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China Sets its Formal Economic GDP Growth Goal for 2016- Setting the Stage for Industry Value Chain Collisions

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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.

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


More Evidence of Overcapacity and Turbulence in Ocean Container Shipping

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Citing estimates from global shipping industry forecaster Alphaliner, The Wall Street Journal headlined earlier this week that global ocean container traffic grew at the slowest rate since the global recession. This provides more evidence of structural change in global shipping patterns and volume needs.

Alphaliner is forecasting that container traffic for all of 2015 will grow by a mere 0.8 percent, the smallest increase since 2009. Traffic among the top 30 ports reportedly declined by 0.9 percent in the third quarter, a quarter that should have reflected robust shipping related to fourth quarter holiday sales. Our readers might recall that entering 2015, lines such as Maersk Line were anticipating upwards of 3 to 3.5 percent growths in 2015 volumes.

The WSJ indicates that ship owners and operators have idled more than 1.3 million TEU’s of shipping capacity and cites one shipping analyst as indicating that a sustainable level of freight rates for 2016 could amount to upwards of 2 million TEU’s of idle capacity.

Interesting enough, ports such as New York, Hi Chi Minh City and Port Kelang, Malaysia experienced double-digit percentage growth. That reflects evidence of changing global supply chain sourcing strategies underway.

In 2014, and again in 2015, one of our annual predictions called for turbulence in global transportation, particularly in ocean container shipping.  Prediction Three of our recently published 2016 Predictions for Industry and Global Supply Chains calls for continued change for an ocean container segment that remains bloated by declining global demand with resultant overcapacity. Industry consolidation will continue and a shipper advantage will prevail in terms of rates. Shipping advisory firm Drewy has already warned that industry overcapacity imbalance would extend over the next 2-3 years. The added deployment of newer, larger super vessels has already led to added port congestion and bottlenecks among the world’s busiest ports and that condition will continue in 2016.

Just before the Christmas holiday, the labor union representing dockworkers at the Port of Rotterdam, one of Europe’s busiest ports, voted unanimously to a strike action in the coming weeks. Dockworkers at Rotterdam are seeking multi-year job security in the light of highly automated container terminals.

Indeed, 2016 will be a year of continued turbulence in ocean container shipping. Industry supply chain teams and transportation providers should plan accordingly with backup risk mitigation if required.


Massive Landslide in China Impacting Industrial Factory Park Causes More Concern for Safety Standards

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At least 85 people are still missing after a huge mud slide caused by accumulated dumping of construction waste impacted the Hengtaiyu Industrial Park in the northwestern section of Shenzhen on Sunday.

According to a published report from China Daily, the landslide buried 33 buildings at an industrial park in Shenzhen city, south of China’s Guangdong province. An initial investigation indicated that 14 factory buildings, two office buildings, one canteen, three dormitories and 13 low-rise buildings suffered extensive damage. The slide further ruptured a natural gas pipeline causing an explosion. More than 1,500 people, including firemen, policemen and medical staff were involved in the rescue operations, with more than 900 residents having been evacuated by the slide that occurred on Sunday. Other reports indicate the many of the missing are migrant workers who were employed in the park.

Various media images depict devastation and structural damage to buildings. One report indicates that the mud covered an area of 60,000 squarer meters some as much as six meters deep.

Chinese Premier Li Keqiang ordered an immediate investigation of the mud slide.

According to a published report by Reuters, the impacted site should have been closed in February, but waste had continued to be dumped at this park. More than a year ago, a government-run newspaper warned that the city of Shenzhen would run out of space to dump waste from a building boom.

To what extent this tragic disaster has to certain industry supply chains remains to be seen in the coming days. The broader implication however, points to far more growing concerns relative to enforcement of industrial safety standards across China. We join the global community in concerns for the safety of those victims still missing.

This incident follows the massive warehouse explosions that occurred in the large logistics park adjacent to the Port of Tianjin. That impact from that disaster is still being felt by certain industry supply chains.

This incident is almost certain to have its own implications for a further government crackdown on industrial safety and risk mitigation.


A Milestone Decision to Move Apparel Production Out of China

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Last week, The Wall Street Journal profiled global apparel producer TAL Group’s  decision to close its apparel production factory in Dongguan China because of cumulative effects of rising direct labor costs. (Paid subscription required)

The fact that one of Asia’s largest manufacturers of apparel, supplying brands such as Banana Republic, J. Crew and others, came to this painful decision is rather significant, not only for the apparel industry itself, but others with high direct labor cost considerations.  Wages and benefits in China are expected to increase by 8.6 percent in 2015 according to the Economist Intelligence Unit. That is incremental to last year’s 10.3 percent increase. Average labor cost in the manufacturing sector of China is reported as $3.27 per hour, considerably below existing wages in Malaysia or Vietnam.

The pants apparel maker is now transferring orders to an existing factory in Malaysia, and is expanding its production presence in Vietnam. However, the report indicates that TAL will keep open its 4000 employee dress shirt production facility within China.  Product design innovation and direct to consumer fulfillment strategies among branded shirts has added more cushion for profitability.

We are calling attention to this report because it provides more evidence that competing in the global economy  is not merely about sourcing production where the lowest costs exist, but also providing distinct differentiation in the collection and value of the products and services being provided to consumers and customers.  Moving factories requires additional capital, training and start-up costs, not to mention tradeoffs in country-specific transportation and logistics infrastructure. As note in the WSJ report, making sourcing decisions with a two-decade horizon is not realistic for today’s more dynamic global economy. Firms need to focus on continuous innovation and supply chains need to have capabilities to accurately quantify cost trends, make leveraged use of innovation and deploy capacity across strategic product demand and supply regions.


Initial Supply Chain Focused Impressions of the Trans-Pacific Partnership- Part Two

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In this two-part commentary Supply Chain Matters shares some initial impressions of the Trans-Pacific Partnership (TPP) which has reached the stage of preliminary agreement pending the ratification by member nations. In early October, ministers of the 12 TPP countries announced conclusion of their negotiations regarding trade among what is estimated to represent 40 percent of current global GDP, which is rather significant, especially from a global supply chain context.

In our Part One posting, we shared perspectives on the defining features and summary descriptions of Sections 2, 3 and 4 of TPP.

We continue with pointing out some other important sections for the education of our cross-industry supply chain reading audience.

Section 14- Electronic Commerce

This chapter prohibits the imposition of customs duties on electronic transmissions and prevents TPP parties from favoring national producers of suppliers.  TPP members agree to adopt and maintain consumer protection laws related to fraudulent and deceptive online related commercial activities and ensure that consumer protections can be enforced in TPP electronic messaging. To promote more online focused trading network activity, the agreement calls for promoting paperless trading between businesses and governments including electronic customs forms, electronic authentication and signatures for commercial transactions. The parties agree not to require that TPP companies build separate data centers in store data as a condition for operating in a member country, and that source code of software is not required to be transferred or accessed.

This area will surely aide in measures to streamline B2C/B2B business process and customer fulfillment networks. We also view this as potentially removing barriers to facilitating electronic supply chain control tower capabilities spanning both planning and execution visibility and decision-making needs.

Section 18- Intellectual Property Protections

Consistently, one of the more important concerns for firms and their respective value-chains is IP protection. This chapter of TPP is described as making it easier for businesses to search, register and protect IP rights in new markets. It establishes standards based on WTO’s TRIPS Agreement and international best practices. For trademarks, it provides protections of brand names and other signs that businesses and individuals use to distinguish their products in the market.

This section further contains pharmaceutical-related IP provisions that address both innovative medicines and availability of generic medicines.

Section 19- Labor

All TPP parties are noted as International Labor Organization (ILO) members and thus recognize the importance of promoting internationally recognized labor rights.  Rights are noted as the right to collective bargaining, elimination of forced labor, abolition of child labor and elimination of discrimination in employment, among other tenets.

There are further acknowledgements to have common laws related to governing minimum wages, hours of work and occupational safety and health.  This section will have special meaning to high tech and consumer electronics, high direct labor focused, and general lower-cost focused contract manufacturing focused value-chains.

Section 20- Environment

TPP parties are to share a strong commitment to protecting and conserving the environment and to effectively enforce their environmental protection laws. There is specific language related to the protection of fisheries, endangered species, water and wetlands and marine environment.  The parties are to commit to cooperate to address matters of joint or common interest, including areas of conservation and sustainable use of biodiversity along with transition to lower emissions and resilient economies.

Section 24- Small and Medium-Sized Businesses

A special chapter promoting a shared interest for small-and-medium-sized businesses sharing in the benefits of TPP. It includes commitments from TPP members to create user-friendly business practices, provide assistance in accessing new markets and in overall training.

Section 26- Transparency and Anti-Corruption

A rather important section for strengthening good governance and addressing the effects of bribery and corruption practices. It calls for laws, regulations and administrative rulings be publicly available along with consistent enforcement of anticorruption laws and regulations. The section covers areas for both corporate and public officials.

Obviously there is much more to TPP, more than we can cover in a couple of blog posts. Ratification is expected to occur in 2016 as legislators of individual member countries vote approval. We can’t help to speculate that this effort may take-up most of 2016, given the far reaching aspects of TPP.

As we noted in our initial commentary, certain influential nations such as China are not a current member of TPP. That country, instead, is now actively promoting the Free Trade Area of Asia Pacific (FTAAP) as a further alternative. This week, Chinese President Xi Jinping stated: “With various new regional free-trade arrangements cropping-up, there have been worries about the potential of fragmentation. We therefore need to accelerate the realization of FTAAP and take regional integration forward.”

With a significant global and supply chain influencer such as China, representing the other significant portion of global growth, promoting yet another or alternative trans-Pacific focused trade pact, TPP can either be ratified, compelling other nations to join in its tenets, or could be fragmented by conflicting standards.

Industry supply chains are obviously important stakeholders in these major trade pacts and it will be important to keep up to date on these trade developments along with their implications on easier access to new markets, more leveraged use of technology and impacts to existing business practices.

Supply Chain Matters will do our part to keep readers informed of important developments.

Bob Ferrari

 


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