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Two Contrasting Events: Brexit and the Expanded Panama Canal Add New Dimensions for More Active Planning – Part Two

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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.   PanamaCanalExpansion_2_450

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.

Bob Ferrari

© 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

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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.


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