These past few weeks, there has been a lot of business and general media attention focused on the threat or existence of a considerable economic slowdown across China. The reasons are obvious. Today, when China sneezes, the rest of the world feels the effects, especially in specific industries such as commodities, alternative energy, high-tech and consumer electronics.

A significant slowdown in China threatens global economic growth prospects. This week, the International Monetary Fund (IMF) indicated that it plans to once again downgrade its outlook for economic growth prospects, which would position its October outlook to be the weakest growth indicator since the financial crisis.

Industry supply chain and sales and operations (S&OP) planning teams should already have first-hand knowledge of these trends, and are obviously preparing various supply chain scenarios to be able to meet specific business revenue and growth objectives. There are now clearer signs that growth prospects are slowing not only in China, but in other emerging markets. Once more, industry and product trends may be compounding the current picture, and there lies the most important trends to decipher.

Within our Supply Chain Matters Quarterly Newsletter, we track the trending of important country and regional PMI indices which are key indicators of global supply chain activity. This week, we reviewed actual reporting numbers through August, and certain trends are becoming obvious.

We have been tracking the China PMI reporting conducted by Markit Economics. Below, we provide a trending graph that spans the years 2013 to date. The important 50 point differentiating expansion or contraction is highlighted.

China Multi-year PMI Trending

Source: Markit and Complied by The Ferrari Consulting and Research Group

 

First, the slowdown in China, which really began in early and mid-2014, has become much more discernable. Readers should observe that the since the beginning of 2015, while with some variation, the slope of the decline in manufacturing is now increasing. Even an economist at China’s National Bureau of Statistics has indicated that: “There is insufficient growth momentum in the country’s manufacturing sector.” Since China continues in its efforts for its economy to be more consumption vs. export driven, the recent PMI trending could be a reflection for both domestic and global export demand trending.

However, it is not just China that is showing signs of supply chain activity decline, and teams need to focus beyond just China to decipher other industry related trends. As an example, a similar analysis of PMI trending for Taiwan, a global hotspot for semiconductor, high tech and consumer electronics industry, shows more acute declining supply chain and manufacturing activity.

 

Taiwan Multi-year Manufacturing PMI

Source: Markit and Compiled by The Ferrari Consulting and Research Group

 

Supply chain teams in the smartphone sector are certainly aware that product demand, of-late, has been slowing, product pricing points are falling falling and inventory levels are building. Similarly, PMI indices for Malaysia, Singapore, South Korea, and to some extent Vietnam, all of which are rooted in high tech manufacturing, are similarly on the decline. These market declines have an obvious ripple effect on the cascading tiers of high tech supply chains.

The Wall Street Journal recently quoted Lenovo’s CEO as indicating earlier this month that this past quarter was possibly the “toughest market environment in recent years.” Samsung Electronics executives have indicated a slowing in smartphone and other consumer electronics sectors. Hewlett Packard in its recent financial results reported a rather challenging past quarter for PC and laptop sales. Today’s WSJ features a report indicating that some analysts are now questioning whether Apple can sustain its iPhone volume output growth rates.

The takeaway for our commentary is that supply chain teams need to view the full global demand and supply picture, beyond a single country, even if that country is a primary hub of global manufacturing and a major source of current and future product demand.

Do not fall into the trap of a singular focus. Now is the time for deeper visibility and more informed context in decision-making.

The J.P. Morgan Global Manufacturing PMI for August fell to its lowest level since July 2013. At 50.7, the index hovers close to the all-important 50 mark that differentiates global expansion from contraction. Yet because of the continuing increases in the currency value of the U.S. dollar, the Eurozone is experiencing growth in exports to the U.S.

Senior executives are becoming increasingly concerned about global economic trends and S&OP teams need to be prepared to provide informed, insightful analysis and scenarios of impacts and/or opportunities to current near-term and longer-term business and resource plans.

All of this points to the importance for exercising more active and frequent business and supply plan chain plans, scenarios and operational intelligence over the coming months.

Supply Chain Matters will provide further analysis in upcoming commentaries as well as in our upcoming quarterly newsletter reflecting on Q3 developments.

Bob Ferrari