These past few days, Supply Chain Matters has been updating our readers regarding ongoing supply chain management developments involving specific companies. That includes Airbus, Boeing, Chipotle Mexican Grill, Pratt and Whitney and others. We have been somewhat remiss in not updating on developments involving one of global business’s most visible supply chain, that being Apple.
There are two somewhat significant developments to share.
Potential U.S. Manufacturing Presence
To begin, multiple published reports now indicate that prime contract manufacturer Foxconn, has confirmed that the CMS is in preliminary discussions to make investments to in-essence expand Apple’s manufacturing operations presence in the United States. One report indicates that this activity is underway despite the objections and wisdom of Foxconn chairman Terry Gau. A Bloomberg published report observes that the disclosure came hours after a joint announcement by U.S. President-elect Donald Trump and SoftBank Group Corp. to invest $50 billion in the U.S. and create 50,000 jobs.
As we have noted in prior commentary, during the heated U.S. Presidential campaign, Donald Trump specifically cited Apple for its tendencies to source thousands of manufacturing jobs in China while reaping the benefits of higher profits. As of now, Foxconn has provided little additional details to business media, no-doubt not wanting to steal Apple’s thunder in such an announcement. Other reports indicate that Apple has been approaching certain other suppliers to consider moving supply chain component manufacturing from China to the U.S.
In the past two weeks, President-elect Trump has publicly confronted Carrier, a Division of United Technologies and this week, Boeing over the projected costs of a new replacement for the Air Force One presidential aircraft.
For multiple years, this blog has challenged Apple to consider expanding some of volume manufacturing volume presence in the U.S. over and above the manufacture of certain Mac computer models. Being a rather savvy and public relations astute company, it may well be that Apple has quickly read a sea-change in the political discourse of the United States and now needs to be prepared to stay on the good side of the incoming administration.
We shall all see what headlines develop in the coming weeks.
iPhone Battery Failure Issues
Turning to the product front, Apple has publicly confirmed that a problem involving some batteries in the manufacturer’s iPhone 6S model is apparently become more widespread than initially revealed. The issue has become known from China’s product safety agency, and Apple reportedly quietly acknowledged the situation on a Chinese web site. China now represents one of the largest installed base markets for the iPhone 6S. The Chinese regulatory agency claims that the battery issue involves older iPhone models as well, including the iPhone6 and iPhone5S but Apple thus far is only acknowledging the small batch of iPhone 6S units.
Apple has stressed that the battery issue poses no safety risk for customers.
The problem manifests itself with the phone prematurely and unexpectedly shutting down to protect its electronic circuitry. Indications are that the cause may be a component within the battery that was contaminated by ambient air. The contamination was initially disclosed to involve phones sold in September and October 2015, but other reports indicate that the situation may be more widespread than just this production interval. Apple has instructed Chinese users to bring their phones to authorized repair centers or to an Apple store for a battery swap. The manufacturer further indicates that it will add a new diagnostic in its forthcoming IoS software update in hopes to mitigate any future problem by a software modification.
This iPhone battery issue is garnering wider visibility after Samsung’s recent crisis involving exploding batteries in the new Galaxy Note 7. Samsung obviously had a clumsy response to its battery issues, which were far more severe, including not informing or involving product safety regulatory agencies early in the process of discovery.
Apple is obviously a more brand marketing savvy customer and has been rather careful in the widespread sharing of the occurrence of product quality issues among its smartphone products. However, one similarity shared with Samsung would seem to be the suspected manufacturing defects involving batteries. Apple also shares a similar battery supplier, that being a component division of Samsung.
Two new developments, each with different connotations related to the brand, and directly involving the supply chain. Even the perceived best in class supply chain is not immune to externally focused developments.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Boeing made a senior management change this week, recruiting a General Electric Aviation Services executive to be the new head of the Commercial Aircraft division. This executive move, which is effective immediately, likely has manufacturing, supply chain and services management implications from two perspectives.
Kevin McAllister previously served as the head of GE’s Aviation Services business unit which is the customer support arm of the aircraft engine unit. Thus, McAllister brings an aftermarket services perspective. His background is one of design engineering, having served in roles of engine component development and services sales.
According to statements from Boeing CEO Dennis Muilenberg, the aerospace manufacturer sought an executive with “fresh ideas” to lead in efforts to triple services related revenue over the next decade. In conjunction with this executive change, Boeing further indicated that it plans to centralize management of the service businesses related to defense and space operations as well as commercial aircraft.
Supply Chain Matters believes that the above moves signify intent by Boeing to expand revenue and profitability growth across managed services and such efforts will likely include leveraging of Internet of Things (IoT) and connected devices as technology underpinnings of such efforts. Boeing had previously announced its intent to leverage more revenues from service parts which decreases revenue opportunities from certain suppliers.
As the new head of Commercial Aircraft, McAllister will oversee all of Boeing’s manufacturing and internal supply chain resources. He represents the first outsider hired for a senior management position since 2005 when former GE executive Jim McNerney was recruited to be CEO. We believe that his prior background in product engineering, services and manufacturing will surely help in the continuing challenge to ramp-up Boeing’s existing aircraft production cadence to meet backlogged product demand. Boeing previously
According to a report published by the Seattle Times, during his tenure, former Commercial Aircraft CEO Ray Connor had precipitated a sharply negative turn in Boeing’s relationships with its various labor unions. Much of this animosity came during plans to source manufacturing and supply chain related strategies for Boeing’s next generation 777X aircraft. In a January 2014 blog commentary, we had highlighted the effects of Boeing’s strong-willed collaboration efforts with the State of Washington, with prospective suppliers, and with Boeing’s labor unions. Other sour relations remain in the shared manufacturing responsibilities for the 787 Dreamliner aircraft among Seattle based, unionized manufacturing workers and predominate non-unionized workforce at its Charleston South Carolina production facility. Mr. McAllister must now direct some of his leadership efforts at addressing these sore areas.
The announcement of this new external executive hire comes after a corporate supply chain management announcement in March. Pat Shanahan, the former head of Commercial Airplane Programs was appointed as Senior Vice President for Supply Chain Management and Operations companywide. According to that announcement, Shanahan was provided direct responsibility for oversight of manufacturing operations and supplier management functions, including implementation of advanced manufacturing technologies and global supply chain strategies. At the time of his appointment, Shanahan reported directly to Boeing CEO Dennis Muilenburg. There will obviously be some shared collaboration and leadership with both McAllister and Shanahan moving forward.
© The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
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
There continues to be significant merger, acquisition and strategic product development activity involving automotive supply chains and the stakes involve which company and which advanced technologies will ultimately control and benefit from the movement of more technology being embedded into automobiles.
If readers have not been up to speed with industry focused news, two recent major acquisitions add more evidence to this movement and to the pending battle between OEM manufacturers, transportation service providers and certain major supply partners as to whom will benefit the most from the ongoing technology wave.
In late October, fabless semiconductor manufacturer Qualcomm announced its intent to acquire NXP Semiconductors, a major supplier of semiconductor chips and microprocessors that control more sophisticated automobile functions in power management, security access, media and audio functions. Qualcomm is paying a hefty sum, upwards of $39 billion, a 34 percent premium in existing NXP stock value, to gain entry into automotive technology value-chain needs. The announcement represented one of the largest semiconductor related acquisitions to-date. With this proposed new arrangement, Qualcomm brings its own technology strengths in mobile cellular communications technologies along with an evolving thrust into Internet of Things based capabilities.
Earlier this week came the announcement from Samsung regarding its intent to acquire electronic components supplier Harmon International for a reported $8 billion all-cash deal. This deal represents Samsung’s largest deal in its history and is no doubt motivated by strategic intents to gain deeper access to the automotive product value-chain. Here again, the deal has similar indicators of marrying Samsung’s technology based capabilities in mobile communications, electronic displays, memory chip and microprocessors with Harmon’s evolving capabilities to support connected vehicle and lifestyle audio product innovation. Harmon has already secured a reported $24 billion in order backlog from major automotive OEM’s.
In a prior automotive supply chain commentary, we called reader attention to a Bloomberg Businessweek report titled: The Foxconn of the Auto Industry, that indicates that Tier One supplier Magna has taken more proactive actions to position itself as the contract manufacturer of choice for self-driving vehicles. The premise is that if Apple, Google, Uber or other technology focused firms want to manufacture a self-driving vehicle than Magna may well remain as the first step as the design and manufacturing outsourcing option, freeing up resources of the automotive or transportation services provider to concentrate on a software and managed services business model. For Magna, the premise of its current strategy is twofold. First, there is a belief that in the coming five years, the core of product design expertise and IP for hybrid or electric powered self-driving vehicles will rest in software and services, rather than automotive component design such as bodies, engines and transmissions. Second, the contract manufacturing industry itself is moving more towards a one-stop shop for product design as well as more automated manufacturing processes including additive manufacturing techniques. Such a shift allows contract manufacturers to broaden their margins while increasing a presence up and down the automotive value-chain.
Obviously, major global automotive manufacturers are not inclined to ignore technology forces and consumer desires for more connected and more safety oriented automobiles. Collectively they each are sinking serious investments into either developing their own advanced technologies or teaming-up with other advanced technology providers such as Apple, Google, Microsoft and others to gain added footholds in these technologies.
From our lens, the vulnerability of some OEM’s rests with supply chain strategy decisions undertaken several years ago, when conscious decisions were made to transfer product innovation of major automotive sub-systems to Tier One or Two suppliers. That strategy afforded OEM’s the flexibility to be able to select from various competing product designs, take advantage of quicker time-to-market, and to be able to maintain buying leverage among key suppliers. Indeed, these strategies have yielded faster product innovation cycles in vehicle safety and control systems, connected cars and navigation systems.
As consumers opt for even more fuel efficient and autonomous type vehicles that serve as both satisfying needs for transportation and another source of entertainment and content, the industry picture takes on a different perspective. Fleets of connected vehicles, leveraging mobile and IoT technologies among such connected vehicles, opens the opportunities for a contract manufacturing strategy that affords new transportation services providers such as Uber, Lyft and perhaps other automotive OEM’s, to be able to directly contract or build autonomous driving fleets.
For automotive OEM’s themselves the strategy has to focus on maintaining brand loyalty and a unique driving experience. That implies continuing to provide consumers with both driving and entertainment technology innovation, marrying modular sub-system hardware, software and respective vehicle platform capabilities with a far faster overall innovation timetable may well be outpacing the OEM’s themselves because industry disruptors may now rest within product value chains themselves.
When a major new technology trend emerges, innovators can try to capitalize on the trend by creating and fostering a consumer product or service, or by creating the tools and technologies (the product supply and value-chain) that both enables and controls the intellectual property of the consumer product or service. Like the California gold rush analogy, you can either make money in providing the service to multitudes of consumers or in supplying all the pick axes and supplies needed to mine for gold. This is the analogy now emerging among today’s global automotive supply chains and there is big money and large technology stakes at-play.
Where these forces converge is indeed worth observing in the months and tears to come. Industry participants all along the supply chain should nor be surprised by other new entrants as well. Indeed, automotive and high-tech supply chains are merging, and that includes cultures of fast innovation in products, coopetition in processes and in value-chain strategies. Future supply chain sourcing strategy decisions will surely be grounded in deeper knowledge of technology capabilities and overall scope of supplier.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
The Donald Trump Presidency- Our Supply Chain, Product, Procurement and Technology Management Focused Perspective
It has taken this analyst over a day to recover from the shock and outcome of the recently completed U.S. Presidential election. Front page newspaper and online media headlines across the globe reflect such unprecedented shock and surprise. Today’s primary headline from The Wall Street Journal declared: A New Political Order.
Supply Chain Matters has become a well-recognized blog providing insights and observations directed at the broad umbrella of what has become supply chain management today. Our perspective is global in nature, not just the United States. Thus, it is probably no secret that this week’s stunning election result has global as well as domestic supply chain management implications for many months to come.
President Elect Trump won the election echoing populist views that favored building frustrations of the everyday workers who remain fearful of the growing tide of globalization. They are perhaps the workers employed, or previously employed in your manufacturing or supply chain operations areas that have had their economic livelihood impacted by various cost-cutting or other business moves.
Populist sentiments fueled Great Brittan’s referendum results to favor exiting the European Union, which was the prior shock heard around the world. There again, populist sentiment was in protection of jobs, a rising tide of immigration and in the burdens of government taxation. Already there is speculation that the populist movement will perhaps impact pending important elections across Europe that are scheduled to occur througout 2017.
However each of us voted, the United States will plan for a peaceful and successful transfer of power. Similarly, U.K. political leaders and institutions will plan for a formal two year exit plan from the European Union.
In this initial viewpoint commentary, we can only touch the surface since so many uncertainties come to mind and a Trump administration is yet to govern and lead the United States. Thus, our first of surely many commentaries to come will focus on helping our readers and clients to begin to think about and context such implications. At this point, supply chain leaders can only assess the potential scenarios and remain prepared to brief the C-Suite on how the overall supply chain is prepared to deal with such implications.
Let’s therefore dwell upon some important areas.
Upcoming Holiday Fulfillment Surge
The most immediate impact is potentially the upcoming holiday fulfillment period. Most retail industry demand for the past two years has been fueled by a positive consumer sentiment. The open question is whether the shock and fear resulting from the U.S. election and other global political concerns spills over to holiday buying sentiments, particularly discretionary type goods such as clothing, jewelry or high fashion. Early product demand sensing will perhaps be a key determinant of any impact.
President Elect Trump was rather vocal and direct regarding current U.S. trade policies involving North America and other global countries. He called for re-negotiation of the North America Free Trade Agreement (NAFTA) and the refusal to ratify the proposed Trans Pacific Partnership (TPP) agreement. There was open admonishment of currency and trade policy related to China with a threat to pose significant tariffs on Chinese manufacturing goods being shipped to the United States.
When the political realities set-in, the campaign rhetoric will likely focus on actions related to both China and NAFTA, but to what degree remains to be seen and assessed. The President Elect was not shy in calling out specific manufacturers such as Ford and Apple on their manufacturing investment strategies and lost U.S. jobs going to China and Mexico. Similarly, online buying and commerce has generally been allowed a free and open access to global markets. Global trade shocks could well spillover to online providers such as Amazon’s access to sell in certain overseas global markets.
For most multi-industry supply chains, it is likely a wait and see perspective at this point. For supply chains that currently have a high-profile sourcing dependency within China itself, there should be consideration for business impact. However, for those that have a stronger sourcing presence in Vietnam and other Asian countries, failure of the United States to support TPP has from our lens, trade and intellectual property protection implications. Like it or not, China today has garnered enormous power to influence basic commodity pricing which is another reality that must be balanced with sudden policy moves.
The obvious industry impacted by a harder currency and trade line with China is high tech and consumer electronics. A further industry is apparel and footwear. The high-tech supply chain with considerable China exposure is that of Apple. However, Apple is not alone from an overall high-tech perspective since the bulk of the industry’s component and final assembly value-chain originates in China. Clothing and sporting goods manufacturers have already moved some sourcing to other low-wage countries but high-margin and high-fashion goods remain likely sourced within China.
The commercial aerospace industry has a potential impact from a product demand perspective because so many of current booked orders involve China’s air carriers, reflecting explosive long-term demand for increased air travel across China. Retaliation to increased U.S. or even European tariffs could result in a demand focused backlash. Also from a demand perspective, a harder U.S. line on currency and trade policy has an obvious impact on global transportation carriers, and ocean container shipping lines that are already struggling with lower demand and significant excess capacity.
A hard line on shipping jobs to Mexico and the threat to build a wall on the U.S. border with Mexico has a potential impact on automotive manufacturers who have made significant strategic production sourcing bets for Mexico to serve as a major manufacturing hub for smaller and mid-sized vehicles serving North American and other geographical consumption markets. The President Elect threatened a 35 percent tariff on cars imported from the country and a backlash on borders could spill over to free movement of goods.
Overall, we might foresee a resurgence towards more accelerated near-shoring sourcing strategies to serve domestic product demand.
Environmental Policy and Climate Change
A Trump Administration is not likely to actively support global climate change initiatives and there is already speculation that U.S. policies related to clean and alternative energy buying and development incentives or electric car purchases will be quickly rolled-back. Campaign rhetoric shunned scientific climate change evidence and included the cancelling of large payments to United Nations sponsored climate change initiatives. Further speculation points to lifting existing restrictions related to oil pipeline construction from the Bakken region, adding a further long-term demand blow to North American railroads. However, to appease coal country voters, the lifting restrictions on coal use would be a commodity movement offset for railroads.
We tend to agree with others including Kevin O’Mara of SCM World that it may be just a matter of time before a Trump administration withdraws support for the Paris climate change initiatives which will serve as a big disappointment to current signors, and could result in added backlashes directed at U.S. produced goods.
This author has already openly stated that a sustainably focused supply chain strategy should serve as the component of a broader overall sustainable business strategy. Current sustainably focused initiatives could well be sidelined by ongoing political events.
Global Economic and Consequent Supply Chain Strategy Trends
The entire Trump Presidential campaign was predicated on shock and bold statements related to the United States being far more aggressive in world markets. Hopefully, such statements will moderate with the realities that U.S. based businesses need to continue to benefit from access to such global markets. Already, corporate CEO’s from Boeing, General Electric, Procter and Gamble and United Technologies who each have a major stake in sustaining global business expansion have reached out to the President Elect seeking to promote what was described as “healing and reconciliation.”
Mr. Trump promised a new tax policy that reduces overall corporate tax rates and will likely allow corporation to move accumulating overseas profits back to the U.S. or elsewhere without substantial tax consequences. The re-patriating of overseas profits triggers the potential risk of other nations seeking more of their fair share of taxation from overseas based corporations, as demonstrated by the European Union’s latest efforts to collect hundreds of millions in added taxes from Apple that were sheltered by Irish tax shelter laws. More local based taxation implies added supply chain movements for inventory and production declarations.
All of the above may well provide an incentive for more near-shoring or increased investments in U.S. and major geographical hub based supply chain capabilities.
However, the largest risk is additional shocks to the overall global economy which is already struggling to bounce back from the prior financial meltdown led global recession. With the threat of more populist sentiments, additional political shocks within other countries such as in Europe, or a complete loss of confidence in global financial structures and currency values, anything can happen.
Technology and IP Protection
A nationalist agenda within the U.S. can well trigger prohibited access to advanced technology across the globe or to local intellectual property provisions that require more sharing and less protections of trade secrets. Certain technologies could be banned, or certain products could be subject to added securitization by regulatory and domestic product safety agencies. This is likely an area of greatest strategic risk and businesses have already experienced such effects in China. A chilling or clash of trade policy among the U.S. and certain other large countries can trigger many ancillary effects. Access to technical talent or IP residing in non U.S. countries could well be even more restricted or shutout all together. Likewise, access of U.S. citizens possessing critical technology skills could be banned from entering other countries without agreeing to waive intellectual property or trade secret disclosure.
We certainly trust that cooler discourse will ultimately prevail but for now, supply chain teams need to think about any of the above implications and their impacts on current supply chain sourcing and distribution strategy.
Indeed, we are all about to enter a new phase of uncharted global uncertainty with added shocks to come.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.