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Some Quantification of the Potential Impact of the Tianjin Port Warehouse Explosions

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There has been much reporting within social and business media regarding the potential industry supply chain disruptive effects of the recent massive warehouse explosions that affected the facilities adjacent to the Port of Tianjin.

It is rather important and crucial that industry supply chain and sales and operations team obtain meaningful and insightful information regarding what is happening on the ground as well as the potential short or long-term supply chain impacts, if any.

We at Supply Chain Matters are disappointed to observe that certain technology and service providers are attempting to utilize this tragic incident as a backdrop to product marketing outreach campaigns. Neither should technology providers suddenly become news outlets.

Not good ideas by our lens.

Supply chain technology providers should instead continue to educate on the benefits of the technology they provide and allow industry supply chain teams to receive clear, unfiltered and unbiased insights and information from informed and educated sources.

One of the better Tianjin perspectives Supply Chain Matters has reviewed to-date ia a published white paper: The Aftermath of the Tianjin Explosions: A Global Supply Chain Impact Analysis, authored by supply chain risk management provider Resilinc.

While this 24 page white paper does include some product marketing, along with requiring registration, the bulk of the report provides meaningful and insightful information related to potential immediate, near-term, medium and longer term supply chain impacts.

The paper concludes that the less apparent ripple effects of the warehouse explosions will be felt weeks, months and even years to come.

The paper provides meaningful background information regarding this vital logistics and manufacturing hub, which services industry needs of automotive, commercial aerospace, high-tech, petrochemical and general industrial manufacturing supply chains, among others. It further outlines important mapping of industrial manufacturing and supplier concentrations within close proximity of the explosions, based on a mapping of over 30 sites in a 2-10 mile radius of the blast.  Four large industrial zone districts are adjacent to the port, with the port serving as what is described as the largest free trade zone in northern China, and the second largest Vehicle Processing Center for importing and exporting of automobiles.

On the topic of near-term ripple effects, the Resilinc analysis predicts that extensive delays can be expected for most companies and sites moving products through Chinese ports as government agencies deal with the after-effects of a regulatory environment needing extra attention.

There are predictions that Tianjin port operations will only begin to resume normal operations by approximately mid-September, and that any containers now at the port will be inaccessible for the next two months, even if they are intact. Resilinc indicates that for any suppliers located within 2-15 miles of the explosions, companies may presume 12-16 weeks of delays.

Long-term impacts outlined related to the ripple effects of increased regulatory actions impacting certain industry sectors including the location and storage of goods near large population centers.

Regarding potential long-term impacts, the paper cites Chinese media as indicating the economic cost of Tianjin crisis could be as high as $8 billion.

If your organization is dependent on operations, logistics partners, suppliers or service providers in the Tianjin area, we recommend you review this report which can be accessed at the following Resilinc web link. (Some personal registration information required)

Bob Ferrari


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

 


Tesla Motors Moves Forward with Battery Gigafactory

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Seventeen months ago, business and social media was abuzz with electric automobile maker Tesla Motors’s audacious plans to build its own $5 billion electric battery “gigafactory within the United States, capable of supplying up to 500,000 electric vehicles per year.  Plans indicated that the plant, would ultimately be able to produce batteries at 30 percent less cost, and when operational, would provide the capacity to be the single largest battery manufacturing volume plant in the world.  To state the obvious, the strategy was a bold and savvy thrust involving vertical integration, given that of the entire value-chain and cost-of-goods sold (COGS) for an electric powered automobile, the batteries are indeed the highest portion of cost.

Tesla battery gigafactory

Source: Tesla Motors

Since the February 2014 announcement, a far broader strategy has been unfolding, one that will extend beyond automotive supply chain needs. In September of last year, Tesla selected a site within the state of Nevada, just outside of Reno. Thus far, the steel structure and roof of the new factory have been completed. Tesla has partnered with Japan based Panasonic to assist in the setup of production processes within the new gigafactory. By autumn, Panasonic will dispatch hundreds of its employees to Nevada to assist in the plant internal design and setup.

In June, Tesla entered into a research partnership with a noted professor at Dalhousie University in Nova Scotia, known for his work in innovating lithium-ion batteries. The goal of this research partnership is to determine methods to incorporate more voltage as well as less cost of materials within batteries without eroding their longevity. According to a published report, Tesla is further investigating its own sourcing and processing of lithium, cobalt, graphite and nickel.

This week featured news indicating that Tesla has now increased its land holdings surrounding the new plant, purchasing an additional 2000 acres. The land purchases reportedly occurred during April and May with the majority of the land, according to Tesla, serving as a buffer zone in which solar arrays are to be constructed to provide internal power to the new factory.

According to a published report from The Wall Street Journal, battery cells will begin to roll-off production lines by the end of 2016, with plans for additional phased ramp-ups extending through the year 2020. Once more, up to 25 percent of the new plant’s capacity is expected to be allocated for production of static storage battery needs for homes, businesses and utilities. Tesla recently unveiled a new line of home storage batteries and the firm’s iconic founder, Elon Musk recently indicated that there has been positive interest from other industries in exploring potential battery supply agreements.

Tesla’s corporate culture of thinking big continues to extend across the supply chain and the new gigafactory will be the most significant testament to that boldness in supply chain vertical integration.

For added information regarding this new factory, readers can review Tesla’s conceptual design.

Bob Ferrari


Report that Johnson Controls Seeking to Divest of Seating Business- Changed Automotive Supplier Dynamics

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During 2008-2009, the U.S. automotive industry faced a significant crisis involving the largest OEM’s, and there were legitimate concerns that many key suppliers within the U.S. automotive supply chain would become collateral damage to a flawed industry business model that did tend toward shared rewards among suppliers.

A lot has changed and much learning has occurred since that crisis.  Some OEM’s such as General Motors are now communicating intent to establish more strategic relationships with suppliers. Many key suppliers have moved toward reducing major exposure to automotive market cycles through industry supplier diversification.

Last week The Wall Street Journal reported that Johnson Controls, a key component and systems provider to the automotive industry was considering the sale of its automotive seats division.  This news is significant because this division is the largest within Johnson Controls accounting for nearly 40 percent of total revenues, and over one billion in pre-tax profit.

Why therefore, is sale being considered?

According to the WSJ, the company wants to shrink its automotive interiors businesses and focus on other more strategic opportunities, even though executives had previously identified seating as a core business. The supplier’s CEO indicates that further investments in the seating business would take away from the goal for diversification among other industry sectors. In essence, senior leadership is acknowledging that it reached an important crossroads for its seating business. A cited quote indicates that Johnson Controls would do harm to continued growth of seating if it did not invest.  Instead, the key supplier is opting to sell the business to a party willing to make the next leap in seating technology.

Further implied by the WSJ is that Johnson Controls shareholders expect higher value in the company’s stock.   Supply Chain Matters as well as others have noted how activist investors have penetrated major industries demanding enhanced short-term shareholder value increased returns.  Such investors are active among key automotive suppliers.

The implication is that years of contentious relationships among certain U.S. automotive OEM’s among suppliers has motivated certain key suppliers to seek reduced industry exposure via diversification. However, influences of activist or major shareholders for increased returns have opened up heightened M&A activity.

When the dust settles, the U.S. automotive supply chain ecosystem may well have a different or more powerful collection of strategic suppliers, either U.S. or foreign based.

As the idiom often reminds us: You reap what you sow.

Bob Ferrari

 


A Significant New Milestone Involving the Quality Perception Crisis Among Automotive Supply Chains

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Throughout 2014, Supply Chain Matters called attention to the automotive sector and the unprecedented levels of product recalls that continued to stress auto aftermarket service supply chains and supplier relationships to their limits. From a tactical lens, we observed that the colliding forces of regulatory, political, supplier management and capacity-restrained automotive replacement spare parts networks may well continue for many more months, and that appears to be exactly what continues to unfold. Once more, Supply Chain Matters predicted that when the dust settles, the automotive industry and its supply chain ecosystem partners need to take a hard look at lessons learned.

While automotive OEM’s and their associated brands have taken the bulk of the consumer and regulatory heat around product recalls, quality defects have more often resided within either OEM product designs or parts suppliers and their associated product design or manufacturing processes.

The most significant culprits for the continuous litany of product recalls has been the ignition switch defects involving multiple General Motors vehicles and the alleged defective airbag inflators produced by Japan based supplier Takata Corp for multiple OEM producers. After undergoing continuous ongoing scrutiny from U.S. regulators these past months, Takata refused to broaden the scope of the defective inflators recall beyond a select number of U.S. States with high humidity concerns because the supplier supposedly could not determine the exact cause of defects. That is up to now.

This week provides yet another, but far-reaching significant milestone, namely what is being described as the largest automotive recall in U.S. history, and involving the same potentially defective air bag inflators originating from Takata. Bowing to intense pressure and scrutiny from regulators, Takata has now, for the first time acknowledged that there are defects in its air bag inflators, yet root causes remain unanswered. This week’s announced product recall will be conducted by 11 different automakers and now doubles the number of vehicles subject to recall. Business media now reports the overall vehicle recall as involving nearly 34 million existing automobiles in the United States. Six deaths and upwards of 100 injuries have been linked to the defective airbag inflator problem thus far.

In announcing the current expanded recall, U.S. Transportation Secretary Anthony Foxx indicated: “It’s fair to say that this is probably the most complex consumer safety recall in U.S. history.” Depending on which math is being referenced, the scope of the overall recall amounts to roughly 14 percent of the total vehicles now operating on U.S. roads. Add to that the scope of the 2 million plus vehicles included in the GM product recalls, along with other product related recalls and the picture of a large number of existing vehicles awaiting repair attention becomes a dominant picture. Needless to state, the implications of the continued litany of product recalls involving the industry are far reaching, for both OEM’s, their suppliers, and their service networks.

Logistically, as we and others have noted in our prior commentaries, it will take months and perhaps years for dealer and service parts networks to complete repairs on all recalled vehicles. That will cause additional safety concerns and added frustration among consumers. There are concerns that previous air bag deflator repairs to vehicles may have been completed with defective parts requiring the need for yet another repair.  As noted, the root-causes of the air bag deflator’s defects have yet to be determined by either Takata or a consortium of 10 automotive OEM’s. The shear volumes of cumulative open recalls are testing existing processes and supporting systems, perhaps to their breaking point. As we have pointed out, alternative suppliers have been recruited to augment supplies for both existing new production as well as repair parts needs.

From a political perspective, legislators and regulatory agencies continue to react to the concerns and frustrations of automotive consumers who wonder aloud if automakers really care about the quality of the vehicles they are producing as well as their attentiveness and timely response to vehicle safety. That leads to a continued sensitized regulatory and judicial perspective.

From a financial perspective, the bulk of the costs related to a litany of past product recalls have been on the shoulders of the OEM’s.  However, some automakers such as GM, have managed to shield themselves from expensive lawsuits from prior legislative actions dating back to a previous bankruptcy filing. That will change with the current scope and visibility brought to bear of the latest Takata related recalls. In its reporting, The Wall Street Journal cites one estimate indicating that Takata alone could face recall-related charges in the range of $4-$5 billion, far outpacing an original estimate of $1.6 billion. Yesterday, Takata’s stock fell 10 percent on the Tokyo Exchange as its investors adsorbed the implications. On a broader perspective, the issue of which party bears the bulk of the financial liability for component quality will again be up for discussion.

To be candid and blunt, product quality perceptions have become an overall mess, and it could not come at a worse time.  There was a feeling that automakers had come a long way in overall vehicle reliability but that perception belies the current picture of numerous vehicles now with open recalls.  Once more, consumers clamor for the latest technology advances in vehicle safety, comfort and convenience including all notions of the connected car. Many of these innovations stem from component and sub-system suppliers within an industry that has a track record of mostly marginal supplier relationship building. In its recent annual supplier poll conducted by Planning Perspectives, for the 14th straight year, suppliers continued to rank Toyota and Honda as best customers. Noted is the diametrically opposite goals of an adversarial relationship where OEM’s often seek a supplier’s best technology at the lowest possible price. Compounding the problem are activist investors and private equity firms investing in various tiers of automotive supply chains clamoring for more short-term returns for shareholders.

From our lens, the global automotive industry, and in-particular U.S. based OEM’s need to have rock solid quality focused product design and more responsive early warning quality mechanisms as a top industry priority. Industry executives need to seriously look beyond any perceptions of the panacea of a current super sensitive regulatory environment that will run its course. The notions of an industry solely being driven by lower product margin goals and placing the bulk of that burden on suppliers has to change.  Component, systems and overall vehicle reliability is not the purview of a marketing campaign but rather a systemic process that spans end-to-end product and aftermarket service centered supply chains. Component and systems quality must be a living fabric of supplier relationship management and suppliers need to be fairly compensated for assuring high standards in product design and process innovation, especially considering current product strategies leveraging common brand and/or vehicle model platforms. The stakes are even higher when considering that the electronic and software content of vehicles continues to rise implying more sophisticated reliability and systems focused hardware and software related engineering. In the analogy of carrot and stick agreements, the carrot is longer-term, more collaborative based product design and supply chain focused relationships and the stick is the shared responsibility and liability for warranty and/or product recall costs attributed to vehicle sub-systems such as vehicle safety.

Finally, you may have noticed that lately, not a day goes by without a barrage of targeted online or traditional media ads urging we as consumers to buy or lease that new car with latest technological features.  From our lens, the industry will be better served by re-allocating existing marketing and sales budgets towards investments in more robust early-warning mechanisms related to component quality and to current overburdened and perhaps collapsing aftermarket service networks that are the first line of intelligence for quality and vehicle safety.

Bob Ferrari

© 2015 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


A Shifting of Supplier Relationship Strategy for General Motors

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Supply Chain Matters has provided a series of ongoing commentaries involving fairly recent multiple industry aspects involving escalating pressures being placed on suppliers. Our commentaries have reflected on reports regarding global retailer Wal-Mart ‘s latest efforts of cost cutting and certain Consumer Product Goods producers being driven to bullying or extreme cost-cutting measures. Today, The Wall Street Journal provides a report indicating how one global automotive manufacturer is now trying to reverse course of previous supplier squeeze actions to foster needed collaboration.

This report, GM Wants Long-Term Parts Contracts (paid subscription or complimentary metered view) describes efforts by General Motor’s newest Chief Procurement Officer Steve Keifer to influence extended component parts supplier contracts that extend as much as a decade, in order to support two new vehicle product development programs and subsequent market volume output requirements.  According to the WSJ report: “locking suppliers into longer-term contracts and looping into vehicle designs earlier in the process, the auto maker can expect suppliers to share more innovations and better processes that help save money.”

For some of our readers, that statement would appear to be forward-thinking but keep in-mind that the U.S. automotive industry has had a long history of supplier bullying that has been difficult to change for some manufacturers. While Keifer is described as a GM veteran, he only recently assumed the CPO role at the end of 2014, after serving an executive role at Tier one supplier Delphi Automotive. The report thus hints that this new CPO has brought more of a supplier sensitivity to his role.

That approach is apparently being influenced and supported by GM’s new CEO, Mary Barra, who herself has a manufacturing and product development leadership background. According to the WSJ, Barra has recently implemented a strategy “aimed at improving relationships with suppliers that believed the automaker was overly optimistic in its planning assumptions or too forceful in cost-cutting mandates.”

The report points to the ongoing technology-driven revolution occurring across the automotive industry, and the need to bring even more technology to market at a quicker competitive pace. However, the new CPO has the challenge of undoing decades of poor supplier relationships that curtailed deeper collaboration on areas of innovation. The spur such innovation, GM is reportedly open to consideration of new suppliers from regions such as the U.S. Silicon Valley or Israel.

On this blog we have pointed out the drawbacks of how a short-term business outcomes perspective driven to cost reduction mandates can permeate across the many levels of the value-chain. While such efforts may lead to short-term accolades and performance bonuses, they undermine efforts directed at longer-term needs for product, process and customer fulfillment innovation.  Suppliers themselves need to have heightened sensitivities to the business pressures of key customers, and try to provide a helping hand perspective on short and longer term supplier relationship alternatives.

In the case of this week’s WSJ report concerning General Motors, a changed senior management perspective, driven by both the realities of long-term industry competitiveness through innovation, and a leadership grounding in the importance of suppliers for contributing to such innovation has helped to initiate a changing perspective. That will help in overall change management.

We trust there will be more of the above positive actions rather than the others we have highlighted of-late.

Bob Ferrari

 


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