The Initial Signs of the Donald Trump Era- Continuous Change, Uncertainty and Supply Chain Risk Mitigation
As Supply Chain Matters has noted in prior commentary, the election of Donald Trump as the incoming President of the United States will present quite a number of global and domestic supply chain management uncertainties for industry teams to manage over the coming months, and perhaps years. The question is how to be prepared.
Thus far, Trump’s initial communications and proposed Presidential Cabinet appointments would imply that campaign promises to kill unfavorable trade agreements as well as openly confronting American companies to keep jobs in the United States are holding true. Then again, news of potential Cabinet and advisor appointees would imply a pro-business administration.
The first public confrontation involving the heat and air conditioning Carrier business unit of United Technologies over proposed job reductions that were transferring to Mexico has received quite a lot of media coverage. Trump’s supporters are elated with this initial confrontation. In the end, after closed door discussions, Carrier has agreed to keep roughly 1,000 jobs in Indiana, while the state of Indiana had to agree to provide UTC upwards of $7 million in financial incentives to remain in the state. While Carrier still plans to invest $16 million to retain some operations in Indiana, the intent is to go-ahead with the movement upwards of 1300 other jobs to Mexico and close another facility in Indiana as originally planned. While visiting the Carrier Indiana facility yesterday, Trump once again vowed to reexamine existing trade agreements such NAFTA, and put U.S. businesses on-notice that there would be consequences for any decision related to the movement of jobs out of the country.
Political opinion is now raising the specter of U.S. corporations having to base business sourcing decisions on threats of punitive actions. That further raises speculation that other countries will respond to a Trump administration with threats or their own punitive actions.
On a somewhat positive note, the selection of Elaine Chao, a former Cabinet secretary serving eight full years during the Bush Administration as the nominee for Secretary of Transportation is being perceived as an intent to follow-through on the campaign promise to aggressively invest in needed infrastructure in roads, bridges and other badly needed U.S. transportation infrastructure needs. Ms. Chao provides what is widely perceived as an extensive policy background and she is also the spouse of U.S. Senate Majority Leader Mitch McConnell. If confirmed, Ms. Chao will inherit management of current unprecedented levels of safety related recalls involving the U.S. automotive sector, especially those related to air bag inflators manufactured by supplier Takata. She will have oversight of regulations pertaining to Uber-like transportation services as well as regulations pertaining to autonomous driving vehicles.
For industry supply chain teams, there is little doubt that capabilities in assessing supply chain network design decision support options based on criteria related to direct labor costs, inventory, transportation and landed costs, as well as what may be constantly changing local content requirements will be essential. Capabilities in managing what may turn out to be very fluid and changing global trade management policies and regulations will obviously be essential along with integrating such information with existing product sourcing and planning systems.
Supply Chain Matters sponsor LLamasoft has already indicated a marked uptick in interest levels in the firm’s supply chain network design and Supply Chain Guru focused technology coming from UK based firms because of the Brexit referendum, and anticipates similar increased interest levels as the Trump leadership era unfolds.
As teams prepare for their 2017 investment and resource budgets, minimizing risks related to global sourcing and material movements, deeper analysis and more informed decision-making capabilities, along with overall agility in supply chain focused decision making should be high priority areas.
In 2017 and beyond, supply chain and product management teams will indeed be very involved in counseling senior and line-of-business management on the various whiplash effects of a far more changing global trade environment.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
The Wall Street Journal is reporting that based on it sources with knowledge of the matter, global container shipping conglomerate A.P Moeller Maersk is looking to acquire German based shipping line based Hamburg Sud. The latter owns and charters upwards of 130 container ships it had nearly 6000 employees and $6.7 billion in revenues in 2015.
The WSJ report indicates that Maersk has interest in acquiring the entire business of seventh ranked container line Hamburg Sud to boost its transportation presence in global trade routes across Latin America. The publication had earlier reported that the Oetker family was considering the sale of its shipping interests.
In late 2012, Hamburg Sud had explored a merger with Hapag-Lloyd but those talks subsequently collapsed over pricing and management issues.
In September, parent A.P. Moller-Maersk announced that it would split its current business operations into two separate operating businesses. Maersk Line, the world’s most dominant ocean container carrier would be the center point for a new container transport and logistics division that will consist of other owned businesses such as APM Terminals, Damco and Maersk Container Industry businesses.
If this rumored acquisition of Hamburg Sud were to occur, it would represent yet another definitive sign of more accelerated occurrence of industry consolidation with influence and global scale flowing to the top-tier shipping lines. In a prior Supply Chain Matters commentary we echoed reports indicating that industry leader Maersk would be interested in acquiring another line if the opportunity presented itself.
A World Trade Organization (WTO) panel has ruled that upwards of nearly $6 billion of prior tax incentives provided to Boeing improperly excluded foreign competition. According to a report by the Associated Press, these incentives that were set to be awarded between 2024 and 2040 apply to the production of the wings to be part of Boeing’s new 777x wide-body aircraft.
In late 2013, Boeing issued RFP’s among multiple U.S. states seeking proposals to source final production and assembly of the new 777x aircraft, which is being designed to carry upwards of 400 passengers on long-haul flights. At the time, Boeing’s threat to source design engineering and production outside of Seattle was part of an effort to seek supplemental longer-term concessionary agreements from various labor unions on longer-term wage and benefit costs. Lobbying efforts were also initiated with the State of Washington which resulted in a package of tax and other incentives valued at $9 billion through 2040 to keep the bulk of the 777x program activities in the state.
This development represents the latest round of commercial aircraft related trade disputes among the United States and the European Union with Boeing and Airbus being the major accusers. The EU voiced its concerns to the WTO over the State of Washington’s tax incentive benefits to Boeing shortly after they were announced, claiming that a total of $8 billion in incentives were prohibited subsidies and needed to be rescinded by the WTO.
In its most recent ruling, a WTO panel opted to deny the overall EU claims, but did focus on the specific incentives related to the aircraft’s wing production. The Financial Times reported that this is only the fifth time in the WTO’s history that it has defined a subsidy as “prohibited.” Two months ago, the WTO found that the EU had failed to unwind billions of dollars in unlawful subsidies to Airbus. That ruling could allow the U.S. to impose tariffs on European goods.
A statement from the EU Trade Commissioner indicated: “We expect the U.S. to respect the rules, uphold fair competition and withdraw these subsidies without any delay.” Boeing on the other hand indicates it will appeal the ruling and again characterized Airbus as being non-existing without “$22 billion in illegal subsidies from the EU.”
This ruling comes on the immediate heels of the unexpected election of Donald Trump as President–Elect of the United States, with a platform for the U.S. to become more hard lined on global trade policies. That will likely amplify the rhetoric and subsequent actions related to this recent WTO ruling.
The battle among both aircraft manufacturers on opposite sides of the ocean has been long noted as the most contentious rivalries involving global trade and the overall sales of commercial aircraft among multiple foreign countries. All came to a head in 2011 when the WTO ruled that both companies had collected billions in unlawful assistance and incentives. In the wake of a rising threat from China’s heavily subsidized aircraft sector, Airbus CEO Enders has since called on his U.S. rival to initiate talks on a new global settlement for government support which would benefit both sides of the Atlantic.
The announcement further comes on the heels of the sudden departure of Boeing’s overall head of the Commercial Aircraft business unit to be replaced by a General Electric Aerospace executive. Business media reports regarding this sudden senior executive move point to deep animosity among Boeing’s labor unions over the process of 777x production sourcing and ultimate plant selection.
For the past two weeks, Supply Chain Matters has featured a series of postings focused on revisiting and self-scoring our prior 2016 Predictions for Industry and Global Supply Chains that we published just before the start of this year. We trust that you have valued from this look back and its now time for a look back at our final two previous predictions.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Not only do we research and publish our annualized predictions, but every year in November, we look-back and score our predictions for the year.
As has been our custom, our scoring process is based on a four-point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.
In our prior Part One posting, we looked backed on our prediction for overall economic climate and business planning and the outlook for sourcing and procurement.
Our Part Two posting revisited our prediction for continued turbulence and change surrounding global transportation, along with our prediction related to the widening of supply chain talent and skill gaps.
Our Part Four posting revisited specific predictions related to the ongoing maturity of both Sales and Operations Planning (S&OP) and Internet of Things (IoT) business processes.
This final posting is our look back at our last two, and often more provocative 2016 predictions.
2016 Prediction Nine: Alibaba and Amazon Will Expand Their Presence in Customer Logistics Fulfillment.
Self-Rating: 4.0 (Max Score 4.0)
Our belief at the start of the year was that there were strong indications that online giants Alibaba and Amazon would continue to expand their presence in last-mile customer fulfillment. There were two primary reasons. First, ownership of parcel logistics, transportation and last mile fulfillment provides each of these major online fulfillment platforms that direct ownership to insure online delivery commitments for premium buying services such as Amazon Prime. From a strategic strategy perspective, it builds full order-to-delivery control management capability for each of these dominant online global provider’s retail platforms that increasingly host multiple retail providers.
Second, analysis data continues to reinforce that Free Shipping policies have consistently attracted online consumers in buying decisions and offsetting costs will remain the determinant of profitability of online orders in the months to come. Consequently, it was our prediction that existing parcel delivery service providers would experience more shipper pushback regarding rate structures. Increasing transportation rates and dimensional package surcharges from both FedEx and UPS that began in 2015, and extended into 2016, along with building frustrations over service arrangements would make this prediction more viable for the most influential online retailers who need to control significant transportation budgets.
During its most recent quarterly earnings performance briefing, Amazon’s CFO acknowledged that while investing in one’s own logistics and transportation capabilities is expensive, customers are embracing more timely and predictive delivery capabilities, and are increasingly demanding faster delivery. Further noted was: “We want to control our own destiny.” Since July, the online retail giant has opened an additional 23 warehouses and customer fulfillment centers globally with investments expected to continue well into Q4.
With Amazon Prime membership members now approaching 60 million, and with indications of even more third-party sellers utilizing the Fulfillment by Amazon platform capability, Amazon is obviously preparing for an even bigger holiday fulfillment quarter in Q4. Upwards of 120,000 seasonal employees are expected to supplement existing full-time staff. Executives have indicated to investors that revenues are expected to be in range of $42 to $45.5 billion in Q4, as much as a 27 percent increase over last year’s similar period. Last year, major investments were made in the long-term leasing of 40 dedicated air freight aircraft along with hundreds of branded tractor trailer units. In the coming weeks, we can expect more same-day last-mile premium delivery services to be managed directly by Amazon.
China’s Alibaba business media has always included the ownership and control of its own logistics subsidiaries, the largest being Canaio. The Chinese online retailer’s co-founder Jack Ma wrote to investors in October indicating that now that China’s explosive double-digit growth in Internet users is now fattening: “in the coming years we anticipate the birth of a reimagined retail industry, driven by the integration of online, offline, logistics and data.”
One of the largest online shopping holidays across China is Singles Day. This promotional shopping day, also known as “Double 11”, produces more online volume than Black Friday or Cyber Monday combined in the U.S. The event was conceived by students in the 1990’s as a mock celebration for people not in relationships, with a desire to give something to oneself. In 2015, the online shopping event racked up the equivalent of $14.3 billion in shopping revenues for various Alibaba sites, surpassing that of Black Friday. Singles Day 2016 held this month was preceded by a nationally televised Internet streaming celebrity entertainment event held in a 60,000-person stadium in Shenzhen hosted by Alibaba Chairmen Jack Ma. A running tally was continually updated on video screen at the Stadium and online. By 3:15pm local time, the 2015 sales volume number had been once again, exceeded. Alibaba indicates that the equivalent of $17.7 billion in online sales, a 32 percent increase, was processed during this year’s 24-hour event. However, the figures don’t include returns which could be as high as 30 percent, and there are growing cautions in that Alibaba reports on a metric of Gross Merchandise Value, which includes the cost of platform advertising fees in the revenue metric.
Just as critical, however, is Alibaba’s network of delivery vehicles and delivery persons who must navigate complex or vague delivery addresses or who must utilize ingenious means to transport these significant volumes of packages among dense urban streets and alleyways.
Given all the above that has occurred, we have placed a maximum self-rating score on this prediction. Each of these global online platform dominants have now recognized the importance for controlling last-mile fulfillment, but more importantly, are building premium multi-retailer fulfillment platforms that will continue to seize more online market share.
2016 Prediction Ten: A High Visibility Supply Chain Snafu or Event with Business Implications
Self-Rating: 3.5 (Max Score 4.0)
The above was a prediction that we were obviously reluctant to publish for readers and clients. However, our observation of industry supply chains being whiplashed with unprecedented business change and growing global chain risks lead us to this wildcard prediction. Continued pressures to reduce overall supply chain costs in 2016 lead us to conclude that there may well be one or more high visibility supply chain or key supplier breakdowns in the coming year. Industry supply chains that have already undergone multiple years of cost or staffing reductions were likely candidates, along industries with highly extended value-chains without adequate risk mitigation. Significantly reduced resources, capacity or product quality assurance and monitoring will likely be casual factors, although public statements would indicate otherwise. We felt that suppliers would continue to experience pressures to reduce costs but at the same time be forced to provide more agility and responsiveness to changing needs. There was already an uptick in product recall incidents along with certain supplier quality shortfalls that we felt would continue.
The most visible and far reaching supply chain snafus or events in 2016 turned out to be two. Samsung’s botched new product introduction and consequent sales suspension of the Galaxy Note 7 smartphone was probably the most visible. It was followed a few weeks later with indications of exploding front consoles related to the consumer giant’s top-loading automatic washing machines that led to a recall of 2.8 million devices. There are still many learnings to come from the highly visible Samsung incidents that were characterized by media as “exploding Samsung devices.” They point to either management’s push too far in aggressive product introduction timing, potential breakdowns in candid collaboration among product management and manufacturing, or actual supplier component faults. Regardless, Samsung must now deal with challenge of restoring brand loyalty among different consumer product segments.
The other most visible event was Volkswagen’s ongoing product recall actions involving software modification of air pollution controls related to diesel powered automobiles. Both came from different casual factors but each has resulted in quite significant monetary and brand value implications. The air emissions modification has already forced VW to predict upwards of $20 billion in additional recall related expenses and many other implications to follow including significant headcount reductions to further reduce costs to pay for efforts to develop more electric or hybrid-powered automobile models.
Other 2016 Industry Specific Snafu’s
As note in our prior look-back at industry-specific predictions, the global automotive sector and their after-market supply chains continue to deal with unprecedented numbers of product and component related recall events. The ongoing series of safety product recalls related to defective airbag inflators produced by supplier Takata that involved a multitude of global brands continued to permeate in 2016. Multiple manufacturers initiated additional product recalls related to a whole series of automotive components with the end result being that most brands had vehicle nameplates under product recall notices involving millions of existing operating vehicles.
Among commercial aircraft supply chains, early product ramp-up challenges involving Pratt and Whitney’s revolutionary new geared turbine fan (GTF) engine forced manufacturer’s Airbus and Bombardier to modify their planned 2016 single -aisle shipment schedules for certain single-aisle aircraft. In the case of Bombardier, the shortfall in previous planned engine availability resulted in an announcement of a revised schedule for the firm’s CSeries program and consequent headcount reductions across the company. The Pratt GTF supply chain was designed to have “no single point of failure.” In June, executives from Pratt indicated to The Wall Street Journal that roughly half of the company’s suppliers for its new geared turbofan engines were not delivering parts and materials at expected levels as seamlessly as the company expected. United Technologies Chief Executive Gregory Hayes further indicated to the WSJ that at the time, 44 percent of the company’s 1,600 suppliers—including the 500 to 600 who supply parts and materials for the engines themselves—weren’t meeting the company’s on-time delivery and quality control targets. The most complex component, the composite metals based fan blade experienced significant production yield challenges that are now being addressed for 2016 output requirements.
Candidly, predicting high visibility supply chain snafus and events is not all that difficult given the constant pressures that various industry and global supply chains currently must deal with. What changed in 2016 was the size and scope dimensions, and the fact that very large, global based manufacturers and services providers are becoming more vulnerable to such occurrences despite such predictions.
This concludes our Supply Chain Matters revisiting of our 2016 predictions. We again encourage our readers to provide their own specific feedback comments and observations regarding each of our 2016 prediction areas. As always, you can add your voice in the Comments section appearing at the end of any of our postings.
We extend a shout out to all those that participate and contribute under the extended supply chain management business process and supporting technology umbrella for responding to yet another difficult and challenging year and delivering expected line of business results. Thanks also to our network of contacts and other research analysts for assisting in formulating our looking back comments.
Normally, we would at this point begin the process of unveiling our 2017 predictions for industry and global supply chains starting in early December. As this noted indicated in our predictions update of November 10, in the light of the unprecedented developments of both the Brexit vote that occurred in the United Kingdom, and the election of Donald Trump as the incoming President of the United States, I made the decision as Editor and Managing Director of Research to postpone our 2017 predictions unveiling until sometime in January.
We believe that global based supply chains are about to enter uncharted waters that may well include increased trade protections and whiplash implications involving various industry supply chains. Any advisory firm predicting 2017 trends at this point may be doing an injustice to clients without further analysis as to how two extraordinary and certainly unforeseen events will likely play out in 2017. We published an initial first take impression after the election of Donald Trump, and will provide further updated insights for readers and clients during December. One thing we do know at this point is that next year’s supply chain predictions will likely focus on any global trade restriction impacts and the threat that these geopolitical forces spread to other countries next year. Other areas we now believe should be included are certain impacts to ongoing social responsibility initiatives, industries bearing the potential brunt of increased trade protections, the impacts of larger and more expensive M&A surrounding Internet of Things (IoT) and more developments concerning global ERP providers.
Stay tuned as we all transition into 2017 which could well be another more challenging year for industry and global supply chains.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved
This past weekend, political leaders of the Asia-Pacific Economic Cooperation forum met in Lima Peru to discuss free-trade, and specifically pending ratification of the Trans Pacific Partnership (TPP). According to various media reports, the delegates sent a direct message to President-Elect Donald Trump, namely that they will move forward with Asia-Pacific trade pacts with or without the support of the United States. The implication could well be more trade influence for China.
The election of Trump reportedly loomed large over this summit of 21 nations, and President Barack Obama had his hands full in trying to assuage fears of the U.S. withdrawing from TPP and other pending global trade pacts. The U.S. Congress has failed to take up TPP ratification in the now lame-duck session, with little likelihood of doing so in 2017 now that there is full Republican Party control across all branches of government. During the presidential campaign, Donald Trump blamed bad trade deals as one of the primary causes of manufacturing and other job losses in the U.S. and threatened to specifically scrap TPP and re-negotiate the North America Free Trade Agreement (NAFTA). In the light of this current perceived trade retrenchment climate, China indicated at the summit that the country was prepared to take the lead in promoting trade. The TPP alliance was a critical component of the Obama policy to counter China’s influence in influencing trade deals and more attractive trade arrangements among Asia-Pacific regions.
This weekend, the countries of Chile and Peru, two existing members of TPP, indicated they were interested in joining the Regional Comprehensive Economic Partnership (RCEP), a China led pact that could involve 16 nations.
Leaders of Both Canada and Mexico also indicated this weekend that they remained committed to North America based trade, which leaves open the question of how much they are willing to re-negotiate the existing NAFTA agreement.
As industry supply chains complete 2016 activities, there is a clear uncertainty looking out to 2017 and beyond if the United States, one of the globe’s largest trading partners takes on a harder trade stance. Many are looking to President-Elect Trump’s policy statements and pending Cabinet appointments to assess how hard a line the U.S. will take.
There are obviously many implications related to protections to intellectual property protection rights (IPP), more open access to Asia Pacific markets and the potential for tariff implications for certain products. All could involve impacts to existing global supply chain product sourcing strategies.
Stay tuned as we continue to assess these changing geo-political developments and their impacts to global supply chain management strategies.