Global commercial real estate firm CBRE Group Inc. has released a research report indicating that over the next decade, 20 markets worldwide—including South Florida; Santiago, Chile; Bajio, Mexico; and Philadelphia—are set to emerge as global logistics hubs.
The concept of emerging global logistics hubs was brought forward to in the book, Logistics Clusters, Delivering Value and Driving Growth, authored by Yossi Sheffi at MIT’s Center for Logistics and Transportation.
According to the CBRE research report, while global hubs will continue to best meet the needs of companies with international supply chains that encompass the sourcing, manufacturing, distribution and sale of goods, there are 20 specific regional hubs that are poised to become major players in the network for global trade. Although they currently serve as central processing locations for regional supply chain networks, the report cites a number of factors are shifting the dynamics of international distribution and catapulting some regional hubs into the supply chain spotlight. We have attached the report’s infographic that names these various hubs.
The CBRE research points to significant logistics investments, such as the ongoing expansion of the Panama Canal, regional industry production cluster, such as those manifested in the automotive sector, the ongoing impacts of Omni-channel and E-Commerce, and evolving trade agreements as major impetus factors for these new emerging logistics centers.
In the latter, the report cites The Trans-Pacific Partnership (TPP) as a potential trade agreement that will have drastic effects on global trade routes and manufacturing demand in Asia. Supply Chain Matters has recently published our initial impressions of the impacts of TPP.
For the implication of e-commerce’s impact on customer fulfillment and supporting logistics, the report indicates:
“In the past, a network of regional centers that fed into the local supply chains with 3-4 day delivery time coverage of the region was sufficient to meet service standards. However, compressed service times—in many cases, to overnight or same-day delivery—has reshaped the supply chain and has often resulted in distribution direct to the consumer from a global or large regional hub. The Eastern Pennsylvania region, anchored by Philadelphia but fueled by the growth of the Lehigh Valley, is an example of a hub that has been transformed by this new technology. This mid-Atlantic location enjoys access to over100 million people within a one-day drive, including key metropolitan areas such as New York, Washington, D.C., and Boston.”
“E-commerce shipments are smaller in size and require more technology and expertise to execute efficiently. As a result, modern logistics facilities are being developed in the traditionally strong logistics hubs of Tokyo, Seoul and Taipei. Brick-and-mortar retailers are entering the online sales market, resulting in strong demand for modern logistics in Tokyo, as logistics networks must be upgraded to accommodate the higher volumes of package movement. Additionally, the online trend is strong in Taiwan and South Korea, where 83% and 73% of shoppers, respectively, go online to avoid going to a physical store.”
There are many other insights and observations regarding rapidly shifting patterns of logistics which are impacting commercial real estate investment. However, what should be of concern to supply chain and Sales and Operations teams are the implications to existing distribution fulfillment networks that were formed under far different business process assumptions than today’s Omni-channel and global production strategy world.
The report itself can be accessed at this CBRE hosted web link. Please note that registration and account sign-up is required to download this complimentary report.
To continue with this week’s theme of decisive supplier management, Supply Chain Matters must also comment on Honda’s decision to no longer source air bag inflators from troubled Japan based supplier Takata Corp. after a U.S. regulator accused the supplier of misleading regulators and withholding information that eventually led to one of the largest product recalls in U.S. history.
The move comes after continuous multi-year product recall actions involving this supplier’s inflators which have on occasion, demonstrated the tendency to suddenly inflate under certain high humidity conditions and spread shrapnel on drivers or passengers. Even more concerning are actions and fines from U.S. safety regulators ordering the supplier to stop using an aluminum nitrate propellant in the Takata designed airbag inflators.
Takata had been a long-standing supplier for Honda, its largest customer and investing stockholder. This vote of no-confidence sends a significant signal in the notions of Japanese supplier management practices where automotive OEM’s constantly collaborate with suppliers on all forms of product design or supply challenges. According to reports, Honda reviewed millions of pages of this supplier’s internal documents and actually alerted U.S. regulators to evidence suggesting “misrepresented and manipulated test data for certain air bag inflators.”
Honda indicated in a statement: “Honda expects its suppliers to act with integrity at all times and we are deeply troubled by this apparent behavior by one of our suppliers.”
Regulators have now assigned an independent monitor to audit the supplier’s safety practices for the next five years and to stop the use of a certain form of ammonium nitrate air bag inflator by the end of 2018. At the end of last year,
Meanwhile, automotive service parts focused supply chains remain stressed by multiple air bag inflator recall campaigns, in some cases calling for multiple re-installations of a similar repair component. As noted in our previous commentaries related to the air-bag inflators, five auto manufacturers, BMW, Fiat Chrysler, Ford Motor, Honda and Mazda Motor account for 18 million of the since recalled inflators.
Honda itself incurred a $70 million fine from regulators for reporting lapses that included Takata air bag inflators. Our readers might wonder why the OEM did not sever its relationship with its air bag inflator at that time. Japanese corporate culture resists admission of a flawed or troubled supplier relationship and in the midst of a product recall crisis of such a magnitude, Honda probably needed to insure adequate supply of inflators to meet both product recall as well as new production needs.
The Wall Street Journal is today reporting (paid subscription required) that General Motors plans to become the first auto maker to import and sell Chinese produced automobiles in the United States. The automobile producer reportedly plans to sell the Buick Envision, a midsize sport-utility vehicle early next year.
The report cites informed sources as indicating that the vehicle will be produced in Shandong province, and will add a third SUV to Buick’s model lineup. Initially, GM plans to import a modest number, indicated as between 30,000 and 40,000 Envisions annually, and the move signals a strategic shift and a bold experiment by GM.
The Buick brand is a well-respected and top brand within China, dating back to earlier times when China’s top government officials rode in chauffeured Buicks. The report observes that nearly 100,000 Buicks were sold in China just last month, compared with fewer than 19,000 sold in the U.S.
According to the WSJ report, by adding a third crossover model GM fills a product gap while accelerating efforts to compete with other foreign and domestic based automakers. However, GM officials indicated to the WSJ that this move is not one related to cost-saving. That obviously remains to be seen as this strategy unfolds.
Buick’s most popular SUV offering is the Encore which is currently produced in South Korea. The second model by sales is the Buick Enclave, a large SUV crossover produced in the United States.
The article opines that the arrival of a Chinese produced model is likely to rile the United Auto Workers which caught rumors of such an announcement during the summer. However, the report indicates that the UAW and GM discussed this move during recent labor talks and appear to have come to some understanding.
GM’s latest move obviously represents confidence that a Chinese produced vehicle can meet or exceed the safety and product feature requirements demanded by U.S. consumers. Supply Chain Matters concurs that this strategic move will be closely watched by other industry players. Depending on the outcome and the response from U.S. consumers, we may well observe other China produced vehicles offered to the U.S. market in the not do distant future.
There is an expression that is often cited in business and military situations: “We are so, so screwed”
That expression likely describes current conversations among the halls and facilities of Volkswagen.
The U.S. Justice Department has begun a wide ranging investigation into alleged use of software installed in nearly a half-million diesel powered cars that make these vehicles appear to have cleaner air emissions than they actually do in operation. The auto producer has now acknowledged that the vehicle software installed in some U.S. diesel powered passenger cars make it appear that the vehicles conform to U.S. emissions standards.
According to various media reports, the German automaker could be subject to fines and penalties amount to $18 billion. That of course, does not include the costs involved in mitigating and correcting the problem of non-conforming vehicles currently being driven by U.S. consumers.’
The Wall Street Journal reports that Volkswagen stock has declined nearly 35 percent since Friday, when word began to spread that the U.S. Environmental Protection Agency (EPA) would accuse the company of cheating. The publication is further reporting this evening that CEO Martin Winterkorn is literally fighting for his job. Today, Volkswagen indicated that it would take a $7.2 billion charge to earnings and cut its full-year outlook, with an indication that as much as 11 million vehicles could be affected by this development.
While business media continues to dive into the implications and consequences to Volkswagen, this blog commentary briefly dwells on the implications from our product design and supply chain management lens.
First and foremost, Volkswagen has the risk of losing the trust and loyalty of its U.S. and global customers if this crisis is not proactively managed. Thus far, it seems that Volkswagen senior management has been candid and forthcoming in issuing a public apology for violating consumer trust. That cannot be said about other automakers recently involved in government investigations alleging wrongdoing.
Beyond words, the automaker has to now expediciously develop a set of action plans to address several supply chain challenges. One relates to a growing inventory of unsold diesel cars that now have their U.S. sales suspended. The auto maker has made great strides in overcoming prior U.S. consumer pre-conceived impressions that diesel powered cars were noisy and dirty. About a year ago, this author test drove a new diesel powered Passat and I was impressed. Now, all of that market education effort could be compromised if proactive management of this crisis does not occur.
Another challenge relates to all of the sold vehicles currently in-service, that are probably now deemed as violating air emissions standards. Both a mechanical and software fix, if one can be economically developed, must be engineered and expeditiously deployed.
In past cases involving vehicles that do not meet air emissions standards, U.S. regulators have either ordered them off the roads or imposed stiff daily fines. The clock is now ticking.
It is no secret that Volkswagen has struggled with its vehicle line-up for the U.S. market. As noted, the U.S. designed Passat is an impressive vehicle but has failed to capture wider interest among buyers. Competitive models are laden with more on-board electronics and entertainment features. The automaker has further lacked any competitive mid-sized SUV model which is essential for competing in the U.S. market. In 2014, the automaker committed to produce a competitive 7 passenger SUV model by 2016 along with a $600 million investment in a new vehicle design research center. The design included fuel-efficient diesel powered models.
The coming weeks and months promise to provide Volkswagen with a leadership and response crisis with significant product development, product and service focused supply chain implications. These are significant challenges requiring proactive actions.
Similar to past consumer trust incidents involving Toyota and sudden unintended acceleration, we all get to observe and learn how a global automotive leader responds to brand, product design and consequent supply chain response crisis.
In September of 2014, Supply Chain Matters began calling reader attention to aluminum producer Alcoa and its efforts to collaborate and introduce newer, high-strength and corrosion resistant aluminum alloys for the commercial aerospace industry. At the time, Alcoa struck a multiyear aluminum supply agreement with Boeing’s Commercial Airplane unit to make this producer the sole supplier for wing skins on its metallic structure commercial aircraft along with aluminum plate products used in wing ribs or other structural aircraft components. The supply deal was valued to be more than $1 billion at the time, and the two parties a desire continue to collaborate on developing newer, high-strength and corrosion resistant alloys including aluminum-lithium applications.
In March of this year, we updated our readers with news that Alcoa’s indent to acquire RTI International Metals, described as one of the world’s largest producers of fabricated titanium products in a stock-for-stock transaction valued at approximately $1.5 billion. RTI’s business focus was centered on long-term supply of titanium fabricated parts that make-up landing gears engines and airframes for both Airbus and Boeing aircraft. The Wall Street Journal reported at the time that that as much as 80 percent of RTI’s 2014 revenues originated from the aerospace and defense sector. This RTI acquisition followed the 2014 acquisition of Germany based titanium and aluminum castings producer Tital, and U.K. jet-engine parts maker Firth-Rixson.
Our March commentary noted that the metals producer was further positioning itself to be a more strategic supplier to the global automotive industry, helping to pave the way for use of lighter metals in automobile product design and functionality.
Last week, the news reverberating across automotive supply chain audiences was that Ford Motor Company had reached an augmented supply agreement with Alcoa for use of aluminum based components. Readers might recall that the Ford F-150 was recently re-designed, making it the first mass market pick-up truck with an aluminum body. As a result of the design of lighter materials, this vehicle’s over weight was lightened by 700 pounds, adding upwards of 29 percent in overall fuel economy. Alcoa worked with Ford on the aluminum component re-design.
According to published reports, this revised supply agreement will allow for the use of more sophisticated alloys for additional use in the F-150 along with production of other exterior metal components such as fenders and door panels for other future Ford models. In its reporting, The Wall Street Journal (paid subscription required) quotes Ford’s product chief as indicating that collaborating on technology at this scale represents a fairly significant commitment by both companies.
While a reportedly large amount of Alcoa’s business still emanates from raw aluminum, the supplier is clearly on a strategic product innovation thrust to target business and product innovation needs in key industries. The WSJ reported that Alcoa is aiming to grow its automotive-aluminum sheet business alone to upwards of $1.3 billion by 2018, from a level of $229 million in 2013.
By developing new casting technologies for fabricating both aluminum and titanium based component parts, the door is being opened for joint product design collaboration and more strategic longer-term supply agreements to insure adequate supply. In its reporting of the Ford supply agreement, the WSJ spoke with Alcoa CEO Klaus Kleinfeld who indicated a focus on growing dozens of niche downstream businesses from aerospace to truck wheels, and in developing supply agreements with eight other auto makers.
Supply Chain Matters brings Alcoa to light as an example of joint supplier and OEM production efforts paying rewards in multiple strategic industries and boosting bottom-line results for both supplier and customer.
Over the past month, business and general media has been reporting on leaked and other types of information stemming from the ongoing Trans Pacific Partnership (TPP) talks currently underway concerning a proposed trade agreement among 12 nations including several Pacific Rim countries and the United States. The stated goals of the TPP are to “enhance trade and investment among the TPP partner countries, to promote innovation, economic growth and development, and to support the creation and retention of jobs.” The latter portion of job creation is the most political and most impactful to industry global sourcing strategy.
The latest round of negotiations that occurred in Hawaii at the end of August ended without any sense of major agreement and the ongoing process remains politically charged among potential partner countries. What has been capturing the interest of Supply Chain Matters is the consideration and weighting that has been placed on global supply sourcing for certain key industries.
Automotive Supply Chain Impacts
Much of traditional business media reporting has been concentrated on the implications to the automotive industry. Major automotive OEM’s do not want this agreement to upend existing global sourcing strategies for component supply. Both Bloomberg Businessweek and The Wall Street Journal have recently reported that Mexico’s primary automotive industry group, which has been booming from continued new sourcing of production announcements from various global auto producers, has thrown a wrench into the current talks.
Mexico overtook Japan to become the second-largest exporter of vehicles to the U.S., primarily because existing free-trade agreements have attracted new plant investments from various global brands. In essence, the country wants to protect its interests in the definition of “rules of origin” and what would be classified as duty-free imports to the U.S. Under the North America Free Trade Agreement (NAFTA), 62.5 percent of component sourcing must come from within the NAFTA free-trade area to qualify as duty-free. Bloomberg reports that Washington tentatively agreed that Japan based automotive producers should be allowed to ship vehicles duty-free to the U.S., even if upwards of 50 percent of component sourcing comes from non-TPP countries. Component suppliers from both Mexico and Canada are reportedly lobbying for negotiators to stand pat with NAFTA guidelines. Meanwhile, autoworkers in all three NAFTA countries are voicing the need for fairer standards, and not allowing Asia-Pac car companies to game the system in favor of more job creation among lower cost manufacturing regions.
U.S. based automotive OEM’s have been similarly vocal as well, declaring that they rely on global supply chains to be able to competitively manufacture vehicles in the U.S. Nations such as Malaysia and Vietnam anticipate that the TPP will provide an incentive for each of these countries to increase their presence in supply of automotive supply chains, but Thailand is now an important component sourcing hub for Japan based OEM’s.
Dairy Industry Exports
Another area of dispute is that of dairy based imports, which are the basis of supply for other food related producers. New Zealand’s economy is dependent on exports of dairy products, which is prompting that country to lobby for broader access to markets of TPP member countries including Canada. Dairy imports into Canada currently invoke a tariff in excess of 200 percent, and that country’s politicians fear a backlash in the upcoming federal elections in October if they dare agree to cutback current tariffs that protect Canadian dairy farmers. New Zealand reportedly is holding firm that the country will not sign any new trade agreement that does not open new dairy related markets.
Apparel and Textile Sourcing
For the apparel and textile industry, only clothing that is wholly sourced and produced within TPP nations qualify for duty-free sales. A recent report from Time points out that Vietnam, currently the second-largest exporter of apparel to the United States, is only able to produce a fifth of the fabric it needs to supply finished apparel to global markets. Vietnam currently imports nearly $5 billion of fabric from China, a non-TPP country, and that scale of fabric sourcing must shift. However, current U.S. tariffs of Vietnam sourced apparel which are currently 32 percent would be eliminated, perhaps adding some impetus for finding new TPP-centric sources of fabric.
High Tech Sourcing
Similarly, high tech and consumer electronics producers have a current high sourcing content dependency on China and Taiwan, and to some extent, the Philippines and Thailand for component supply. Some high tech companies have initiated their own political lobbying to insure any TPP agreement does not impose a competitive or cost disadvantage for their products. Consider how much of the value-chain components of an iPhone or iPad are sourced from non TPP regions.
Clock is Ticking
The clock is ticking on whether a final agreement on TPP can be reached soon. The U.S. Presidential sweepstakes is well underway, and member nations have their own political events that will hold legislators to task. In the end, it would appear that any TPP agreement will have some direct and probably indirect impacts on global component sourcing strategies for multiple industries.