We would like to alert our Ferrari Consulting and Research Group clients and our Supply Chain Matters readership that our Q3 2016 Newsletter published yesterday and should be in the email inboxes of those who have subscribed.
Our latest newsletter again reinforces important trends brought forward by developments this past quarter.
Global manufacturing and supply chain activity as recorded by the JP Morgan Global Manufacturing PMI index reflected some bounce back but otherwise the long-term trend of low growth prevails.
Among Developed Regions, there were mixed signals with Japan and Taiwan experiencing stronger demand conditions but the United States experiencing some setbacks. GDP in the United States was reported to be a disappointing 1.2 percent in the second quarter.
Emerging Regions reflected slower growth momentum in Q3. Manufacturing and supply chain activities continue to improve in India, but there was some moderation reflecting on the prior growth levels within Mexico, Vietnam and Indonesia. Activity across China moved to expansion level however, the rate of expansion is characterized as marginal.
Among other Newsletter articles for Q3:
- Significant Industry and Supply Chain Developments in Q3- the quarter was dominated by significant and highly visible supply chain related news and developments. That included the emerging financial fallout from Volkswagen’s cheating on emissions levels over a year ago. Samsung’s unprecedented sales and production suspension of the Galaxy Note 7 smartphone after continuing reports of fire and explosions with this device dominated media channels, as were the emerging implications and learning. In global transportation, The Hanjin Shipping bankruptcy events cascaded among multi-industry supply chains and provided the wake-up call to the extent of industry overcapacity and more pending consolidation. Wal-Mart’s revised strategic emphasis on online shopping, and fulfillment capabilities coupled with additional retailers announcing permanent closings of physical stores motivated us to declare that the retail industry has entered a new phase of online and omni-channel fulfillment.
- China Investing in Broad Industry Value-Chain Capabilities- we highlight a recent report from The Wall Street Journal reporting on the trend of more of China’s manufacturers turning to domestic sourcing of key components, with a government strategy emphasizing more value-chain sourcing within that country. More and more product value-chain component suppliers in-turn are developing world-class manufacturing capabilities at lower inbound costs for China’s end-item manufacturers. All of this has implications for broader global supply chain activities and global trade.
- Vietnam- Asia’s Next Manufacturing and Supply Chain Tiger– we highlight a report by The Economist for why the country is increasingly becoming a new end item manufacturing and component sourcing destination for many industries which include strategic cost advantages in areas such as workforce, geography, policies and global trade.
- Record High Global Supply Chain Risk– we also highlight the latest report of the CIPS Risk Index which reportedly rose to its highest level in nearly two decades. The existing rise in global supply chain risk is attributed to heightened geopolitical risks, to include the unknow effects of Brexit and the U.S. Presidential Election, the extent of the growth slowdown and protectionist trends within China, emerging markets financial vulnerabilities and increased terrorism impacts on global cross-border movements. CIPS recommends that supply chain teams gain clear visibility of the supply chain, and with continued exchange rate downside risks, that teams consider paying suppliers ahead of contracted payment.
As a reminder, all registered subscribers of the Supply Chain Matters blog automatically receive a copy of the newsletter at their designated email address. If you are not signed-up for distribution and would like a copy of our latest Newsletter, please send an email with the title Newsletter Request to:
newsletter <at> supply-chain-matters <dot> com.
Please remember to include your Name, Role and/or company with your email address and we will have a copy sent directly as well as automatically add your email to future distribution. As a reminder, our policy is to not sell or disclose any individual subscriber data to any third parties.
Thanks again for your continued readership.
Bob Ferrari, Founder and Executive Editor
It is that time of the year again, one which has become rather predictable for Apple’s supply chain ecosystem. Every year in the September-November time period, the world anticipates Apple’s announcements of its newest products including the all critical iPhone.
September triggers other external industry actions as well that reflect on what may be occurring across the company’s supply chain.
Apple has established a predictable pattern for announcing its new products in the September-November period, and the consumer giant’s loyal followers are patterned to anticipate such announcements in-time for Q4 holiday gratification. Every other year, Apple’s new product announcements typically include a compelling hardware revamp.
However, patterning and predictability has allowed Apple’s principal competitors such as Samsung, Huawei Technologies, Xiomi and others to move their new product announcements to occur mid-year, prior to Apple, in-essence scooping Apple in marketing features and function buzz.
We have longed praised Apple’s public relations and marketing teams for the superb job they do in building-up the hype interest related to Apple’s newest products. Every September, not only do social media channels buzz with comments related to what may be announced in the latest iteration of iPhone, in this year’s case, the iPhone7, but also the usual rumors of supply chain challenges that may hinder consumers in getting one’s hands on the newest phone by the holidays.
This week was no exception with Apple’s iPhone7 announcement, only this time, Apple’s PR teams have what appears to be a greater challenge of convincing existing iPhone owners of the compelling need to upgrade to the newest model. Already, the initial buzz seems to be that Apple has not included enough compelling evidence to warrant a new upgrade purchase. Then again, there are always those that have to get their hands on the latest iPhone model.
The new iPhone7 and iPhone7 Plus models were announced with longer battery life, sharper screens and long awaited larger storage, but alas, the elimination of the headphone jack has captured most of the initial social commentary. The jack was eliminated to make the newest model thinner and allow for more waterproofing. Instead of the traditional plug-in jack, Apple has introduced AirPods, wireless headphones that are designed around a wireless microprocessor that can be obtained for a mere $159. According to a report from today’s edition of The Wall Street Journal, technophiles in China have affectionately dubbed the new AirPods as hair dryers.
For customers in the all-important China region, it would appear that the new features and functions can be garnered from competitor manufacturers at less cost.
This week’s iPhone7 announcement schedule was far more aggressive. Orders for the new model will begin shipping on September 16 for 28 countries, up from an initial 12 countries for last year’s iPhone6 launch.
Supply Chain Ramp-Up and Sourcing
August and September are when Apple’s component suppliers and contract manufacturers ramp-up volume production to build inventories for the all-important holiday fulfillment quarter. Multitudes of temporary workers are brought on-board, and select Asian country production and inventory activity indices predictably spike in Q3/Q4 to reflect the Apple wave. This year, as is in past years, rumors are prevalent about production ramp-up challenges, lower than expected production yields and other supply challenges. Most are directed as the new dual-lens camera feature.
Earlier this month, the WSJ reported that as Apple grapples with subsequent quarters of declining iPhone sales, the consumer electronics icon began an effort in January to once-again cut better supplier deals, However the latest development is the double whammy of cutting prices as well as setting lower volume expectations with component suppliers and contract manufacturers, threatening to further impact various supplier financial performance. According to the report, suppliers are wary about the lack of a smash hit and the demands from Apple for additional discounts is not sitting well. Foxconn, one of Apple’s largest and most trusted contract manufacturers has seen its operating margin slip from 3.4 percent to 2.3 percent in Q2. Other Q1 and Q2 financial performance results from various key Apple suppliers reflect weakening results and increasing operating margin stress,
No doubt, Apple will be closely monitoring weekly fulfillment results and will dynamically adjust supply requirements. Suppliers will be expected to respond and conform to any required changes either up or down in nature.
Social Responsibility Concerns Continue
Also every September, social responsibility watchdog China Labor Watch, reports on its latest findings of alleged labor abuses involving Apple’s major suppliers. This year is no exception, with the watchdog group again focusing on reported abuses involving contract manufacturer Pegatron. Readers may recall that in 2015, Apple further segmented its supply chain with the addition of Pegatron as a supplemental, lower-cost contract manufacturer.
In a report published in late August, the labor watchdog analyzed over 12 months of payroll statements from select Pegatron workers. This latest report concludes that while the average wage rates in China have steadily increased, contract manufacturer worker wages decreased significantly in the past 8 months from a series of payroll practice changes along with added worker deductions. The report further points to the occurrence of excessive overtime work particularly occurring during production ramp-up periods. The China Watch analysis of 2015 pay statements concludes that 62 percent of Pegatron workers worked over 82 hours of overtime per month, and that factory workers continue to be forced to work overtime hours. The labor watchdog group indicates that it has shared its findings with Apple.
In fairness to Apple, labor conditions across China’s consumer electronics sectors are not just common to Apple. China Labor Watch has issued similar concerns regarding Samsung’s China based suppliers as well as other manufacturers, which reflect a continual environment of accepted or tolerated labor abuses. At least Apple is willing to put more effort and broader visibility to its social responsibility expectations and audit practices.
Thus, the Apple supply chain enters another Q3-Q4 period of expected performance and miracle-making but with far more uncertainties related to the financial fortunes for being an Apple supplier. Meanwhile, Apple itself seems to be protecting its high operating margins and the potential expense of a more volatile supply chain.
This will indeed be an interesting subsequent period of the new iPhone and other newer Apple product models. Apple’s influence and clout remain open to challengers. If you had thoughts that your firm or organization’s sales and operations planning (S&OP) was continually challenged and constantly changing, think perhaps of Apple.
As Supply Chain Matters blog readers are aware, one of our objectives in providing supply chain management focused education is to point out and reference significant industry milestones that we believe should be monitored. Two very recent examples were the announcement of China’s first flexible display production line and our declaration of a new phase of online and Omni-channel fulfillment. We now call attention to a third significant development, one that involves the aerospace and commercial aircraft industry and its associated supply chain ecosystem.
This week, the government of China announced the creation of a new state-owned firm, Aero Engine Corp. of China (AECC). The mission of this proposed manufacturing firm is to accelerate the development, production and testing of advanced jet engines within China. In conjunction with Sunday’s state media announcement, China’s President Xi Jinping indicated that the creation of AECC is a “strategic move” to help develop homegrown aerospace companies, part of China’s current five-year plan to foster more high technology industries that can fuel future economic growth. The company would be funded with 50 billion yuan ($7.5 billion) of initial capital investment with three investors that include the government of China, Aviation Industry Corp. of China, an aerospace conglomerate, and Commercial Aircraft Corp. of China (COMAC), a manufacturer of commercial aircraft. According to a state-media report, AECC will eventually employ upwards of 100,000 workers.
It is common industry knowledge that the explosion of demand for new commercial aircraft designs was fueled by the ongoing and future air travel needs involving Middle Eastern countries as well as China. Currently, China’s current two homegrown passenger jet designs rely on non-Chinese manufacturers such as CFM International, General Electric and Pratt & Whitney. The newly announced COMAC C919 relies on CFM International engines for its two power plants. A homegrown jet engine designer and producer strategically allows China to less dependent on foreign manufacturers for its military aircraft needs.
As various business media are pointing out, the design and manufacturing of advanced jet engines is a very complex task requiring a lot of engineering intellectual property and production process capabilities. Today’s more advanced and fuel-efficient aircraft engine designs stem from billions of dollars and multi-year investments in component design, more advanced materials and turbine technologies.
Then there is the longstanding challenge of occurrences of multi-industry industrial espionage that often involve China’s state-owned firms. In one example, when China initially had desires to enter the high-speed industry, the country elected to partner with French and Japan producers leveraging technology transfer arrangements. Eventually, China’s state-owned railway firms managed to copy the advanced design of components and now provide high-speed rail trains not only for China’s domestic needs but other countries as well. In a 2013 Supply Chain Matters commentary, we called attention to a Financial Times report indicating that a quarter of U.S. companies conducting business in China at that time had indicated that they have had trade secrets stolen or compromised through cyber related attacks on their China operations. China has since made overt efforts to crackdown on industrial espionage but such threats and concerns remain.
Thus far, existing aircraft engine producers have resisted technology transfer arrangements with China’s aerospace industry. However, both Airbus and Boeing, requiring broader market access to China’s new aircraft needs, have established respective local manufacturing assembly presence in the country along with significant component suppliers as part of respective new aircraft supply chains.
The obvious question is when will AECC eventually come up with a viable aircraft engine design and production capability. The reports that we reviewed thus far currently predict a realistic 5 to 10-year timeline window. In its reporting, The Wall Street Journal observes that while Chinese engineers have since developed military jet engines, they have yet to master technologies required to produce more powerful and reliable turbofan engines suitable for commercial transport needs.
Thus, August 2016 provides yet another milestone, that when China declared its intent to eventually be a home-grown designer and producer of commercial aircraft engines. The open question is now design methodologies and timing.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Two Contrasting Events: Brexit and the Expanded Panama Canal Add New Dimensions for More Active Planning – Part Two
It’s the last Monday in June and as we pen this part two Supply Chain Matters advisory commentary two major developments over these past few days are going to have a definitive long-term impact on various industry supply chains. One is the unexpected results of the referendum by voters in the United Kingdom endorsing an exit from the European Union. Our part one posting of this series addressed our initial perspectives and recommendations regarding Brexit. In this part two advisory, we will address yesterday’s formal opening of an expanded Panama Canal.
Yesterday, after nine years and in excess of $5 billion in investment, the Panama Canal Authority formally opened new locks on both the Pacific and Atlantic Ocean facing entries to accommodate the transit of far larger ships. The first ocean container ship to transit the expanded canal, the renamed Cosco Shipping Panama, operated by Costco Shipping Lines traversed an expanded canal from the Atlantic to the Pacific side.
The opening of this well-known expanded waterway was completed after nearly two years of delay, and considerable cost overruns. At one point in 2014, a stalemate raised doubts as to whether this huge infrastructure project would ever be completed. Container vessels with capacity in excess of 12,000 TEU’s are now expected to be able to take advantage of the widened canal with promised faster direct transit times from Asia based ports directly to eastern United States ports, thus avoiding inter-modal movements across the United States. The other opportunity is for east coast based regional shippers to now have a direct transit route to East Asia.
There has been much anticipation as well as speculation regarding the benefits of an expanded Panama Canal. About a year ago, The Boston Consulting Group (BSC) and C.H. Robinson released a joint study-How the Panama Canal Expansion is Redrawing the Logistics Map, and predicted that by 2020, up to ten percent of container traffic bound for the United States from East Asia could shift their destination to U.S. East Coast ports. According to the authors, that shifting volume is equivalent to building a port double the size of the existing Ports of Savannah and Charleston. The study concluded that this container routing shift will permanently alter the competitive balance among U.S. East and West Coast ports as well as the battleground region for determining the most cost efficient or service-sensitive assumptions in logistics and transportation routing. The BSC study concluded that time-sensitive cargo may continue to route through U.S. west coast while cost sensitive or high density cargos may have economic advantages in east coast port routings.
Since then, other studies have pointed to new opportunities in logistics and transportation related to direct Asia to U.S. and converse goods transit, including the operation of new inland ports.
However, the one current gating factor is that many of the key U.S. East Coast ports are still working on infrastructure projects that would allow larger vessels to call on such ports. The ports currently best prepared to handle these larger vessels are the Ports of Miami and Savannah. Both the Ports of Baltimore and Charleston have active dredging projects underway while the combined Ports of New York and New Jersey still have significant infrastructure requirements yet to be overcome including a bridge near Bayonne New Jersey.
As we noted in a previous Supply Chain Matters commentary, a current boom in distribution and warehouse development includes large investments in east coast regions. The State of South Carolina is aggressively positioning its logistics and distribution infrastructure to be an economic beneficiary of the new routing. Over six million square feet of warehouse space is under construction in the Greenville- Spartanburg region mostly being attributed to the ability to support direct ocean container movements from Asia to the U.S. An inland port at nearby Greer South Carolina is connected by rail to the Port of Charleston. From the Greenville- Spartanburg area, trucks can transit goods to the rest of major eastern U.S. cities or to U.S. Midwest manufacturing regions within a day’s drive. Thus, an alternative option opens up for direct transit and distribution of goods.
A lot will depend on active analysis and modeling by logistics and transportation as well as S&OP teams on the various cost and service options related to ocean movements to U.S. West Coast ports with intermodal truck and mail inland vs. direct ocean transit to U.S. East Coast ports with adjacent inland distribution and transit. A factor in modeling will be assumptions on port and infrastructure readiness as well as direct labor environment. Another uncertain factor is the all-important long-term cost of fuel, which is currently still hovering at unprecedented low levels.
Needless to state, global supply chain logistics and distribution routing has no changed. Active global supply chain network modeling and assessment has become an all-important necessity followed by capability elements for ensuring broader supply chain wide visibility. The expanded Panama Canal now opens a long anticipated new opportunity but comes with differing and changing assumptions.
Be prepared with people, technology and more informed decision-making capabilities.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.
China Sets its Formal Economic GDP Growth Goal for 2016- Setting the Stage for Industry Value Chain Collisions
The depressed state of manufacturing activity across China has garnered far broader business media and industry supply chain attention. Gross overcapacity among certain industry manufacturing and supply chain sectors has created bigger headaches for China’s governmental leaders, and consequently for industry supply chains.
Last week’s announcement indicating that this year’s annual growth target has been lowered to a range of 6.5 to 7 percent range will add, in the view of Supply Chain Matters, further consequences with the stage set for industry vale-chain collisions.
Last year, China’s growth rate was reported as 6.9 percent but a variety of global economists continues to question the reality and accuracy of that number. Further, that growth rate represents the slowest growth pace in 25 years. The International Monetary Fund (IMF) had established that agency’s growth plan for China as 6.3 percent this year as compared to an original forecast of 2015 growth of 7.1 percent nearly a year earlier. The 2015 forecast was subsequently revised downward to 6.8 percent by mid-2015. The new established growth rate marks for the first time in nearly twenty years that rather than a specific number, a target range has been established. Previously, a specific GDP growth target has always been achieved, regardless of market challenges. It was a number that would consistently be reported and achieved.
The new annual growth goal was announced by Premier Li Keqiang at the National People’s Congress last week. The goal is part of a broader strategy aimed to stimulate growth, maintain employment, encourage needed restructuring of industries and continue to focus cities as the nucleus of employment growth. A recent edition of The Economist featured a published article titled, The march of the zombies, (Paid subscription required) which in-essence, declares that China’s existing “grotesque overinvestment in industrial goods is a far bigger problem.” In his recent declaration to the People’s Congress, the Premier declared: “We will address the issue of “zombie enterprises” proactively and prudently by using measures such as mergers, reorganizations, debt restructuring and bankruptcy liquidations.”
However, publications such as The Wall Street Journal and the Financial Times continue to point out that local governments are highly dependent on these zombie enterprises for local revenues to offset prior large investments in regional manufacturing and local economic manufacturing zones to spur employment and economic growth. Thus, the impetus for zombies is self-fulfilling and a means for continued survival.
Included in this annual growth declaration was a commitment to generate 10 million new jobs among the country’s urban areas and to maintain unemployment below 4.5 percent in cities. A revised five year economic blueprint additionally calls for easing controls on overseas investments among China’s largest enterprises. China’s targeted budget deficit will reportedly be risen to 3 percent of GDP in 2016, up from 2.3 percent in 2015, while there are additional pledges to reduce corporate taxes and fees for Chinese enterprises. The ongoing strategy toward fostering a consumption based economy will continue, one that has businesses more focused and responsive to domestic consumption needs while decreasing China’s dependence on export-driven manufacturing needs.
As face value, this latest news on revised, more pragmatic growth would have been viewed as good news for foreign based firms focused on tapping China’s vast market potential. Instead, it should be, by our Supply Chain Matters lens, cause for additional caution and added concern.
China’s continuing slide in economic growth has in reality placed more de-facto protections on China’s home grown firms to tap existing anemic domestic product demand in various industry segments. Whether by increased regulation of foreign firms or the uptick in de-facto investigations of the business practices of foreign-owned enterprises, foreign firms doing business in China will continue to experience added challenges. Battered domestic manufacturers, who are now more desperate for growth, are attempting to move-up the technology ladder, turning to additive manufacturing, increased automation such as robotics and Internet of Things as well as other investments aimed at diversification of product offerings. However, as is the usual trend in these initiatives, as goes one, so go the many, causing more duplicative initiatives and investment fueled by the same economic regions that already have high debt loads.
Gross domestic overcapacity in areas such as the manufacturing of steel have prompted other countries to declare unfair price practices with the World Trade Organization, kicking in new tariff protections among other countries. That places new artificial ceilings on producer prices in key economic regions such as the Eurozone and the United States which in-turn are striving to boost domestic manufacturing levels.
The easing of controls on overseas investments implies that some select Chinese manufacturers have the green light for external investments within external industry supply chains. Evidence of this has already occurred in automotive industry value-chains and in high-tech and consumer electronics supply chain by virtue of investments in foreign semiconductor based firms. Readers should not be surprised by future investments in alternative energy value-chains such as battery and storage technologies.
The J.P. Morgan Global Manufacturing PMI posted a value of 50 at the end of February, representing a 39 month low and a level that signals overall global manufacturing contraction. China, the epicenter of global manufacturing, beset with enormous challenges of balance sheet profitability and significant overcapacity challenges among industry manufacturing sectors will now have to respond to even greater challenges to maintain growth momentum, diversify into more promising strategic growth sectors or risk being an economic casualty. Other countries have come to the realization that the promise of added growth for emerging market regions has also significantly muted. In 2016, the stakes are far higher along with the consequent implications to broader industry and global value-chains face their own challenges to spur manufacturing and supply chain growth.
Years ago while an industry analyst at AMR Research, this author recalls our well attended annual client conferences when tech industry icon Bruce Richardson would present his often anticipated talk: When Industry and Technology Forces Collide. Something has to give when industry forces collide, and that will likely be the global manufacturing and industry value chain scenario of 2016.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.