Few waterways are as vital to global commerce as the Red Sea. Disruptions in such strategic routes ripple through global trade, affecting everyone—from bustling markets in India to households bracing for winter in Sweden. Whether it's a blockade or a conflict in this critical region, the consequences are felt far and wide, reminding us of the fragile interdependence of the world’s supply chains.
But first, let’s dive into what’s really happening in the Red Sea.
This vital waterway holds a unique geopolitical advantage, with the Suez Canal anchoring its northern end—handling nearly 20% of global trade—and the Bab-el-Mandeb Strait guarding its southern gateway (See Image 1 for reference). Together, these chokepoints make the Red Sea a cornerstone of international commerce, connecting Europe, Asia, and Africa in a seamless trade network.
The Red Sea has long stood at the crossroads of geopolitical crises. From the Yom Kippur War to the Suez Canal crisis in the 1970s, and most recently, the Israel-Hamas conflict in Gaza, this critical waterway has consistently felt the ripple effects of regional tensions. These crises often spill over to disrupt maritime traffic, impacting ships crossing the Red Sea. Since 2023, this has become alarmingly evident, with Houthi rebels reportedly targeting Israeli and European vessels, further straining an already fragile global trade route.
In retaliation, the US-led coalition has launched numerous strikes on Houthi-held territories in Yemen, further intensifying the conflict in the Red Sea. Moving beyond the geopolitical tensions, let’s now focus on how these disruptions are impacting global trade and commerce.
To circumvent disruptions in the Europe-Asia maritime route, shipping companies are rerouting vessels around Africa's southern tip. While reducing delays in the Red Sea, this shift has congested other trade routes, such as the Asia-U.S. West Coast, causing freight prices to soar by 3-4 times. The extended 4,000-nautical-mile detour has aggravated container shortages and increased fuel costs, driving up shipping expenses globally and disrupting the trade balance.
The ongoing global trade disruptions, spanning nearly two years, have significantly affected import-dependent and trade-deficit countries, driving inflation higher. Companies grappling with soaring logistics costs face two options: absorb the expenses, reduce profit margins, or pass the burden onto consumers through higher prices. In today’s market-driven economy, large corporations often choose the latter, intensifying inflationary pressures. Resource shortages further compound the issue, increasing the cost of goods and services and eroding consumer purchasing power in already struggling economies.
India, which imports 20% of its goods via the Red Sea route, has seen shipping cost increases over the past two years contribute to a 2% rise in inflation. This has pushed CPI inflation beyond the RBI’s 6% upper limit for the first time since September 2023 (UBI report), reflecting the widespread economic impact of these prolonged trade disruptions.
To gain deeper insights into the situation, we have decided to analyze the top sectors most impacted by the crisis and explore how they are navigating and addressing these challenges.
Industry wise Analysis: Retail Industry
The ongoing supply chain crisis has disrupted every link, from exporters to retailers. Companies like Adidas and Puma, heavily reliant on the Suez Canal and Asian production, face delays and rising costs. In the U.S., importing goods from Asia has become more expensive due to soaring container shipping prices. Hopes for a post-COVID retail recovery are dimming as apparel companies struggle with delays and rising prices, while global logistics routes remain disrupted, adding further pressure to already uncertain supply chains.
The retail industry, once optimistic about recovering sales post-COVID, now faces new challenges. Apparel companies, many of which rely on outsourcing from Asia, are
struggling with increasing delays and rising prices as global logistics routes remain disrupted. This ongoing issue continues to impact supply chains, adding pressure on companies already grappling with fluctuating costs and uncertainties in the
market.
WHAT THE INDUSTRY IS DOING?
To adapt, retail giants are using multi-modal logistics, combining sea, air, and road transport to reduce delays. Many are also nearshoring, relocating manufacturing closer to key markets. Long-term shipment contracts are becoming essential, providing stability and cost predictability in volatile logistics conditions.
India being one of the largest consumer economies in the world, perfectly placed to tap into this nearshoring trend. Global companies are likely to pour a lot of revenue into employment sectors. Manufacturing and logistics, along with related industries, will attract millions of job opportunities at various skill levels.
To take proper advantage of it, the government and private players in India would need to provide the necessary inducements, such as taxes, streamlined policies, and adequate infrastructure, with which the prospective companies can operate their businesses smoothly in the country. This will then make India attractive for long term partnerships with a global manufacturing ecosystem.
Industry Analysis: Manufacturing Industry
The global manufacturing sector is facing a significant downturn, with India experiencing stagnation despite modest growth of 4-5% in the Index of Industrial Production (IIP). India's manufacturing sector heavily relies on $100 billion worth of imported raw materials annually, but higher input costs are pressuring companies to reevaluate their strategies.
Globally, delays in supply chains have led to disruptions for major manufacturers. Tesla temporarily halted production at its German plant due to supply chain delays, and a similar situation forced Volvo to pause operations in Belgium. These disruptions are prompting manufacturers to consider diversifying their supply chains, nearshoring production facilities, or investing in alternative logistics strategies to mitigate risks. This shift underscores the urgent need for more resilient and sustainable \manufacturing models to navigate rising costs and supply chain vulnerabilities.
WHAT THE INDUSTRY IS DOING?
Outsourcing manufacturing to countries with lower labor costs has long benefited Western companies, but the ongoing supply chain disruptions are forcing a reevaluation. Beyond this, production companies are increasingly shifting soft services like payroll and customer support to nations like India and Vietnam. Meanwhile, to mitigate the risks of raw material shortages and import delays, companies are diversifying their supply chains by seeking nearby alternatives. Strengthening the small-scale manufacturing sector will be the priority in the Indian context. Accessing raw material options through local producers could reduce import reliance and develop a more robust supply chain for India. Such alternatives may prove expensive in the near term but strategically serve as a buffer against current disruptions to assure relatively better operational conditions in such uncertain times. While these options may be more expensive in the short term, they offer a strategic buffer against ongoing disruptions, ensuring more reliable operations during uncertain times.
Image Credits- offshore-Energy.biz
Industry-wise Analysis: Shipping Industry
The shipping industry has been severely impacted by recent disruptions, with the safety of cargo, ship hulls, and crew members being the top priority for shipping companies. Alongside these concerns, companies are facing increased insurance premiums, the need to reroute vessels, and issues related to container efficiency. Major players like Maersk and MSC are maximizing their deadweight capacities to cope with these challenges.
Fuel prices have also soared since OPEC’s decision to cut supply, making each voyage around the Cape of Good Hope cost shipping companies over one million USD. Compliance with the International Maritime Organization’s Carbon Intensity Indicator (CII) and EEXI standards is mandatory, adding further operational challenges. The recent tragic death of four seafarers in the Red Sea has added to the concerns of crew safety and well-being. Shipping companies are providing dangerous region allowances, though these are often minimal—mere hundreds of dollars. Ships navigating through the Red Sea also face risks of tracking by Houthi forces, requiring them to turn off satellite communications, which could hinder rescue efforts in case of accidents.
WHAT THE INDUSTRY IS DOING?
Shipping companies are securing longer contracts with their charters to gain flexibility, while pushing for more warehousing space at ports in anticipation of lower freight prices. Additionally, a positive strategy has emerged whereby cargo is discharged at the nearest safe port and transported by rail to its destination, helping to bypass some of the risks and delays caused by disrupted sea routes. This approach is already proving effective in maintaining supply chain stability.
Voices from the Industry
We had the opportunity to interview professionals directly tackling the crisis—here’s what they had to share.
Mitigation for a Safer Sea
The Red Sea disruptions have strained global supply chains, raising questions about why supply chain managers failed to anticipate the crisis. Carriers have deployed more vessels to handle longer transit times, unintentionally causing a container shortage in Asia. However, the real issue lies in the shortage of vessel space, which has fueled intense competition among shippers and driven up costs. With the Suez Canal effectively inaccessible, rerouting via Africa has added complexity. Companies must choose between expensive vessel charters or faster sailing speeds that increase fuel consumption and operational costs. Given ongoing geopolitical instability, including the Israel-Hamas conflict, retail, manufacturing, and operations managers must prioritize adaptability and proactive planning to navigate these challenges.
So after going through the learnings from industries and professionals, we are now in a position to provide the following mitigations:
Leverage Data Analytics and AI in Supply Chains: Harnessing the power of AI and data-driven strategies has revolutionized supply chain operations, making it possible for companies to better navigate geopolitical disruptions and trade uncertainties. Maersk uses AI-powered analytics to predict delays and reroute shipments ahead of time, ensuring deliveries are made in a timely and efficient manner. IBM's Watson Supply Chain delivers real-time insights by analyzing global data streams and identifying potential risks, enabling businesses to respond promptly. Project44 enhances supply chain visibility with AI-driven tracking, offering instant updates on port congestion and delays for rapid adjustments. Additionally, the European Space Agency collaborates with nations to deploy satellite technology for precise ship tracking, ensuring uninterrupted operations during crises. Together, these innovations highlight AI's pivotal role in creating resilient, adaptive, and seamlessly connected supply chains.
Partnering with BPO Services: Collaborating with Business Process Outsourcing (BPO) providers offers a long-term strategy to decentralize risks. This approach spreads operational responsibilities and safeguards firms from recurring supply chain disruptions.
Adopt Multimodal Logistics: Retailers are increasingly using multimodal transport options to navigate surplus effectively. This practice should be standardized, following initiatives like the India-Middle East-Europe Economic Corridor proposed at the G20, to enhance connectivity and reduce bottlenecks.
Maximize Shipping Efficiency: Shipping companies must increase operational efficiency, striving to utilize 100% capacity rather than the current 80–85%. This can significantly reduce costs and optimize the use of resources during crises.
Encourage Advance Container Bookings: Early booking of containers shields businesses from last-minute price surges and delays. Companies already benefiting from this practice showcase its value as a proactive supply chain strategy.
Nearshoring for Value Chain Optimization: Relocating key elements of the value chain closer to the end consumer minimizes risks tied to geopolitical events and logistical challenges. Nearshoring ensures greater control and flexibility in uncertain times.
The Red Sea crisis underscores the fragility of global supply chains and the need for immediate and strategic adaptations. The ripple effects of geopolitical instability, rising costs, and logistical bottlenecks have pushed businesses across industries to rethink their operations. By leveraging advanced tools like AI for predictive analysis, adopting multimodal logistics, and nearshoring to minimize risks, companies can build more resilient supply chains. These proactive measures, combined with collaboration among stakeholders, will be crucial for navigating current challenges and preparing for future disruptions. As global interdependence deepens, resilience and adaptability must become the cornerstones of supply chain management to ensure sustainable growth and stability in an uncertain world.
By Saksham Jaiswal
Saksham Jaiswal is a dynamic and driven student pursuing a specialization in Business Global Operations at the prestigious Shri Ram College of Commerce (SRCC). With a rich background in the merchant navy as an officer, Saksham brings a unique perspective to global trade, economics, and resilience studies.
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