Deep Dive on 2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Provide Added Global Sourcing Challenges
The following Supply Chain Matters blog is part of our ongoing series of deep dives into each of our previously unveiled ten 2017 Predictions for Industry and Global Supply Chains.
At the start of the New Year, our parent, the Ferrari Consulting and Research Group along with our Supply Chain Matters blog as a broadcast medium, provide a series of predictions for the coming year. These predictions are shared in the spirit of assisting industry specific and global supply chain cross-functional teams in helping to set management objectives for the year ahead. Our further goal is helping our readers and clients to prepare supply chain management and line-of-business teams in establishing impactful programs, initiatives, and educational agendas.
The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and customer service management.
In an earlier Supply Chain Matters blog postings, we provided deep dives related to:
In this deep-dive series posting, we drill down on Prediction Four.
2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Will Provide Added Sourcing Challenges for Industry Supply Chains
In our predictions concerning 2016, we stated that major developments surrounding global trade policies would occupy the attention of many industry supply chain organizations during the year. Our context was the potential adoption of major global trade agreement such as the Trans Pacific Partnership (TPP), China’s competing One Belt, One Road (OBOR) initiative, and the Transatlantic Trade Investment Partnership (T-TIP). Geopolitical events turned quite negative in terms of expanded global trade and thus the attention of industry supply chains never materialized.
For 2017, our prediction remains that major developments surrounding global trade policies will occupy the attention of many industry supply chain organizations during the year, but now from a far different and perhaps opposite perspective.
Across the globe, growing gaps in income inequality and rising political discontent against elements of domestic and international status quo are fueling a growing backlash towards global trade and unfettered open markets. With heightened global tensions now turning toward more anti-trade and possibly more protectionist rhetoric among developed nations, industry supply chains must now be prepared to deal with potential near and longer term implications that such policies will bring about.
A global environment that begins to turn hostile toward open global trade policies could result in increased import tariffs and added protectionist measures among trading nations, particularly China and the United States. According to the IMF’s October 2016 World Economic Outlook: “In short, turning back the clock on trade can only deepen and prolong the world economy’s doldrums.”
As we pen this prediction in early January, the World Bank declared that political and policy uncertainty in China, Europe, and the United States and in other major global economies are at unprecedented levels. There are fears that the Administration of Donald Trump could trigger a trade war with China and Mexico with threats to impose higher import tariffs for components and products entering the United States. The bank cautions that such a trade war may offset any gains from corporate tax cuts for U.S. businesses.
Further as we pen this prediction, proposals being floated by the Republican Party dominated U.S. Congress that are being directed at corporate tax reform feature border adjustment concepts. Essentially, the concept is applying taxes based on where a product is sold rather than where it is made or where the producer’s operations or executives are based. Imports would not be deducted as a cost of doing business, while exports would be exempted from taxes. The Wall Street Journal and other business media have already raised awareness as to the potential impact on industries that sell most their products domestically while sourcing most production externally in lower cost manufacturing regions. Examples are toys, consumer electronics, apparel and footwear and other products. Such concepts, if enacted, will place a far different financial perspective related to lower-cost production sourcing.
We anticipate that industry supply chain network models will undergo continuous analysis and scrutiny in the coming year as respective supply chain teams assess various changing landed cost and tax factors among product management models. That will likely require a lot of analytical modeling to ascertain impacts to product margins and line-of-business financial metrics. They could further impact today’s contract manufacturing services model in the notions of where bill-of-material components originate from and where final products are shipped to.
Global trade issues indeed percolate in the coming year and they will likely be complex and confusing to sort out in terms of which will ultimately come to fruition. We concur with the IMF and the World Bank assessments that the Trump Administration could well be part of the epicenter of anti-trade disruption rhetoric to fulfill the political promise of Make America Great Again, and that may well include heightened trade tensions involving China or other lower-cost manufacturing nations.
Global trade advisory firms and consultants will be quite busy in 2017 in advising clients of potential implications of more protectionist trade policies or the heightened risk factors for certain global markets.
As noted in Prediction One, the ability to analyze and share important information, and to educate the business and C-Suite executives on supply chain impacts and/or risk tradeoffs of changed trade policies that potentially impact existing global and product innovation sourcing will be an important differentiator and competency throughout 2017. Collaboration among product sourcing, product development and supply chain strategy teams is essential. Organizations should further consider the value of organizing centralized, dedicated sourcing strategy and impact teams responsible for ad-hoc analysis while fostering a common foundation of analysis data and information. In essence, the task may be more of multiple scenario based analysis predicated on different input and output factors.
Our takeaway is that an assumed static global sourcing strategy could prove to be rather risky in 2017. Technology supporting more analytically focused analysis and decision-making will likely play a very important role in the coming year.
This concludes our Prediction Four drill-down. In our next posting of this series, we will dive into Prediction Five that predicts continued turbulence across global transportation networks.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Just before the Christmas holiday there was an announcement regarding an additional investment in LCD supplier Japan Display. Its largest shareholder, the government-backed Innovation Network Corp. of Japan is investing an additional $636 million in this supplier, consisting of both convertible bonds and a subordinated loan. Yet another financial infusion from government of Japan interests provides yet another example of the high stakes involved for being a supplier and constant innovator of consumer electronics components.
In late August of 2011, three of Japan’s existing liquid crystal display (LCD) component producers, Sony Corporation, Toshiba Corporation, and Hitachi Ltd. merged their, at the time, money-losing LCD manufacturing operations to form a single company that was named what is today’s Japan Display. Each of the former suppliers could not financially afford to continue to compete with the likes of other industry competitors such as Samsung Electronics and Sharp Corp., who were major suppliers to Apple and some other consumer electronics OEM’s. The new venture was financed primarily by $2.6 billion in funding by The Innovation Network of Japan, a government backed agency with strong industry influences, and subsequently an IPO in 2014.
Today, Japan Display serves as one of the four suppliers of LCD technology for the Apple iPhone product lineup. This includes competing with industry leader Samsung Electronics who is already suppling Organic Light Emitting Diode Display (OLED) screen technology. Japan Display indicates that the latest round of funding will boost its efforts to develop OLED panel capability, the literal next wave of technology innovation in displays. This includes the acquisition of OLED developer Joled, which was formed in 2015 by the merger of the OLED operations of Panasonic and Sony. Plans further call for Japan Display to decrease its current concentration as a technology supplier for mobile devices, and to instead focus on next generation display needs within automobiles, laptops, appliances, and virtual reality devices.
This strategic move is wise from two perspectives.
First, Samsung Electronics remains a dominating industry leader and already provides OLED displays for namesake Samsung smartphones, and is likely to continue to supply Apple’s and other high tech OEM OLED needs as well.
Rival Sharp Corp. was acquired earlier this year by Apple’s prime contract manufacturer Foxconn Technology after a lengthy and endless cycle of capital infusions. The acquisition represented a strategic move by Foxconn toward vertical integration of the value-chain of high tech and consumer electronics devices. A February published commentary in The Economist pointed out that in acquiring Sharp, Chairman Terry Gau had the opportunity to exercise his grand “eleven screens” strategy, which opens the possibility that Foxconn assumes the dominant supplier position of advanced high-tech displays of broader industry products from computers, to automobiles to industrial devices or smart watches. Recognizing that threat, Sharp was also evaluating a counter bid from Innovation Network Corp. of Japan for roughly the same ownership stake. The issue of concern behind this counter option was having Japan based Sharp not come under foreign control.
Foxconn’s presence as a long-term strategic manufacturing and technology implementer for Apple places Sharp’s eventual OLED technology as another preferred supplier option, which had to be on the minds of Japan Display executives. With a move away from sole dependence on mobile smartphones, Foxconn and Japan Display will now compete head-to-head in next generation auto and consumer electronics display needs.
As noted in our prior high tech industry focused blog commentaries, LCD screens account for a considerable amount of cost of goods sold (COGS) complement in smartphones and tablets. Increasingly, electronic displays will cater to the needs for enhanced user interaction, most notably automobiles and other transport or user-centric equipment.
The need for production innovation remains relentless, the cost of capital highly expensive and the competition for favored supplier status is fierce. Another theme is one of nationalism, namely a country’s control of product and process innovation securing a long-term industry and component supply chain presence in that country. Often, display industry supply exceeds demand because of overcapacity, eroding abilities to maintain prices that insure adequate profitability as well as continuous new investment needs. It’s a model permeated by dominant high tech OEM players such as Apple and it continues to extract needs for even more financial investment from suppliers.
The difference in this cycle is the potential for electronic displays to be part of the designs of many other product and equipment areas and to lessen the influence of high tech industry supply chain dominants. The financial and market stakes are high but the opportunities continue.
The open question remains which suppliers eventually dominate.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
In October of 2014 we alerted Supply Chain Matters readers to a noteworthy milestone development, namely Chinese designed and branded railway cars appearing in a U.S. subway system. Since that time, much as occurred, and this week, there is yet another development, one that perhaps has implications for the upcoming administration of President- Elect Donald Trump.
The headline back in 2014 was that the State of Massachusetts Department of Transportation selected China’s state-owned CNR Corp. for the replacement and delivery of 284 modern subway cars for the Massachusetts Bay Transportation Authority (MBTA), also locally known as the “T’.
This was the first Chinese manufacturer to win a U.S. based major transit system equipment replacement contract. The further significance was twofold. First, the awarded contract cost, namely $566 million, was a rather affordable sum for this amount of modern rail equipment, far underbidding other railcar manufacturers. According to local news reports, CNR aggressively courted the Massachusetts transit system to gain a foothold in the U.S. rail equipment market. A further significance was that the contract called for the railcars to be assembled at a new final assembly manufacturing facility at a former closed Westinghouse factory site located in Springfield, a central city in Massachusetts. Assembly operations would therefore be U.S. based, with the expectation that other U.S. equipment supply contracts could follow. Major components however, would be produced in China and transported to the U.S. for final assembly of railcars.
Since that time, there have been other developments.
China’s government facilitated the merger of China’s two major state-owned rail manufacturers which included CNR. The combined China Railroad Rolling Stock Corp. then created a local U.S. subsidiary to administer contract delivery needs involving the U.S. including the MBTA contract.
The state-owned China U.S. subsidiary has since landed a major equipment replacement deal with the Chicago Transit Authority, described as a monumental overhaul of the transit authority rail car equipment, amounting to a $1.3 billion contract to replace 846 rail cars, about half of the existing subway car fleet — the biggest car purchase in that agency’s history. The described new generation of railcars also called for localized final assembly to be performed at a new final assembly manufacturing facility to be located on the Southeast Side of Chicago. This assembly facility is expected to be in operation for a total of 10 years with railcar prototypes coming out in 2019, and initial cars being delivered into operational service in 2020. The CSR Sifang America bid came in $226 million lower than that of Bombardier Railcar Equipment, the most recent manufacturer of Chicago’s railcar fleet. Since that time, competing bidder Bombardier filed a protest with the agency, saying that the bidding process was rigged in favor of a Chinese firm that promised to bring manufacturing jobs to Chicago.
This week, the Massachusetts based MBTA control board voted to authorize as much as $277 million to acquire an additional 134 Red Line railcars as an extension of the existing contract with the China based railcar producer. This amended change to the existing contract bypassed standard bidding procedures because the agency indicated that it was seeking to standardize its entire network-wide fleet of both Orange and Red Line cars. The MBTA considered rebuilding the 184 existing Red Line cars not scheduled to be replaced in the initial contract, but a financial analysis had indicated that brand new cars would cost as much as $310,000 less than overhauling the existing ones. The added Red Line cars are expected to replace the entire existing fleet by the end of 2023.
Specifics of the amended agreement were reportedly revealed publicly for the first time on Monday of this week. Board members were asked to approve the deal that same day, to supposedly avoid a price increase and to secure local manufacturing capacity.
Supply Chain Matters brought initial attention to China’s state-owned railway efforts to make a more sustained equipment presence within the U.S. because it included both global and domestic supply chain implications. The plans calling for many of the major train components to be produced in China and shipped to the U.S. for final assembly within local U.S. final facilities insured some local jobs, which was an obvious big deal for local governments. That theme has more current resonance with the discourse that came out of the recently completed U.S. Presidential election. Voters opted for the candidate they perceived to have a more aggressive protectionist stance on jobs and who would take on China as a perceived currency manipulator and in the consequent outsourcing of jobs to that country.
However, from our lens, the real question will come as the new Trump administration begins to unfold its trade protectionist policies.
Current speculation is that the incoming administration will not be shy in slapping increased tariffs on Chinese parts and components imported into the United States. Some plans call for a revised tax code that would feature a form of a value-added-tax or tariff on imported goods. If that comes to fruition, then the economics related to the existing U.S. subway equipment replacement contracts could well be impacted. The question is how much and whether local final assembly turns into something quite different, or whether new subway cars can indeed be delivered at such attractive pricing.
This is an area worthy of observation over the coming months. On the one hand, U.S. taxpayers are saving money and supposedly gaining use of very modern, technology-laden passenger railcars for urban transportation needs. They also gain some local manufacturing jobs.
On the other hand, China’s existing lower direct labor costs, overcapacity situation in steel production, and needs to insure continuous employment among state-owned manufacturers make the landed cost more attractive for local transportation agencies. It is a delicate balance that may well be subject to change, especially if the expected costs of landed components increase substantially.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
These past few days, Supply Chain Matters has been updating our readers regarding ongoing supply chain management developments involving specific companies. That includes Airbus, Boeing, Chipotle Mexican Grill, Pratt and Whitney and others. We have been somewhat remiss in not updating on developments involving one of global business’s most visible supply chain, that being Apple.
There are two somewhat significant developments to share.
Potential U.S. Manufacturing Presence
To begin, multiple published reports now indicate that prime contract manufacturer Foxconn, has confirmed that the CMS is in preliminary discussions to make investments to in-essence expand Apple’s manufacturing operations presence in the United States. One report indicates that this activity is underway despite the objections and wisdom of Foxconn chairman Terry Gau. A Bloomberg published report observes that the disclosure came hours after a joint announcement by U.S. President-elect Donald Trump and SoftBank Group Corp. to invest $50 billion in the U.S. and create 50,000 jobs.
As we have noted in prior commentary, during the heated U.S. Presidential campaign, Donald Trump specifically cited Apple for its tendencies to source thousands of manufacturing jobs in China while reaping the benefits of higher profits. As of now, Foxconn has provided little additional details to business media, no-doubt not wanting to steal Apple’s thunder in such an announcement. Other reports indicate that Apple has been approaching certain other suppliers to consider moving supply chain component manufacturing from China to the U.S.
In the past two weeks, President-elect Trump has publicly confronted Carrier, a Division of United Technologies and this week, Boeing over the projected costs of a new replacement for the Air Force One presidential aircraft.
For multiple years, this blog has challenged Apple to consider expanding some of volume manufacturing volume presence in the U.S. over and above the manufacture of certain Mac computer models. Being a rather savvy and public relations astute company, it may well be that Apple has quickly read a sea-change in the political discourse of the United States and now needs to be prepared to stay on the good side of the incoming administration.
We shall all see what headlines develop in the coming weeks.
iPhone Battery Failure Issues
Turning to the product front, Apple has publicly confirmed that a problem involving some batteries in the manufacturer’s iPhone 6S model is apparently become more widespread than initially revealed. The issue has become known from China’s product safety agency, and Apple reportedly quietly acknowledged the situation on a Chinese web site. China now represents one of the largest installed base markets for the iPhone 6S. The Chinese regulatory agency claims that the battery issue involves older iPhone models as well, including the iPhone6 and iPhone5S but Apple thus far is only acknowledging the small batch of iPhone 6S units.
Apple has stressed that the battery issue poses no safety risk for customers.
The problem manifests itself with the phone prematurely and unexpectedly shutting down to protect its electronic circuitry. Indications are that the cause may be a component within the battery that was contaminated by ambient air. The contamination was initially disclosed to involve phones sold in September and October 2015, but other reports indicate that the situation may be more widespread than just this production interval. Apple has instructed Chinese users to bring their phones to authorized repair centers or to an Apple store for a battery swap. The manufacturer further indicates that it will add a new diagnostic in its forthcoming IoS software update in hopes to mitigate any future problem by a software modification.
This iPhone battery issue is garnering wider visibility after Samsung’s recent crisis involving exploding batteries in the new Galaxy Note 7. Samsung obviously had a clumsy response to its battery issues, which were far more severe, including not informing or involving product safety regulatory agencies early in the process of discovery.
Apple is obviously a more brand marketing savvy customer and has been rather careful in the widespread sharing of the occurrence of product quality issues among its smartphone products. However, one similarity shared with Samsung would seem to be the suspected manufacturing defects involving batteries. Apple also shares a similar battery supplier, that being a component division of Samsung.
Two new developments, each with different connotations related to the brand, and directly involving the supply chain. Even the perceived best in class supply chain is not immune to externally focused developments.
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.
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Thanks again for your continued readership.
Bob Ferrari, Founder and Executive Editor