Once a year, just before the start of the New Year, the Ferrari Consulting and Research Group and the Supply Chain Matters Blog provide our series of predictions for the coming year. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, as well as helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the upcoming New Year.
In Part One of this series, we unveiled the methodology and complete listing of our 2014 predictions. In this posting, we explore our first two predictions, which traditionally focus on what to generally expect in global economic and procurement dimensions.
An Optimistic yet Uncertain 2014 Global Outlook with Consequent Impacts on Industry Supply Chains
As has been noted in our annual predictions since 2011, the global economy continues to present an environment of uncertainty in many dimensions. However, economic forecasts concerning 2014 are a bit more optimistic but come with many cautions or caveats.
Both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) forecast some growth in the global economy in 2014 but both agencies point to notable downside risks. The IMF forecasts global growth to be 3.6 percent in 2014, rising from a forecasted 2.9 percent in 2013. It attributes much of the anticipated growth to be driven by the advanced economies. Emerging market growth is expected to be weaker while the Eurozone region is expected to gradually pull out of recession, but at a rather modest 1 percent pace. Growth in China is anticipated to level off to the 7 ¼ to 7 ½ percent range.
The OECD also forecasts global growth to be 3.6 percent in 2014, rising from a forecasted 2.7 percent in 2013. The OECD has also downgraded growth projections for emerging economies, citing slower trade, subdued investment levels and potential further negative shocks that could impact these economies. In August of 2013, business media featured reports indicating that the BRIC honeymoon was over after the OECD declared that their data reflected slowing economic momentum for Brazil, Russia, India and China
Both organizations reinforce the existence of rather fragile consumers. Job growth remains tepid with unemployment levels especially high among young professionals in Europe and little improvement in the United States. Weakness in the European banking system and the cumulative effect of two years of recession does not add to the confidence levels of European consumers. The past shutdown of the United States government and continued brinkmanship actions over fiscal policy continues to spook consumers and is reflected in their spending levels. Each quarter, analytics firm ComScore polls a select group of U.S. consumers regarding their rating of economic conditions. For the past three quarters, consumer responses of poor economic conditions have consistently averaged between 40-42 percent. Similar sentiment continues across the Eurozone. The implication is that any product or retail focused supply chain focused on demand from direct consumers will continue to experience the effects of consumers who will be cautious in spending, and will be highly sensitive to price and value.
In 2014 industry supply chains will continue to be constantly challenged and must further enhance capabilities to be able to plan, sense, respond or adjust to product or services demand. Industry supply chains and their planning and S&OP teams who had previously planned on aggressive growth and product fulfillment in emerging markets need to be more diligent in the coming year. Overall, the ability to sense and respond to changing markets at the discrete region or country level will prove beneficial. Supply chain wide visibility to inventory, or exceptional supply and demand imbalances at the regional level will prove important as a differentiator to other competitive players.
Stable Inbound Commodity and Component Prices with Certain Exceptions
Commodity costs moderated significantly in 2013. As of mid-November 2013, the Standard and Poor’s GSCI Commodity Index was down approximately 5 percent year-to-date. Prices in certain sectors were down considerably, for example grains down 22 percent, industrial metals down 13 percent and agricultural products down 20 percent. The IMF forecasts that most commodity prices should remain flat or fall over the next 12 months. Some upside price risks were forecasted in corn coffee and wheat products.
In the all-important area of energy and fuel, both the IMF and the U.S. Energy Information Administration (EIA) are forecasting that oil prices are expected to stabilize at the levels incurred in late 2013. The EIA is currently forecasting a 2.8 percent drop in the price of West Texas Intermediate (WTI) crude oil for 2014, with both a 5.9 percent reduction in the per gallon cost of diesel and a 3.2 percent reduction in the per gallon cost of gasoline. Of course, any significant political or terrorist-related event in proximity to oil-producing regions changes the equation altogether. There are some upside price risks in the cost of U.S. natural gas in 2014 due to expected demand surges.
While commodity price pressures will generally moderate in 2014, we continue to believe that certain emerging market regions will be challenged by locally based commodity price pressures brought about by either localized economic, currency or other political factors.
Component pricing trends remain dependent on specific industry demand and supply developments, and will obviously continue to be dynamic. As always, industry supply chain dominants with the largest volume scale and long-term financial resources will garner attractive pricing. Small and mid-sized manufacturers and retailers should continue to benefit from buying consortiums or networks that provide scale.
In the area of procurement of services, trends will again be dependent on supplier relationships, buying scale or influence along with specific geographic regional specific trends. As always, the ability of procurement teams to obtain a deep understanding of spend patterns enterprise-wide requirements, with savvy contract management and supplier intelligence, will benefit in contributing to cost savings.
Bottom line, an easing of inbound pricing pressures should allow procurement executives to re-allocate their teams towards an increased focus on overall strategic needs for deepening supplier based collaboration in products and services, and in nurturing a deeper focus on joint supplier focused sustainability programs that deliver both innovation and cost avoidance opportunities.
Keep your browser focused on Supply Chain Matters as we continue with this 2014 Predictions series.
As always, readers are encouraged to add individual or their own organizational perspectives to these predictions in the Comments section associated to each of the postings in this series.
A complete and more detailed research report that includes all of these predictions will be available for no-cost downloads in January.
Published reports from the Financial Times, Bloomberg and American Shipper report that two high profile ocean container shipping lines, Germany based Hapag-Lloyd and Chile based CSAV, are in talks concerning a potential merger. These discussions had not led to any agreement and both lines were compelled to issue statements indicating existence of these talks. Bloomberg reported that the initial news came from the Die Welt newspaper and later acknowledged by company statements after CSAV shares spiked 27 percent. CSAV itself has lost 86 percent in the past three years according to Bloomberg.
According to rankings from Alphaliner, Hapag currently ranks globally as the sixth largest container ship fleet while CSAV ranks 20th. If both lines merge, the combined fleet would rank fourth globally. Just about two years ago Hapag had merger talks with Hamburg Sud, but those discussion talks broke down.
Hapag-Lloyd became a member of the G6 Alliance in 2012 in an effort to pool multi-carrier capacity on select global routes. On Tuesday, American Shipper issued a newsflash indicating that the G6 Alliance is now planning to expand its cooperation to Asia-United States West Coast and transatlantic trade lanes, pending regulatory approvals.
After many rants regarding proposed rate hikes involving global ocean lines, Supply Chain Matters declared in July that the implications for structural changes involving global transportation were compelling. This latest news of a potential merger of lines should therefore not be of great surprise. One of our upcoming 2014 predictions will call for even more re-structuring of global transportation networks. Manufacturers and retailers will need to continue to keep a keen eye out for the implications to their ongoing sourcing and supply chain strategies.
On Friday, ThyssenKrupp AG announced that it would sell its troubled but state-of-the art Calvert Alabama steel finishing plant to the 50-50 joint venture of ArcelorMittal and Nippon Steel & Sumitomo Metal Corp. for $1.55 billion. The announcement concluded an 18 month effort to sell two packaged facilities, in essence a vertical integrated supply proposal. The price garnered in this sale was considerably lower than the $5 billion that Germany based Thyssen originally invested in the Alabama steel rolling facility.
Three years ago, the Calvert plant was paired with Thyssen’s other raw steel producing plant in Brazil in an effort to provide auto manufacturers located in the southern region of the United States a more technology laden supply of fabricated rolled steel for product design and supply purposes. It was an effort to benefit from the resurgence of auto manufacturing in the U.S., but ran astray because of the rising production costs involved in the Brazil facility, and lower than expected global steel demand. Thyssen initial attempts for sale involved both the Brazil and Alabama plants as a package, but that resulted in lack of attractive bids. Thyssen later agreed to sell the Alabama facility itself, and managed to garner five different bids for the facility, including U.S. based Nucor.
For the potential new owners is the ability to utilize raw steel supplies from other U.S. or Mexico based steel fabrication facilities. However, the deal reportedly includes a pledge to annually procure a minimum of two million tons of raw steel from Tyson’s Brazil facility over a 6 year horizon. The new owners can further leverage the higher capacity and productivity that the Alabama plant provides along with a shorter logistics chain for manufacturers with plants in the southeast U.S. region.
The deal itself is still subject to regulatory approvals. According to reports published in business media, AccelorMittal currently accounts for roughly 40 percent of the steel supplied to the North American market and that may be a sticking point for regulators. Nippon-Sumitomo currently operates a 2.9 million square foot finishing facility in Indiana that supplies U.S. Midwest auto and appliance manufacturers with rolled steel products.
Because of possible concerns, reports now indicate that the review process is not expected to be completed until at least July of next year. One would hope that regulators would have a strategic sourcing perspective for insuring that the current resurgence of auto, appliance and other steel focused manufacturing in the southeastern United States continues with an Alabama plant that now has other options for vertical integration.
An important milestone for the U.S. automotive industry will occur this month. The United States Treasury announced that it plans to sell its remaining 31.1 million shares of General Motors stock sometime before the end of the year. The move hopefully represents the final chapter in the 2008-2009 government bailout of General Motors and indeed, the U.S automotive supply chain.
According to business media reporting, the U.S. government initially invested $50 billion in GM, and thus far has recouped $38.4 billion of that investment. The planned final sale could bring in an additional $1.2 billion, based on the current value of GM stock, making the final net cost to taxpayers of $10.4 billion. In addition, asset sales have helped the U.S. government to recoup over $12 billion of the $16 billion invested in GM’s automotive finance arm. More importantly, the U.S. automotive industry and its associated supply chains have rebounded from the certain brink of disaster.
In its reporting, the conservative-leaning Wall Street Journal indicates that because of the rescue bailout, companies and communities were saved from possible collapse. The WSJ writes: “The U.S. auto industry has recovered nearly all of jobs lost since the beginning of the financial crisis, is broadly profitable and is expanding again.” A partnership between government and business provided more novel means to expedite restructuring needs and provided .labor with a stake in the end results. The WSJ echoed analysts and indeed Supply Chain Matters declared beliefs that many auto suppliers that relied on the Big Three U.S. automotive OEM’s would have collapsed if the rescue did not occur. It quotes Bureau of Labor Statistics data that indicates the same numbers of people now work in automotive and parts manufacturing as existed in October 2008. Tier One automotive suppliers have also garnered the opportunity to seize on the move toward more technology-laden auto models and are now growing their revenues and profits based on investments in more innovative and fuel efficient features for new models of automobiles. The expression “a rising tide lifts all boats” is alive and well among U.S. focused automotive supply chains. Not only have U.S. brands garnered the benefits but non-U.S. nameplates as well. Today, European, Japanese, Korean and even China based manufacturers are investing in U.S. based automotive manufacturing.
In contrast, the Eurozone countries have endured two long years of economic recession with the European auto industry dealing with similar effects of recession, namely declining sales, gross idle and excess capacity in both manufacturing and dealer networks. Labor unions and indeed individual governments seek to protect jobs and local economies, but decisions seem to linger. Much can be learned from what occurred in the U.S.
The Thanksgiving holiday celebrated this week in the U.S. and other regions is time to reflect and give thanks for blessings in our lives.
Those that contribute to or are indirectly associated with the U.S. automotive industry for their economic livelihood should give thanks that a partnership among government and business actually accomplished its goal to save an industry and its supply chain ecosystem. From our lens, it was a proper and meaningful investment. It could have well had a far different and negative outcome.
The Wall Street Journal reports that the three global groups addressing social responsibility and work standards for Bangladesh garment factories have tentatively agreed on common standards for factory inspections. The three groups involved in this tentative agreement are:
- Accord on Fire and Safety in Bangladesh, led by mostly European based retailers
- Alliance for Bangladesh Worker Safety, led by Wal-Mart Stores, Gap, and a consortium of other U.S. based retailers
- National Tripartite Action Plan, an agency of the government of Bangladesh
According to the WSJ, this tentative agreement, brokered by the International Labor Organization requires the final approval of each organization’s steering committee. However, concerns are still being raised as to whether future inspections will be transparent, that they will be conducted by competent safety engineers and whether major retail brands will provide the financial backing for factories to make required safety improvements. The WSJ indicates that upon its review, the agreement mandates that “factory inspections must be carried out by a least two qualified inspectors with five years minimum experience each, and a combined experience of a least twenty years.” It further details the maximum load of machines allowed in a floor area and standards for the existence of fire doors and fire exits.
The Europe based consortium will inspect 1600 factories while the U.S. alliance is overseeing 600 factories. The government has reportedly pledged to assess and upgrade 1200 factories not covered by the consortium pacts. There are an estimated 5000 total garment factories in the country.
From the financial resources perspective, 100 mostly European brand retailers have signed a five-year, legally binding accord that requires members to maintain garment order levels in Bangladesh factories for at least the first two years, and to assist in the cost of factory upgrades. Two-dozen U.S. based retailers led by Wal-Mart and Gap have signed a non-binding pact which pledges to invest in factory inspections and upgrades.
A report published by business network CNBC however indicates that tensions among the European and U.S. based consortium broke into the open earlier this week. An official from the European pact voiced concern that the American retailers would piggyback at no cost on the efforts of the Europeans in financing safety upgrades. There are also differences of opinion on how much actual monies are being set aside to finance factory upgrades.
Meanwhile, worker unrest and protests continue to occur across Bangladesh’s garment factory sectors with a deadly clash with government troops reported on Tuesday. Weeks of rolling worker strikes and unrest have occurred after the Bangladesh government recommended that the minimum wage be raised to roughly $67 per month. Workers have protested that that figure is not enough in spite of the call from labor unions to accept the minimum wage hike.
As Supply Chain Matters has indicated in previous commentaries, the path toward social responsibility practices across Bangladesh is laden with challenges, but the overall efforts are moving toward a more positive direction. All parties need to continue to work collectively toward a common goal of standards, financial support and consistency of purpose. Global retailers are making various commitments to continue sourcing garment orders from Bangladesh in return for minimum safety standards. While these new agreements will certainly need further refinement, the broader goal must be kept in context.
The Wall Street Journal reports that the U.S. Federal Maritime Association has taken the unusual step to call for a meeting with its European and Chinese counterparts to scrutinize the proposed alliance of the globe’s top three shipping container lines.
Readers may recall that in June, the three lines announced the intent to establish the P3 Network that pools vessels operated by Maersk Line, Mediterranean Shipping Line (MSC) and CMA CGM among the most traveled global routings. According to media reports, the alliance, if consummated, would control 40 percent of total sea cargo capacity that includes an estimated 43 percent of ocean container shipping from Asia to Europe, 24 percent from Asia to the United States, and 41 percent of trans-Atlantic routings. According to estimates from Drewry, the three subject carriers of this proposed alliance control about one-third of the world’s shipping fleet.
Such an alliance requires the approval by the combination of Europe, China and U.S. regulatory groups. The pact calls for a sharing of capacity among the top three carriers with the biggest container ships, the so-termed Triple E vessels, being part of the shared capacity and routing arrangements. If approved, this alliance is scheduled to go into effect in the second quarter of 2014.
According to the WSJ report, the chairperson of the U.S. Federal Maritime Association called for this meeting because of concerns raised by other carriers and the shipping community as a whole. Such a meeting among all three regulatory agencies is unusual and could occur as early as mid-December. Other concerns relate to the impact on smaller shippers as well as the impact to the other ocean container carriers that are not part of this proposed alliance.
Business network CNBC reports that alliances of shipping lines usually involve the pooling of carrier equipment, typically allowing the carriers to offer more frequent service to more ports. But in the case of the P3 alliance, shipping and trade groups lack specifics about both the potential economic and market impacts. These concerns are focused on a restriction of the supply of shipping capacity which could drive ocean container freight rates higher. The CNBC report quotes a statement from U.S. Federal Maritime Commissioner William Doyle as concerned about reports that a combined fleet of 346 vessels will be reduced to 255 vessels once the P3 alliance is consummated.
Needless to state, the unprecedented joint meeting among all three involved maritime regulators is well-timed and could lead to further clarity as to whether the proposed alliance will meet resistance.