Trade Finance Lessons From The Microchip Shortage

Published  4 MIN READ

For thousands of companies across the globe, the worldwide shortage of microchips has added to the economic pressure they already face as a result of the pandemic. Michael Boguslavsky, Head of Artificial Intelligence, Tradeteq, looks how trade finance has been affected and the steps firms can take to mitigate supply chain risk.

The worldwide shortage of microchips has proved that their timely delivery is essential to global trade, with manufacturers and companies across more than 150 industries reeling from their lack of availability. Two unconnected events that caused the temporary pause in the manufacturing process made it hard to predict – a fire at a warehouse in Japan, and severe winter weather in Texas, United States.

By the end of July 2021, at least 17 factories in Europe and North America had either stopped or slowed production for lack of computer chips, according to The Washington Post. Bigger names in the industry – including Tesla, BMW, General Motors and Ford – have also been affected by the shortage, with Ford reporting the cost of the microchip shortage to the company alone being as much as $2.5bn.

It is not just manufacturers and suppliers that have been affected – banks, factoring companies and other ‘sellers’ of risk with a stake in trade finance deals were also impacted by reverberations across the industry.

Many of these firms have the resources to hand. Specifically, they have access to, or in some cases have developed, advanced technologies and world-leading operational and risk management systems. However, many existing systems in place failed to foresee the microchip shortage and the effect on operations.

This is a moment of self-reflection for the global business community. And within trade finance, it is both a timely reminder and an opportunity to review and potentially improve risk-monitoring protocols.

AI role

Numerous systems today enable businesses to track how consumers engage with them, send payments to counterparties and partners thousands of miles away in real-time, and communicate with people globally. Surely the technology exists to monitor risks in the supply chain more effectively?

The answer could lie in the adoption of artificial intelligence (AI) – a technology that has made significant advances over the past decade. For investors and sellers of risk, including banks and factoring companies, it holds the potential to help identify and monitor risks in the supply chain before they become a systemic issue.

If, for example, a supplier has a cash flow issue, unexpected weather patterns affect a supplier’s ability to manufacture a product, or an incident takes place that affects multiple companies with a similar size and profile, firms can receive an early-warning sign to investigate what happened, how it might affect them and parties across the trade finance chain and respond quickly.

This ensures they are staying ahead of potential risks and systemic events, rather than reacting to them. Crucially, it is an example of technology making the global trade and supply chain ecosystem more responsive, agile, and efficient.

Banks can also use AI-powered analytics to assess the riskiness of clients, vendors, and individual transactions – all of which can suffer from the knock-on effects of supply chain disruption. Banks can begin to do this with entirely new levels of granular insight and accuracy. In many cases, this can open the door to new financing opportunities for businesses that would have otherwise been overlooked using traditional methods.

In particular, AI can help to create more accurate credit-scoring models that offer deeper levels of analysis. This can include a company’s payment history, measurement of the risks of funding a specific transaction when dealing with different counterparties, and identification of specific supply chain risks and then benchmarking them against their peer group.

Trade finance revolution

Global trade is interconnected and businesses are more reliant on one another than ever before. This is why the impact of the microchip shortage has been, and continues to be, so significant.

Technology has been one of the biggest drivers for change in global trade finance in recent years. It can be used to digitise and speed up how information is shared and improve communication across supply chains.

Trade finance is a centuries-old industry that remains largely paper-based and reliant on manual processes. With the need for automation and digitisation becoming the norm in all industries, these outdated approaches are quickly becoming unfeasible.

The Digital Container Shipping Association, for example, recently revealed that only 0.1% of bills of lading are issued electronically. Digitisation of this process can drive down the cost of trade finance transactions while increasing the transparency for all parties involved – consequently reducing credit risk and enhancing cash flow forecasting.

That said, the past two years have shown that many global events cannot be predicted or planned for, nor can their impact be completely avoided. However, firms can use AI models to manage and mitigate the negative effects, enabling them to respond quicker and become far more agile. As the industry looks to step beyond the microchip shortage and continue supporting business and global supply chains, recent events have proved to be a vital turning point – helping shape the trade finance landscape of tomorrow.