Deep downturn may hurt supply chain, delay rebound

By Nick Carey - Analysis

DETROIT (Reuters) - The global recession may be so deep that it is destroying manufacturers and other companies in the supply chain at too fast a pace for the damage to be repaired quickly.

That could hamper an eventual recovery and trigger inflationary pressures, some experts warn.

"There has been widespread decimation of production capacity," said Paul Bingham, managing director of world trade and transportation markets at IHS Global Insight. "There is no question that this destruction will become an impediment to recovery."

Bingham and others maintain that factories may have been lost forever rather than simply mothballed, as they might have been in a less fearsome downturn, and that labor may also have been driven from particular geographical areas because of the lack of jobs.

The time it will take to bring all this back together, particularly for more advanced goods, will likely cause bottlenecks and price increases as demand overwhelms supply in any upturn.

The U.S. economy -- the world's largest and the long-standing driver of global economic growth thanks to the voracious appetite of the American consumer -- has been in recession since December 2007.

The economy shrank at an annual rate of 6.1 percent in the first quarter after a fourth-quarter decline of 6.3 percent.

The U.S. downturn has taken a toll on production in China, where many of the goods Americans buy are produced. Industrial output grew at a rate of 3.8 percent in February, which was a record low, before rebounding to 8.3 percent in March.

According to Panjiva, which collects information on suppliers and manufacturers using customs and other data, the number of active foreign manufacturers exporting to the United States totaled 120,000 in March, 26 percent below the peak of 162,000 foreign manufacturers in July 2007 and more than 15 percent below March 2008.

Although the March number was a 1.7 percent improvement over the 118,000 foreign suppliers in February, the number of Chinese manufacturers shrank 3 percent.

Panjiva -- whose customers include home-improvement chain Home Depot Inc -- has created a watch list of significant suppliers at risk. Under Panjiva's methodology, a significant supplier is defined as one with 10 or more shipments a year. To get on the watch list, a significant supplier has to have experienced a 50 percent decline in shipments in the past three months.

Thirty percent of all significant suppliers were on the list in March. Some 30 percent of significant suppliers were Chinese in March and 28 percent of them were on the watch list.

Manufacturers from China form the largest group of suppliers to the United States.

MISSING LINKS

"On a basic level, the greatest threat companies on the watch list pose is that these factories could go out of business," said Panjiva Chief Executive Officer Josh Green. "It could mean you are no longer able to deliver to your customers because a critical link in your chain has disappeared," he added.