In this two-part commentary Supply Chain Matters shares some initial impressions of the Trans-Pacific Partnership (TPP) which has reached the stage of preliminary agreement pending the ratification by member nations. In early October, ministers of the 12 TPP countries announced conclusion of their negotiations regarding trade among what is estimated to represent 40 percent of current global GDP, which is rather significant, especially from a global supply chain context.
In our Part One posting, we shared perspectives on the defining features and summary descriptions of Sections 2, 3 and 4 of TPP.
We continue with pointing out some other important sections for the education of our cross-industry supply chain reading audience.
Section 14- Electronic Commerce
This chapter prohibits the imposition of customs duties on electronic transmissions and prevents TPP parties from favoring national producers of suppliers. TPP members agree to adopt and maintain consumer protection laws related to fraudulent and deceptive online related commercial activities and ensure that consumer protections can be enforced in TPP electronic messaging. To promote more online focused trading network activity, the agreement calls for promoting paperless trading between businesses and governments including electronic customs forms, electronic authentication and signatures for commercial transactions. The parties agree not to require that TPP companies build separate data centers in store data as a condition for operating in a member country, and that source code of software is not required to be transferred or accessed.
This area will surely aide in measures to streamline B2C/B2B business process and customer fulfillment networks. We also view this as potentially removing barriers to facilitating electronic supply chain control tower capabilities spanning both planning and execution visibility and decision-making needs.
Section 18- Intellectual Property Protections
Consistently, one of the more important concerns for firms and their respective value-chains is IP protection. This chapter of TPP is described as making it easier for businesses to search, register and protect IP rights in new markets. It establishes standards based on WTO’s TRIPS Agreement and international best practices. For trademarks, it provides protections of brand names and other signs that businesses and individuals use to distinguish their products in the market.
This section further contains pharmaceutical-related IP provisions that address both innovative medicines and availability of generic medicines.
Section 19- Labor
All TPP parties are noted as International Labor Organization (ILO) members and thus recognize the importance of promoting internationally recognized labor rights. Rights are noted as the right to collective bargaining, elimination of forced labor, abolition of child labor and elimination of discrimination in employment, among other tenets.
There are further acknowledgements to have common laws related to governing minimum wages, hours of work and occupational safety and health. This section will have special meaning to high tech and consumer electronics, high direct labor focused, and general lower-cost focused contract manufacturing focused value-chains.
Section 20- Environment
TPP parties are to share a strong commitment to protecting and conserving the environment and to effectively enforce their environmental protection laws. There is specific language related to the protection of fisheries, endangered species, water and wetlands and marine environment. The parties are to commit to cooperate to address matters of joint or common interest, including areas of conservation and sustainable use of biodiversity along with transition to lower emissions and resilient economies.
Section 24- Small and Medium-Sized Businesses
A special chapter promoting a shared interest for small-and-medium-sized businesses sharing in the benefits of TPP. It includes commitments from TPP members to create user-friendly business practices, provide assistance in accessing new markets and in overall training.
Section 26- Transparency and Anti-Corruption
A rather important section for strengthening good governance and addressing the effects of bribery and corruption practices. It calls for laws, regulations and administrative rulings be publicly available along with consistent enforcement of anticorruption laws and regulations. The section covers areas for both corporate and public officials.
Obviously there is much more to TPP, more than we can cover in a couple of blog posts. Ratification is expected to occur in 2016 as legislators of individual member countries vote approval. We can’t help to speculate that this effort may take-up most of 2016, given the far reaching aspects of TPP.
As we noted in our initial commentary, certain influential nations such as China are not a current member of TPP. That country, instead, is now actively promoting the Free Trade Area of Asia Pacific (FTAAP) as a further alternative. This week, Chinese President Xi Jinping stated: “With various new regional free-trade arrangements cropping-up, there have been worries about the potential of fragmentation. We therefore need to accelerate the realization of FTAAP and take regional integration forward.”
With a significant global and supply chain influencer such as China, representing the other significant portion of global growth, promoting yet another or alternative trans-Pacific focused trade pact, TPP can either be ratified, compelling other nations to join in its tenets, or could be fragmented by conflicting standards.
Industry supply chains are obviously important stakeholders in these major trade pacts and it will be important to keep up to date on these trade developments along with their implications on easier access to new markets, more leveraged use of technology and impacts to existing business practices.
Supply Chain Matters will do our part to keep readers informed of important developments.
There are additional consolidation related events underway in ocean container shipping. The Wall Street Journal cites informed sources as indicating that China’s two ocean container carriers will merge by January. China Ocean Shipping Co. (Cosco Group) and China Shipping Group Co. have reportedly been working on a tie-up for several months, responding to Chinese government directives to consolidate similar state-owned enterprise in order to more effectively compete in global markets. This consolidation is expected to create the world’s fourth-largest container shipping carrier. According to the report, the value of this merger could exceed $20 billion, accounting for 8 percent of global volumes.
This news comes in midst of other industry and business media reports that Singapore based Neptune Orient Lines (NOL) is in talks with Maersk Line and CMA CGM, with the latter now favored as be the final suitor. Neptune and its affiliates represent 3 percent of global container shipping volumes. According to one report, NOL, which is 65 percent owned by Singapore sovereign-wealth fund Temasek Holdings Pte. Ltd., has been looking for a buyer for months. The company reported a $96 million loss in the third quarter and sold its profitable logistics business, APL Logistics Ltd., for $1.2 billion to Kintetsu World Express Inc. in May.
Both of these developments are continued but not expected developments for an industry that has significant excess capacity and is losing any leverage to increase tariff rates to expected levels.
Once both of these entities are merged, readers should not be surprised by other consolidation developments as remaining carriers feel the pressure to compete with now larger and perhaps more cost-efficient survivors.
This is a follow-up to an August Supply Chain Matters commentary highlighting a published report indicating that a key component part production scalability problem had been identified on the Boeing 737 MAX development program. At the time, The Wall Street Journal had reported that that a key supplier within Boeing’s 737 MAX program, United Kingdom based GKN PLC, was challenged with production ramp-up supply issues related to an engine thrust reverser on this new aircraft. Difficulties in use of an advanced titanium based material and consistency in manufacturing output volume were reportedly flagged by Boeing as a significant development challenge for its commercial aircraft business. However, at the time, Boeing indicated every confidence that GKN would be up to the task of volume production.
This week, the WSJ reported that nearly three months later, Boeing has now canceled its engine thrust reverser supply contract with GKN. Further reported was that a change in the component part design that would more readily support high ramp-up volumes of production was underway. A Boeing spokesperson indicated: “We made this decision to ensure we have a product that is not only maintainable and reliable but is producible at the high production rates of the 737 program.”
With a current order backlog approaching 3000 aircraft, Boeing must meet its time-to-market output objectives. It further appears that Boeing has translated learning from the 787 Dreamliner program where advanced technology, such as the lithium ion batteries led to aircraft groundings and production delays, and volume production of composite carbon fiber airframe components led to overall program delays. Instead, it would appear that Boeing is taking precise actions to readily identify design for supply chain challenges as quickly as possible.
As we noted in August, the fact that the design of the new thrust reverser was flagged for production volume capability assessment, two years before planned first customer ship, is indeed a good sign of proactive and decisive program management.
Last week provided an important milestone for China’s commercial aircraft sector. China’s first single-aisle commercial jetliner, the C919 rolled-off its prototype production line at an unveiling ceremony that included a reported 4000 government officials, aviation executives and other invited guests held at Pudong International Airport near Shanghai.
The C919 was developed by state-owned Commercial Aircraft Corp. of China (Comac) and was originally unveiled in 2006. Supply Chain Matters initially called reader attention to this program in 2010. The C919 program is very significant since it represents China’s efforts to be recognized as a competitive global manufacturer of commercial single-aisle aircraft. A short video of the unveiling ceremony can be viewed at the UK’s The Telegraph reporting web site.
China represents one of the biggest global aviation markets but has seen Boeing and Airbus aircraft models compete and deploy among various China based airlines. The multibillion-dollar effort to create a homegrown jetliner is aimed at clawing back some of the commercial benefits that flow to foreign providers. However, with its maiden flight scheduled for next year and at least another three years of test flights, it will take some time before the single-aisle jet can fly commercial air routes across China and globally.
Versions of C919 can seat 158 to 174 passengers with a standard range of upwards of 4,075 kilometers. Its current supply chain consists of more than 30 foreign firms including CFM International, Honeywell and Rockwell Collins who have supplied key components. Thus the program must rely on key foreign-based technology, including composite materials, in its current value-chain. According to China’s Xinhua News Agency, upwards of 12 percent of the C919 airframe include advanced composite materials.The significance of the reliance on the existing global supply chain is even more significant given that when this aircraft reaches full certification and production release, aerospace supply chain will have reached unprecedented and untested levels of monthly production output.
Comac indicates that it has booked 517 orders from 21 foreign and domestic customers for the C919.
According to business media reports, both Airbus and Boeing extended congratulations to Comac and welcomed new competition in their markets. When the C919 does enter commercial service, it will likely be competing with the newest versions of the Airbus A320 neo and Boeing 737 Max aircraft models possibly placing the aircraft at a competitive disadvantage. But, as a state-owned company, Comac will surely garner purchasing influence among China’s domestic air carriers.
The C919 truly represents China’s efforts to be recognized as a viable player in commercial aircraft design and manufacturing, and as such, this is an important program to watch in the coming years.
In late May, Supply Chain Matters noted that commercial aircraft producer Airbus, in response to increased orders, was actively evaluating a further ramping-up of its A320 family production volume cadence. In February, the stated plan called for increasing monthly production from the current 42 to 50 aircraft per month by early 2017. However, evaluation was underway to assess if the global supply chain could support a ramp to 60 aircraft per month.
Late last week, the company formally announced that it would indeed increase the A320 production rate to 60 aircraft per month by the middle of 2019. To further enable this ramp-up, Airbus will extend an additional production line at its Hamburg Germany manufacturing facility, as well as harmonize some production processes at its Toulouse France facility. As of September, Airbus reported backlog orders for the single-aisle A320 aircraft family amounting to 5502 aircraft.
While Airbus scrutinized suppliers for ability to support such a plan, there are still concerns regarding CFM International, the joint venture among General Electric and Safran SA, which is a major supplier for its new LEAP family of advanced aircraft engines for both Airbus and rival Boeing. As of September, nearly 4300 of Airbus backlogged orders were designated for the A320neo (new-engine option) model, powered by the new CFM LEAP engines.
During the summer, company management publically expressed concern about each OEM’s aggressive ramp-up schedules. Through September, CFM had booked orders for 9550 LEAP engines. If one were to conservatively assume that this backlog was spread out over the next eight years, CFM would have to sustain an average production rate of nearly 100 engines per month. The reality of order and delivery timing skew would likely make that monthly volume number higher. That is quite a challenge, one that obviously requires a significant investment in resources, capacity and consistent quality focused processes.
As Supply Chain Matters has previously noted, the realities of multi-year order backlogs are now reaching the point of all-in commitment. These are record-breaking production volumes and massive scale that this industry has never experienced at a regional or global-wide perspective. Technology will play a critical role along with people, since the aerospace industry is facing the same reality of highly experienced older employees about to retire. Processes, systems, risk mitigation, talent and supplier management practices are sure to be tested in the continuing journey that is unfolding.
Hewlett Packard Now Operating as Two Separate Companies: Supply Chain Test Comes in the Coming Weeks
Today marks the official first day of high-tech firm Hewlett Packard operating as two separate and distinct companies. One company, Hewlett Packard Enterprise Company will oversee operations of the former HP Enterprise division, a $55 billion dollar entity. The other, HP Inc., will oversee operations of the former HP Printer and PC divisions, of equivalent revenue size. Supply Chain Matters commented on this proposed split, along with supply chain implications in a July commentary, as we envisioned a very busy summer across the company.
The massive HP split involved separating balance sheets, facilities, IT systems and applications, including those related directly to the support of HP’s end-to-end supply chain. Purchase agreements among various suppliers would have to be recast foe each new company along with various special agreements.
A published article from the San Jose Mercury Times provides perspective on the scope and efforts that went into this split, which overall involved 300,000 employees among 651 global locations. Formal planning began last February and initially involved a flow chart that consumed a 40 foot length, 10 foot high wall. Approximately 60,000 employees had to be moved to separate locations, along with a reported 2700 bank accounts and IT systems.
An interesting perspective brought out in the article was the planning could not be a consensus-driven decision-making process. Instead, a small group of executive decision-makers were supported by a separation project team that grew to about 400 people.
The real-test of this separation comes over the coming weeks as the spilt processes and systems begin efforts as two separate enterprises. From a supply chain and product management perspective, key sensitivities will be seamless uninterrupted operation of both order fulfillment, supply chain planning and execution systems. A further perspective will be how inbound direct material and indirect materials contracts are structured, implemented and managed under the split. The Mercury Times report indicates that HP Labs will remain as a separate research and development center shared by both companies.
Obviously, the good news here was that the November 1st separation milestone was completed as required. The systems shakeout period will hopefully occur without major snafus.