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The Tianjin Warehouse Explosion and Disaster Has Obvious Industry Supply Chain Implications

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Last week, while on our two-week summer break, we took the time to alert Supply Chain Matters readers to the reports of severe explosions that occurred last Wednesday at the major Chinese logistics center at Tianjin.  The reports and video images alone implied to this author that this was a concerning event.

Since that time, the scope and implications of this tragedy continue to evolve.

Reports now indicate that this tragedy has taken 112 lives with upwards of 700 people injured as a result of the two massive explosions. According to media reports, 95 people, mostly firefighters, are still missing. Supply Chain Matters expresses our condolences and concerns for all of the victims of this tragedy.

The video and visual footage of the wide-scale destruction is sobering to view. The China Earthquake Networks Centre indicated the initial explosion had a power equivalent to three tonnes of TNT, while the second was the equivalent of 21 tonnes. The blast zone extended in excess of 2 kilometers.

Yesterday, authorities confirmed reports that hundreds of tons of the highly toxic chemical sodium cyanide were present in the warehouse involved in the initial explosion. A BBC report indicates that the warehouse stored other chemicals including calcium carbide, sodium cyanide, potassium nitrate, ammonium nitrate and sodium nitrate. The warehouse itself was operated by Ruihai International Logistics Co. and questions have been raised as to how much of the chemical was authorized for storage. Chinese media indicates that at least one member of staff from Tianjin Dongjiang Port Ruihai International Logistics, which owns the warehouse, has been arrested.

When burned, sodium cyanide releases hydrogen cyanide gas which is now the overriding concern for residents throughout the Tianjin area as the clean-up efforts continue.  According to published reports from the BBC and The Wall Street Journal, criminal prosecutors are vowing to conduct an extensive probe amid a growing concern that regulators often turn a blind eye to enforcement of regulations.

Chinese Premier Li Keqiang has visited the scene and has met with the victims of this major disaster and has indicated that regulators will act in transparency regarding readings of current air, water and soil quality within the area. Nearly 3000 troops with chemical protection equipment are reportedly combing areas outside of the 2 kilometer blast zone for possible hazardous chemicals that were ejected by the explosions.

This disaster occurred in the logistics zone serving Beijing, and one of the busiest ports in China and perhaps the world. The port is a major trading center for commodities and metals and a gateway to the industrial northern regions of China. Reports indicate that shipping containers were tossed into the air like matchsticks and were crumpled by the blasts and a logistics park containing several thousand cars was incinerated by the fireball. Renault indicates that some 1,500 of its cars were lost, while Hyundai indicated that around 4,000 cars on the site may have been lost as well.

While the port remains partially open, operations are noted as restrictive due to continued investigations and checks within the area. Toyota announced that it was closing production lines at its factories near Tianjin until the end of Wednesday, while agricultural machinery maker John Deere suspended work indefinitely. Both saw some of their workers injured by the blasts.

For industry supply chain teams, the implications of the Tianjin disaster will likely continue in the coming weeks or months. As the building tide of widespread sentiment reflecting that regulators have turned a blind eye to industrial safety, there will likely be increased scrutiny of manufacturing and logistics operations, particularly those involving forms of hazardous or industrial materials. Already, China has ordered a nationwide check on dangerous chemicals and explosives.

Similar to the 2013 tragedy involving the Rana Plaza explosion in Bangladesh, the 2015 Tianjin explosion could well be a watershed event concerning industrial safety standards. Anticipate that individual firms and industry groups will be motivated to become more active and involved in assuring international standards of warehouse and factory safety, particularly in areas adjacent to high population areas.

The Tianjin disaster could well turn out to be one that either defines improved safety standards or one that places certain industry supply chains with heightened challenges to assure and attest to individual worker and industrial safety standards.  Social responsibility practices will likely again be tested against product margin needs.  The final outcome is one yet to be determined, but one that reflects the realities that China needs to maintain its export volumes and global competitiveness.

Bob Ferrari

 


Commodity Markets Continue to Plunge: Good News and Not So Good News for Industry Supply Chains

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Last week’s financial and equity market headlines featured the news that global investors and speculators are bailing-out on commodities amid mounting worries about the slower pace of global manufacturing growth. If you have been following our global tracking of select PMI indices featured in our Quarterly Newsletter, you will have Two Year Global PMI Trendingvisually noticed this slower overall trend as depicted in the visual attached to this commentary.

Likewise, the precipitous plunge across China’s key stock market also continues, having a potential further impact on China’s major manufacturing sectors as consumers financially stung by severe financial loses retrench in domestic spending.

Commodities such as copper, gold, silver and oil are at their lowest points in years. Global mining firms such as Anglo American, BHP Billiton and Rio Tinto are quickly addressing cost savings by restructuring their commodity businesses that relied on the manufacturing growth and commodity speculation that has occurred in China. Multiple state-owned steel companies across China continue with optimistic output levels despite the evidence of a global surplus and overcapacity condition in steel. Anglo American alone has indicated it would slash upwards of 50,000 jobs over the next several years, amounting to a 35 percent reduction in its current workforce.

Likewise, energy companies are planning additional cost-cutting moves in the light of the sudden drop of oil prices, increased glut of supply and declining trends in global demand for oil.

For the majority of multi-industry supply chain teams, this is ironically good news since lower commodity prices equate to lower input, logistics and cost of goods sold (COGS).

In our Supply Chain Matters 2015 Predictions for Industry and Global Supply Chains (available for complimentary download in our Research Center), we highlighted a continued overall moderation trend for the cost of commodities in 2015 with certain industry specific exceptions.  We predicted that dramatically lower oil prices would be the dominating headline driving commodity and pricing trends in 2015, and just past the half-year point, the trend is holding true. Purchasing and commodity teams can therefore anticipate inbound cost savings in the coming year with the usual exceptions related to unforeseen global weather or risk events such as the bird flu outbreak affecting turkey and poultry flocks in the U.S. Midwest and West regions.

However, teams cannot rest easy since the rising value of the U.S. dollar and resulting foreign currency shifts are providing rather significant headwinds to existing financial results for U.S. based manufacturers or those dealing in U.S. dollar dominated revenue flows. In some cases, such headwinds are having as much as a 10 percent or greater negative impact on overall revenues.

While lower commodity related inbound costs will help to offset some of the cost erosion, it may not be enough. Those manufacturers that had significant revenue and profitability expectations by tapping into China’s emerging consumer consumption could soon feel the effect of continuing concern. To provide added evidence, The Wall Street Journal reported today that the Chartered Institute of Procurement and Supply is raising its global risk index to its highest level since 2013. The heightened risk has a lot to do with certain key suppliers in China that may be impacted by the sharp decline in equity and consequent credit markets.

These are the not so good news messages.

Sourcing, procurement and supply chain leadership teams must therefore remain diligent to further opportunities to reduce inbound or supply chain services related costs for at least, the remainder of this year.

Bob Ferrari


Demand Sensing Lessons Learned in China

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As thought leaders in supply chain management, we often point out the critical importance for firms to more quickly sense geographic or regional changes in product demand and respond to such changes with integrated supply and fulfillment capabilities. This week, The Wall Street Journal highlights (paid subscription) how certain high-profile consumer product goods companies were hampered in China by not having such capabilities.

The report notes that a sudden change among China’s consumer buying trends suddenly occurred as millions of consumers elected to shift their buying practices away from larger retail outlets in favor of online marketplaces. The WSJ indicates that an estimated 461 million Chinese consumers, nearly a third of the population, are now shopping online. Further cited is Nielsen data indicating that nearly half of Chinese consumers are buying groceries online, compared to a quarter of consumers on a worldwide basis. Global CPG firms such as Beiersdorf, Colgate-Palmolive, Nestle and Unilever were reportedly laggard in the sensing of this channel buying shift.

For Unilever alone, the shift toward online buying accounted for a 2.7 percent drop in global revenues. The CFO of Unilever is quoted as indicating that CPG firms in China were “too slow to react to the changes in the marketplace.” Another Unilever executive is quoted as indicating: “It’s very, very difficult for us to be absolutely sure (of inventory levels) because the visibility across the extended supply chain in China is not that great.”

Many CPG firms distributing products in China had targeted their merchandising and inventory strategies towards large retailers and thus were not able to sense the changed buying patterns until inventories grew.

Many of these firms are likely to have acquired important learning and are re-focusing supply chain strategies more towards online fulfillment channels including more direct presence.  There will obviously be further learnings in the months to come.

Suffice to state that in today’s complex supply chain universe, generalized market support and distribution strategies will not suffice.  Each major market requires its own set of product demand planning, sensing and supply chain response strategies.

Bob Ferrari


Report That Foxconn is Close to Finalizing Plans for Massive Production Facility in Northern China

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In October of 2014, there was a report that the leading global contract manufacturer Foxconn, had entered into preliminary talks to build a high-end LCD display factory within China’s northern city of Zhengzhou. According to that report, Foxconn and Hon Hai Precision Chairmen Terry Gou visited Zhengzhou in August and met with government officials to discuss an investment proposal estimated to be upwards of $5.59 billion.

Earlier this week, The Wall Street journal cited a statement from a local development agency and reported that discussions concerning the Zhengzhou facility are progressing and may be nearing finalization stages.

This announcement is significant since it would represent Foxconn’s largest investment in component manufacturing thus far and would be an additional sign of further diversification within key downstream strategic components of high tech and consumer electronics supply chains. The Zhengzhou region is also the home of an Apple iPhone assembly facility. Both represent the high tech supply chain ecosystem’s movement into far more interior regions of China.

In its reporting in October, the WSJ stated that it remains unclear as to whether Apple or other investors are being approached to invest in the proposed display plant.

In July, Foxconn disclosed plans to build a new environmentally friendly production complex in one of China’s most rural and pristine provinces. According to a published Bloomberg BusinessWeek at the time, a 500 acre park would be built in the province of Guizhou, on the outskirts of the provincial capital, Guiyang. Plans called for an environmentally focused facility to produce smartphones, large-screen televisions and other products employing upwards of 12,000 workers. Production processes within this new plant were to include new methods for mold based painting, carbon nanotube film for touchscreens and other innovations. The Guizhou plant was slated to be operational this month.

These developments indicate Foxconn’s continued investment in downstream electronics supply chain component manufacturing capabilities as well as this CMS’s continued commitment toward China based production presence. Being Apple’s and other high tech OEM’s prime contract manufacturer, that is an indicator of potential future strategic sourcing strategy.

Missing however, is any announcement of a substantial manufacturing investment in North America.


Reports of Apple Designing and Producing a Concept Electric Car

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Business media including the Financial Times and the Wall Street Journal reported last week that Apple was working on a secret research lab (not so secret anymore) possibly directed at developing a concept electric car.  According to these reports, under the code name “Project Titan” Apple has several hundred employees working at this research lab designing a concept vehicle that resembles a minivan.

Apple, of course, has declined comment to any of these publications.

According to the published WSJ report, the size of the project team and the senior executive hires are indications of seriousness, with Apple CEO Tim Cook approving the development project almost a year ago.  Once more, the report indicates that Apple executives have flown to Austria to meet with contract manufacturers.  The publication names the Magna Steyr unit of Canadian auto parts supplier Magna International as one potential party involved.

The report accurately notes that manufacturing an automobile is enormously expensive with a single plant costing upwards of well over $1 billion. Thus, it should be of little surprise that Apple might be investigating existing contract manufacturing options.

Auto supply chain teams know all too well that sourcing production in any particular country and transporting autos among global regions can be an expensive proposition without volume and market scale. It’s clearly not the same as shipping iPhones and iPads or for that fact, ramping-up new product and supply chain labor resources to coincide with a product development lifecycle. Once more, intellectual property (IP) protection becomes a larger consideration because of the nature of the multiple components and new technologies that may be involved. For electric powered vehicles, the design and production cost of the batteries is the single most important material and product margin component.

Another parallel that these reports bring forward is that if Apple becomes serious in pursuing this foray into electric cars, it will likely be a competitor to Tesla Motors, who has been pursuing a vertical integration strategy including the design and production of its own electric storage batteries for automotive and solar energy storage use. Tesla elected to invest in a former Toyota auto factory located in Fremont California.

Certainly, there will be continued speculation as to what Apple ultimately decides to do.  However, in the light of our previous Supply Chain Matters challenge to Apple to invest more in U.S. or North America based production, Project Titan could provide the opportunity to consider such an investment commitment, either contract manufacturing or owned manufacturing investment.  North America automotive production plants and their associated supply chains have proven world class competitiveness and indeed are exporting vehicles to global markets.

However, in light of our previous commentary noting excess auto production capacity across China, Apple may elect its familiar new product introduction and contract manufacturing model.

Bob Ferrari


Report of Automotive Production Overcapacity Across China

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Bloomberg BusinessWeek reports that both domestic and foreign-based auto producers continue to build and subsequently bring online more auto production capacity across China. The report cites a projection that by 2017 there will be 140 auto production plants in China vs. the 123 existing at the end of 2014. The problem, however, is that China’s nationwide domestic auto consumption is far short of this capacity indicating that overcapacity is expected to worsen. Cited is an IHS Automotive chart indicating that China’s excess capacity has jumped 83 percent in the last two years. The article cites a JSC Automotive forecast that by 2017, auto plants across China will be able to produce 11.4 million more cars than are expected to be sold.

The report cites one Shanghai based consultant as indicating that some carmakers are regretting plans to expand plant capacities, but decisions have already been made. Once more, as Supply Chain Matters readers all well aware, China’s domestic market remains an open opportunity for future growth, but the continued battleground pits China’s domestic brands against foreign based nameplates. The obvious consequence is that there is not enough product demand to sustain all manufacturers, and that has the potential for industry consequences.

Production overcapacity is a common problem in China in many industry and commodity sectors and the results have been messy or sometimes ugly consequences. An ongoing overcapacity condition remains for the production of steel. According to Bloomberg, already, car dealerships across China are seeking more financial assistance and lower sales volume targets. China’s domestic consumers will obviously gain more buyer benefits over time.

Europe’s automotive industry has a similar overcapacity challenge since prior to the 2008-2009 global recession, there was already too much industry-wide capacity, and that remains an ongoing challenge.

With China and Europe reflecting overcapacity, global automotive OEM’s must continue efforts to balance global consumption and supply as well as protect margins. Currency headwinds are yet another challenge.

Supply Chain Matters would not at all be surprised by the entry of Chinese produced autos in the U.S. as well as other emerging markets over the next three years.

Bob Ferrari


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