The Red Sea Conflict: Building Resilience Amid Global Uncertainty

In 2020, in the context of COVID-19, I wrote about how supply chain resilience was the strategy of choice for handling risk and vulnerability. I defined supply chain resilience as the ability to endure highly disruptive events and being able to recover after a disruption occurs.

In just a few years since the COVID outbreak, the world has seen multiple highly disruptive events that have significantly impacted the global supply chains and the global economy, but this time in the geopolitical landscape.

The Red Sea has emerged as a geopolitical flashpoint that threatens to trigger a cascade of global economic repercussions. Recent conflicts in this strategic region have not only escalated political tensions among the involved countries but have also raised economic alarms due to the potential increase in shipping freight rates. This surge in maritime transportation costs, in turn, poses a risk of worldwide inflation, potentially having a significant impact on the global economy.

Attacks in the Red Sea have led to a dramatic increase in the prices of 40-feet shipping containers, which doubled to more than around US$3,000 in just one month. This conflict represents monumental economic risks, especially for China, where around 80% of its trade is conducted by sea.

The situation is further exacerbated by the suspension of operations by some big companies leading to inflation. The European Central Bank has voiced its concern, indicating that the current conflict could delay the anticipated reduction of interest rates, adding an additional layer of complexity to the already fragile European economy. Spain, among other European countries, is already experiencing supply shortages due to these tensions, directly impacting critical sectors like the automotive industry.

The global supply chain is under high pressure. Shipping companies are opting for alternative routes, such as around South Africa, significantly lengthening transit times and increasing transportation costs. Some companies have had to partially halt their production due to shortages of some products, while others have resorted to air freight, despite its high costs, to avoid maritime shipping delays. This situation has led companies to implement temporary layoffs and technical stops due to maritime delays.

The dramatic increase in maritime insurance costs, which multiplied by 10 in just a few weeks, reflects the perceived risk on these routes. Insurance companies are significantly raising their rates, which could lead to a generalized increase in inflation and a rise in the cost of nearly all products we consume. This will undoubtedly have a significant impact on the global economy in the coming months.

The current crisis in the Red Sea is a critical reminder of how local conflicts can have global repercussions, affecting all sectors of the world economy. Although companies have managed to contain the situation to some extent by adjusting their operations, this solution is not sustainable in the long term. If tensions continue to escalate, we could face an endless scenario of maritime traffic disruptions, similar to the grounding of the vessel in the Suez Canal, but with potentially more prolonged and devastating effects.

In addition to impacting specific sectors such as textiles, fashion, food, hardware, technology products, automotive, and the chemical industry, the current logistics crisis could lead to an increase in shipping times and transportation costs by more than around 200% per container. This significant increase in costs and delivery delays could have the potential to pose a real risk of an inflationary scenario, which could precipitate a global economic slowdown marked by the slowest growth in decades for economic powers such as the United States, the Eurozone, and China.

With some very clear signs of a significant slowdown on the horizon, it is crucial that both governments and businesses develop robust and flexible contingency plans to mitigate supply shortages and adapt to an uncertain global economic landscape. 

So, how do highly disruptive events like the conflicts at the Red Sea affect the aerospace industry? The aerospace industry could face a range of challenges from increased costs and supply chain disruptions to shifts in strategic and operational priorities. Companies will need to be agile and resilient in their responses, leveraging strategic planning and risk management to navigate the uncertainties presented by the conflict in the Red Sea. This is definitely a reminder of the importance of building supply chain resilience. 

In situations like this, aerospace companies and supply chain professionals can create resilience in their supply chains by enabling new transportation alternatives even when that may represent a significant increase in transportation cost; however, the most expensive part is the one that you don’t have to be able to deliver to your customers. Another option could be to proactively create decoupling hubs that are close to the companies´ manufacturing operations, and that could serve as distribution centers strategically located to protect supply networks from potential shortages. Last but not least, diversifying the suppliers portfolio and regions would enable alternatives to source parts from less affected regions when supply chain disruptions occur. 

The current crisis in the Red Sea is a call to action to prepare for the economic turbulence that may be just around the corner, highlighting the importance of a proactive strategy to manage geopolitical risks and their economic consequences.