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.
In July, we updated Supply Chain Matters readers concerning Tesla Motors construction of its $5 billion massive gigafactory, which when completed, will provide the capacity to be the single largest battery manufacturing volume plant in the world. Once more, the plant is located in the United States, an area that many thought impossible for sourcing such a plant.
Tesla’s strategy is bold, involving supply vertical integration. Given that a considerable portion of the cost-of-goods sold (COGS) for an electric powered automobile involves its batteries, the strategy is to control the bulk of the value-chain. The massive scale of this facility is targeted at reducing the unit costs of lithium-ion batteries by 30 percent.
Since the state of Nevada site selection announcement in 2014, a far broader strategy has been unfolding, one that extends beyond automotive supply chain needs, including the power storage needs of homes and businesses. The site was chosen because of its close proximity to supplies of the all-important raw material of lithium as well as to the Tesla factory in California. While the highest concentrations of lithium are mined in Bolivia and Chile, there are supply sources in the western U.S. and Mexico.
Last week, there was a significant joint announcement regarding one source of raw material supply for this new battery production plant, that being lithium hydroxide. Tesla announced that it had secured a five-year strategic long-term supply agreement through a partnership with mining firm’s Bacanora Minerals Ltd and Rare Earth Minerals PLC. The two suppliers have formed an entity termed the “Sonora Lithium Project Partners.”
According to a published announcement from Alberta Canada based Bacanora: “The Sonora Lithium Project Partners are working to develop a mineral-rich, lithium-bearing clay deposit into a planned low-cost, sustainable and environmentally conscious mining operation.” The announcement further estimates that the mine and processing facility will have an additional capacity of 35,000 tonnes of lithium compounds, with a scaling potential of up to 50,000 tonnes annually. That is a considerable supply, somewhat equating to global supply needs. The Sonora Lithium Project itself consists of ten mining areas in the northeast of Sonora State.
The supplier is further required to reach certain performance milestones and pass product specification milestones. A key milestone is noted as the ability to supply lithium hydroxide in accordance with the volumes and timeframes that will be established by Tesla. To do so, Sonora Lithium Project Partners will be tapping lithium supply from Bacanora, along with additional supplies located in Northern Mexico, owned by partner REM. The Mexico site will mine lithium from mineral-rich clay.
The electric automaker will additionally purchase specified minimum tonnages in accordance with an agreed-upon pricing formula which is described as below market pricing.
Noted is that this new agreement will form only a portion of Tesla’s lithium-based feedstock needs. The remainder will likely come from other mining suppliers which imply that Tesla has an active supply risk mitigation strategy for lithium feedstock.
The agreement requires that Sonora Lithium Project Partners raise additional financing to design and construct this mine and processing facility. That implies additional time required for fund-raising, permitting, construction and volume production. Thus, we strongly suspect that initial gigafactory lithium supply will come from other sources. However, the Bacanora announcement indicates that the Sonora Lithium Project will rapidly accelerate mining and development efforts.
In the spirit if its founder and CEO, Elon Musk, Tesla consistently makes bold moves in its product designs, detailed manufacturing, and now with its supply vertical integration strategies. It is going to be quite interesting to observe how all of this unfolds.
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)
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.
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.
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.
Report that Johnson Controls Seeking to Divest of Seating Business- Changed Automotive Supplier Dynamics
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.