Impacts of Contraction in Europe and Possibly China Should be of Concern
As the Q1 earnings and economic forecast cycle winds down it should be somewhat clear to supply chain teams that the planning for product demand and associated resources across the Eurozone, and in some cases, China, will continue to be challenging at best.
Last week, the International Monetary Fund trimmed its forecast for total European output to a negative 0.3 percent this year. The agency also trimmed its 2013 forecast for global-wide growth from 3.5 percent to 3.3 percent.
As Supply Chain Matters has noted in our previous commentary concerning global output activity, PMI levels for Europe continue to trend further downward. Uncertain signs are now appearing concerning China. The Wall Street Journal reported today that industrial profits in China for the March timeframe rose just 5.3 percent, down from the 17.2 percent growth rate posted for the first two months of this year.
Financial media reporting reflecting on the latest Q1 quarterly results from manufacturers have specifically taken note on the negative aspects of the Eurozone. Some of the examples across various tiers of industry supply chains include:
- Dow Chemical reporting a 12 percent decline for sales volumes across Western Europe.
- Air Products and Chemicals reporting a 5 percent decline in European revenues with a reduced outlook for the remainder of the year and prompting the need to cut additional costs.
- General Electric, who was one of first multinational companies to warn of European trouble signs last year, recorded a 17 percent decline in European sales. GE indicated that the contraction was broader and worse than initially thought.
- The Wall Street Journal recently reported that five of the biggest auto manufacturers in Europe reported grim Q1 performance. This included an uncharacteristic 26 percent decline in operating profits at Volkswagen, a 12 percent revenue decline at Renault SA, and a 6.5 percent revenue decline for PSA Peugeot Citroen. Ford Motor Company reported a $462 million operating loss in the region, and despite initial bold efforts to close 3 European factories, expects to take a $2 billion loss by year-end. Even German premium brands such as Mercedes and BMW have begun to feel the effects of slowdown in both the home German and other Eurozone markets, as well as in China. BMW is now forecasting a single digit increase in China auto sales vs. a 40 percent increase last year.
- Global consumer goods company Unilever, previously demonstrating a rather agile and broad support for global product demand also felt the effects of a slowdown in Europe among its various product offerings.
- Global apparel and footwear producer Nike indicated a 20 percent decline in operating profits concerning China while restaurant services provider Yum Brands reported a 41 percent decline in Q1 operating profits in China following media accusations of antibiotic use by its suppliers.
All the above are continued reinforcement that supply chain organizations must be able to refine supply chain planning capabilities. The ability to plan in more finite segments, by country, region and individual product area are obvious. Scenario-based planning and more insightful business intelligence by country are ever more important.
While the current news of contraction remains negative there will as we all know, eventually be a bottoming. Some individual countries may bounce back earlier than others. Similarly some markets and product segments may rebound quicker than others. The key is to be able to assess and determine when it occurs before your competitors. With capacity and resources continuing to be cut-back across the Eurozone, it is equally important to have adequate lead time to plan for additional resource needs, when the time comes.
While contraction is the overriding headline for Europe, there will come an eventual bottoming and upturn. Will your organization or S&OP process be able to determine that point quicker than your competition?