemic recovery seemed clear. However, it has quickly become apparent that the pandemic has left a glaring void in its wake: a global supply chain crisis caused by extensive production disruptions which has left “bottlenecks in every link of the supply chain.” (CNBC)
In 2020, lowered industrial activity was initially equalised by reduced consumer demand. However, as lockdowns have lifted, consumer demand has skyrocketed and suppliers are struggling to get up to speed. This supply chain crunch has caused shortages of everything from food and household goods to computer chips, cars, furniture and electronics. With Christmas and the holiday season looming, historic delays and product shortages are “threatening to topple an already tense global supply chain.” (Business Insider)

Different countries have had their supply chain issues exacerbated for other contributory reasons and this, in turn, creates a “non-linear” ‘domino effect further down the supply chain (Business Insider).

Take the semiconductor industry for example. In an increasingly digitalised world, semiconductors are the backbone to many industries who rely on electronic equipment, such as the automobile industry. In 2020, China assembled 35% of the world’s electronic devices (Semiconductor Industry Association). The current extreme electricity shortage caused by soaring prices of coal in China, the world’s largest exporter who relies heavily on coal for its energy source, is predicted to cripple global supply chains (Financial Times).

Major energy shortages in China will impact China’s ability to produce and assemble semiconductor-embedded products, piling on concerns for, for instance, British automakers who have already seen production slashed by the existing chip shortage (Bloomberg). British car production dropped by 27% year on year in August as a lack of semiconductors led to a big drop in the number of vehicles exported (The Guardian). In addition to the shortage of semiconductors, British car makers have their fair share of logistical headaches exacerbated by Brexit causing an estimated 100,000 strong shortfall of truck drivers. Truck drivers are essential not only for delivering finished products to their intended destination, but are also key to managing the flow of car parts products between key European suppliers.

What It Means For Businesses and Law Firms

Time and time again, the pandemic has revealed the fragility of our global supply chain and its tendency to ‘bottleneck’.

This may benefit law firms in several ways.

Firstly, businesses will increasingly strive to make substantial operational changes to their supply chain to help mitigate their supply chain ‘concentration’ risk or over-reliance on certain vendors or geographies. Two common strategies include acquiring lower tier vendors (also known as ‘vertical integration’) or wholesale exits from particular supply chains. As such, law firms may be called to assist in M&A, general corporate and/or project finance deals as their clients attempt to:

  • vertically integrate their supply chains through a series of strategic M&As;
  • exit or renegotiate existing supplier contracts;
  • enter into new supplier contracts, or
  • ‘repatriate’ their production units to different geographies - which may require extensive project finance, real estate and construction expertise if the client, for example, wishes to build a new production plant. A recent example of this includes Intel’s recent plans to invest €80 billion in a European chip plant (Reuters).
Alternatively, law firms can profit from general advisory work from helping clients mitigate risks arising from commercial contracts that underpin their trading relationships. For example, suppliers may wish to restructure their delivery obligations by reconsidering their ‘force majeure’ clauses or evaluate whether their insurance policy adequately covers any losses or claims stemming from any delays in contractual deliverance.

On the other hand, manufacturers may want to mitigate the risk of customers ‘pulling out’ of undelivered or unfinished products due to supply chain issues by re-evaluating when the ownership of goods passes on to the customer - i.e. whether ownership of the goods passes upon manufacture or packaging, rather than actual delivery. See this briefing by Clifford Chance for more information on evaluating contracts, supply chains and the threat of disputes post-pandemic.