2021 JULY
GLOBALIZATION
NEEDS
REINVIGORATE
PART 1
By : Andrew Sia
Introduction
Globalization started in the 1980s and before that manufacturing was a rich-country activity due to the capital investment and the management skills that required for the different levels. The poor countries were treated as the resources for the various raw materials.
In the 1980s the rich-countries, also began to be known as the developed countries, decided to do the outsource because of the increase of labor cost and also the labor unions were getting stronger by the day. A team of the blue-collar technicians and engineers, led by the industrial engineers, brought along the blueprints of the products and started their journey to the East to find factories who were able to duplicate until the “prototype” was produced.
Prior to this, smaller scale of the outsourcing, already started in the 1970s, mainly by individual brands who did it independently, but we have never seen it in such a large and organized scale until the 1980s. We began to hear the word “globalization” being used and it was like the opening of the floodgate that it wiped out all the manufacturing in the developed countries and the manufacturing has been taken over by the developing countries and eventually the under-developed countries.
Starting of Globalization
I have to admit that I was the lucky one to have started my own manufacturing operation at the beginning of the globalization. I can say that I was riding the crest of this opportunity that I took it as once in the life time.
One of the factors that have driven the redistribution of the industry is the wage difference between the developed countries and the developing countries. The difference can be so big that the hourly rate as paid in the US for instance can be eight times the rate as used in China, whereas in the US the hourly rate is the daily rate in China for instance. I am referring to the garment industry but with the other industries the situation is similar.
In the beginning in the 1980s when I witnessed the moving of those styles from the US manufacturers to their subcontractors in China, I reminded them to send those minute-intensive styles and keep the low-minute contents back home in their plants or in those factories they were operating in the Caribbean. My rational was simple, as the needle-skill in China has always been proven to be better, and not only they should maximum the sewing skill, but also the production cost. Otherwise, they won’t be able to maximize their opportunity.
They were soon discovered that the volume was able to drive the cost further down then they went frantic with the enormous order quantity which they had successfully maximize this advantage.
Investment was at one time the key consideration, but soon all those specialized sewing machines were copied and duplicated by the Japanese, and later on some of those renowned brands were taken over by the Japanese sewing companies. But soon we were able to find the knockoff from the Taiwan sewing machine companies where their copies were usually the more inferior ones due to the materials that they were using.
Most of the fabric cuttings were done by the handheld straight knives and we seldom found cutting done by band-knife. And later, this was taken over by the computer cutting equipment (CAM), which not only solved the skill requirement for the cutters, but also speeded up the production and maintained the consistent quality of those cut-pieces no matter if it was a flimsy or slippery material.
But all these were inexpensive and thus the garment factories were coming up in many towns and villages in China.
Of all the factories we visited, we seldom found a factory with the installation of the air-conditioning system. Perhaps due to the cost factor, or the hefty electric bills, they had all shied away not knowing the cleanliness and the control of the humidity inside the factory. With the controlled temperature, not only it can keep the quality but also maintain the production efficiency.
This was extremely true in the tropical countries, like Cambodia, the Philippines, Vietnam and Thailand. We have heard that workers fainted in the sewing room especially when those poorly processed dyed fabrics which gave away the chemical particles which affected the healthiness of the workers. The situation went from bad to worse under the scorching sun especially when those factories were built very crudely with the corrugated tin-roof. We have also to know that these locations are either on the Equator or near the Equator.
In the beginning, I have seen the manufacturers from the US would send the sewing machines well equipped with attachments, especially the feeders and the folders, for the mechanics to study and eventually to copy for the production use. Later, the technicians were all well trained after they picked up so many tricks and gathered with experiences, and in some occasions they even exceled their counterparts.
For those brands who moved their production eastward, they sent their sewing instructions, cutting plans, materials and trims, the bills of materials, the quality instructions, all for the factories to study.
Once the companies who were doing the outsourcing had secured their supply chain, knowing that they could rely on the source, and began to commit with six to nine months of orders to block the capacity from the manufacturers. They also would want the manufacturers to dedicate their production capacity to them which in this case they could better control them. Once they have contracted their supply, they were able to dedicate their marketing department to take orders from the department stores, specialty shops, discounters, mail-order houses. Later this “everyday low price” became an addiction to them as they went back for more and more. From the market they were readier to enter into any deals and promotions and made use of every opportunity out there for selling in volume. On the other hand, they went back to the manufacturers for lower price and they began to squeeze from upstream, the fabric suppliers by committing with them the business volume, and they went to the sewing factories to tell them where to source for their fabrics and trims, it ended up by creating a bubble that everyone was working in the same condition by declaring it as a partnership.
Since 1980s, the trade in manufactured goods grew twice as fast as the global economy. Everyone was counting how fast it would take to sail from the East Asian countries to the West and the East Coast of the US, be it in 21-days to reach the port in Los Angeles or a week longer to the Port of New York for instance. They would never thought that one day something would happen when all the commercial activities were stopped, then they would need to deal to the consequence.
There were occasions, such as the 911 in 2001, where the terrorists attack took place in New York City, and for a short while the border was shut between Canada with the US.
In 2011, the Tohoku earthquake in Japan triggered the tsunami and damaged the Fukushima Daiichi nuclear and melted down three of its reactors. It was the strongest earthquake ever recorded in Japan, and the fourth most powerful earthquake ever recorded in the modern world. As the result, it crippled hundreds of Japanese auto parts plants.
The latest one is the pandemic-related factory closure in 2020. This one has been so widely affected along the supply chain, and this pandemic is yet to be over. It is affecting the whole supply chain, the businesses related and the world economy is taking the hardest hit which has never been seen or experienced before.
Department Stores – Selling Channels
If manufacturing is one side of the coin, then we can say that department is the other side of the coin. And it is the most important one in according to my opinion.
Before the department stores were introduced, shops, especially those standalone shops, located on the main streets of every town, were the places where the consumers’ needs could be served. And it was until department stores were introduced.
World’s first exhibition, the Great Exhibition, was held in 1851 in the London’s Crystal Palace with more than 14,000 exhibitors and attracted six million visitors.
This was followed by the Exposition Universelle, an international exhibition held on the Champs-Élysées in Paris in 1855. The Hôtel du Loure in Paris, was built for the visitors to the fair which drew 4.5 million visitors. Later the hotel site was turned into the department store—Grands Magasins du Louvre.
In the International Exposition 1867, Bon Marché was opened. It drew more than 9 million visitors. There were more exhibitions that followed, for instance: in 1878 it drew 16 million visitors; in 1889 – 32 million; and in 1900 – 50 million. And along came the department stores. It not only attracted the local population, but also became the mecca for the international tourists.
England, the first industrialized nation and benefited from it. After the Great Exhibition, where 14,000 exhibitors showcased their products, and the opening of the department stores began the urban growth. By 1900, London was already the world’s largest city with 6.5 million population and ten million within easy communicating distance.
After London, Paris and Berlin were Europe’s third largest city at the time. And in Germany, cities like Hamburg, Leipzig, Munich, Dresden, Breslau, and Cologne were coming up.
On the other side of the Atlantic, New York in 1860 its population was almost 1,750,000 but by 1900 it nearly became triple. Chicago, second largest city by 1890, grew fifteen folds. Followed by Philadelphia, more than double; Boston more than triple; St. Louis more than triple and Baltimore more than nine-fold.
Department stores were the catalysts for urbanization, mass transportation, and mass production. And in 1980s led us to globalization.
Urbanization at the time led to higher incomes and also improved the standard of living. Each department store was able to create jobs for thousands of employees.
They buy manufactured goods rather than let the consumers made them at home, and the most common ones for instance was the clothing at the time. Department merchandise can raise the consumers’ standard and experience. They can create the fashion trends and set the lifestyle. Purchasing directly from the manufacturers, and sometimes engage in manufacturing by themselves, so that they can lower the price to the bigger group of consumers and earn more profit. This is known as the “white label” or “private label”.
“Alice in Wonder Land” is the theme of the toy department, it has playgrounds, and even zoos that in the older days they brought in animals inside the department stores.
They would promote performance and arts and from time to time you can find fine arts are on display. Department stores are known as institutions.
Fragileness of Our Supply Chain
The giant container vessel, Ever Given, was found grounded in the Suez Canal on March 23, triggered the awareness of the problems that we have in our supply chain. It happened during the same time when the world was strained in the coronavirus. With the trade war raged between the US and China, the supply chain has been in the process of realignment.
The globalization was boasted by the freight rate as billed by the shipping lines which resulted the consolidations of several big shipping companies and that drove the smaller ones out of business already. There was a fierce competition between the shipping magnates. For the most part of 2020, up until September there was not enough containers to move around and, like many industries, the shipping was hemorrhaging.
With the opening of the market and the help of vaccination has helped to enable this, we have seen the shipments are coming back with full container loaded on those mega-container vessels, but we have maintained our skepticism as the sudden influx for shipments can only lengthened the vessel’s transit time. We have seen freight rates going up and container ports congested to a point that the offloading are becoming a hassle. The event of Ever Green that happened in the Suez Canal was like the straw on the camel’s back.
Also, there were less container ships sailing in these days as the transporting of the shipping crews are constrained in their own countries during the lockdown. Most of them had suffered in finding their way home when everything was grounded since March 2020.
Shipping Industry
This type of the ultra-large container ships, take Ever Given for instance, was built in recent years. It is known as the F class, is a series of 20 container ships being built for Evergreen Marine. The ships have a maximum capacity of 12,100 TEU. On March 23, it was sailing from Tanjung Pelepas to Rotterdam and the ship ran aground and remained in place for six days before the salvage crews freed it on March 29, 2021.
This vessel is like carrying the cargo loads of 12,000 trucks. And because of the enormous cargo loading, not only it has to sail slower, but also takes more time to load and unload. It has already proven that its shipping schedule is undependable, and this episode happened and exposed the fragility. It is time to study the percentage of the freight cost in the whole equation and the risk factor will need to be built in seriously.
We are not here to waive the globalization away so abruptly, but to offer points for consideration, such as the use of artificial intelligence through the machine learning algorithms, and the use of blockchain for the traceability for instance.
The globalization with its long-distance supply chain will need to be redefined. It is possible to:
- Shorten the distance
- Shorten the production lead-time
- Buy closer to the demand
- Use AI to navigate the business, machine learning and use to forecast demand with increasing accuracy and to optimize the supply chain
- Use more the “read-and-react”
- Maximum the opportunities
- Establish the true partnership and not just in name or act as the lip service
Situation at the US ports on the West Coast at this Pandemic
While the giant container ship was grounded in the Suez Canal, at the same time there were 24 container ships, carrying 120,000 containers in twenty-foot equivalent unit (TEU) said to contain washing machines, medical equipment, consumer electronics, clothing, worth millions of dollars waiting for the berths to offload at the ports of Los Angeles and Long Beach. Some of them have been waiting for twelve days already in an unseemly long queue. It was the result of the mess up of the global supply-chain.
The backing up was the result created late last years as retailers and manufacturers tried to rebuild their inventories that were depleted in the early months during the pandemic.
The two ports, Los Angeles and Long Beach, together handled more than a third of the US container imports. The US imported a record of $219.86 billions of goods in January this year which is about 9% higher than a year ago. The ports have been working through the backlog as the number of ships arriving continue to rise.
In February, there were 177 container ships and more than 800,000 TEU arrived at the ports. That is another record of 31% more ships and 49% more containers than the same month last year.
March was also the busiest month on record, handling a combined 898,287 loads of container, that was 97.1% from the same month last year. But it was compared to 2019, it was still 65.1% higher.
The ports are expected the container volume to rise 28% from last year in April and 45% in May.
Shipping companies are adding vessels in their service and the bottlenecks to ease in the third quarter.
The disruption shows the vulnerable supply chain that challenged the market when it started to rebound as the result of the resurgent consumer demand.
Another problem it has brought on to the supply chain is the delay in the deliveries. In this period, the freight cost has gone up as well due to the demand.
Situation at the US ports on the East Coast
The extraordinary surge of household cargo has broken the record at the Port of New York and New Jersey. It started to move 755,437 standard cargo containers in October already. It sets the busiest month in the history of the port since 1960s.
The port is operated by the Port Authority of New York and New Jersey, which is a bistate municipal agency and is also the largest on the East Coast and the third largest in the nation.
The cargo volumes were up to 23% higher each month from August through December 2020, compared to the same months in 2019. In January it rose by 17% and February by 7% compared with a year ago.
This has brought forward another problem which is a shortage of cargo containers resulted in the extensive delays at some ports, including Los Angeles. Also the virus slowed down the longshoremen and the truck drivers, and forced them to take quarantine, that caused further delay.
The Port Authority of New York and New Jersey has a portfolio of three airports—JFK, LaGuardia and Newark Airport, the Port Authority Bus Terminal in Midtown Manhattan, the PATH train and six bridge-and-tunnel crossings.
Cargo volumes dropped at the height of the pandemic, but picked up in August as shoppers started to purchase and manufacturers and retailers rushed to restock their shelves. This led to the traffic and cargo congestion at the port. The port on the East Coast is serving the Northeast, as well as part of the Midwest and Canada.
During the pandemic many businesses brought in imports but had nowhere to put them as their warehouses were full and the port does not have room for storage. The port went out and found 70 off-site warehouses and parking lots in New Jersey and Connecticut for the storage.
Imports of furniture, bedding, cushions and lamps have soared nearly 35% in the second half of 2020. This is due to the boom in home decorating as rebuilding of kitchens and bedrooms during the lockdown, and also the construction of the workplace for work-from-home.
There are more time in home cooking, baking and eating at home led to the consumption of roughly 117,000 tons of plastic tables and kitchen wares which represented a 12.5% jump from the same period the year before.
All of the sudden, Bob’s Discount Furniture, a national chain of 140 stores, has never been so busy with the big demands of living-room sets, including sofas and sectionals, followed by bedroom sets.
Sales of refrigerators, stoves, dishwashers, washing machines and dryers are in high demands. Naturally the televisions, computer monitors and laptops are also in high demand.
These are goods that have the fastest growth in shipments and they are those that take up a lot of space on container ships relative to their value. This has been a growth in volume of trade than the growth in value.
We would also like to mention that shipments of wine, liqueurs have all rose tremendously. The non-alcohol beverages, flavored bottled waters and milk-based drinks were also in higher demand.
The Port Authority projected that it will lose $3 billion in revenue from March 2020 to March 2022 from the steep drops in passenger volumes at the airports and fewer cars and trucks at the bridges and tunnels.
Another Shipping Business – Shipping Commodities
This is known as the dry bulk shipping sector and at this time the Chinese has the high demand for iron ore, a key steel ingredient, is driving the demand for the dry bulk carriers which transport unpackaged raw materials in large holds.
It is also known as the bulk carrier and it is a merchant ship designed to transport unpackaged bulk cargo—coal, grain, ore, steel coils and cement in its cargo holds. It is made up of the world’s 21% of merchant fleets.
The Baltic Dry Index which tracks rates of the three largest classes of ships, has risen to its highest level in more than a decade, soaring 700% since April 2020.
Capesize vessels, the largest type with an average capacity of 180,000 dead-weight tons is charging $41,500 a day, close to double the level of a month ago, but almost eight times last year’s average. Its price has been driven by China’s insatiable appetite for iron ore has been the single most important factor.
Iron ore hits a record high of almost $230 a ton. With China curbing its production in Tangshan, China’s top steel industry city, as part of the pollution crackdown, while it is cranking up its production in its steel industry.
There are also vessels tied up with coal and other materials outside the port in China amidst the trade dispute between China and Australia.
But it was since 2008/2009’s financial crisis, an overcapacity of ships damper the demand of the dry bulk shipment.
Case Study – Global Shortage of Microchips
Microchips, also known as semiconductors, is the center of countless products in our modern economy. The business is worth roughly half a trillion dollars has to rely on a supply chain that is so opaque. Without them the products cannot be completed and the worst part is that it cannot be easily substitute for another.
Do not take it wrong that every microchip are high-tech and can only be supplied by Taiwan-based Taiwan Semiconductor Manufacturing Group as most of the consumer products and industrial machinery are often rely on normal chips. This also include those use in the car industry, and because it is low profit margin and many manufacturers would outsource them without any thoughts that it’s shortage can wreck the whole supply chain. We have already heard that Ford Motor announced the shortage will cause them to reduce their profit forecast by $2 billion.
Since the beginning of this century, American companies embraced “just-in-time” production tactics and “lean” supply chain and started to outsource everything to foreign factories. They cut their inventories of any components and parts and hold only the minimum supply in their production line. They negotiated the cheapest form of shipments and everything must be “just-in-time” and any hiccup can grind the production to a halt. But they were proud to showcase this to their principals not knowing to build in the risk factors for any remedy as any disruption from one single supplier can wreck the supply chain.
And it went without saying that for “lean” production will also bring “mean” production and the low-end chips are always under the price pressure and the brutal price negotiation would not leave any interest for any new suppliers to come into the business.
With the industrial engineering and the information technology, each circuit board using different chips is breaking into many production steps, and each step is assigned to the cheapest provider. And instead of owning the whole production process for individual chips, every factory is competing with other global players over every step of production. The industry will have to rely the global shipping lines to bring the semi-finished circuit boards around until they can be completed. As a result the hyper-efficient and super-lean factories can be created and again not knowing any disruption and natural disaster can bring the whole industry down to its knees.
All of a sudden, the Department of Defense has woken up and claimed that this supply chain is threatening the national security, especially when those chips are completely relied on foreign producers. This can even threaten their geopolitical leverage and we can look for many sensitive parts and components that can threaten the US.
The lockdown of this global pandemic further exposed the fragility of the supply chain for the microchips. This has paralyzed the global supply chain that alerted companies like Intel, Nvidia, Qualcomm, Verizon, to ask for federal funding to address the problem.
Not to forget the high-end cutting-edge chips, the five-nanometer, which can only be produced by Taiwan Semiconductor Manufacturing Company and Samsung from South Korea. And next year, TSMC has already claimed that they will start to produce the three-nanometer chips. These manufacturers are all located in the South China Sea, a region of many conflicts with the territorial claims from China.
To build a resilient and sustainable supply chain with many sensitivity threats will probably the first and immediate action to be taken. We wait to see how it will be dealt with by the industrial leaders and the US government.
Closing Remark
This article, Globalization Needs Reinvigorate, is a series that we are launching. We put it under the segment of the Supply Chain, where we used to introduce the countries for production and in this time, we think that it is appropriate to report the supply chain from end-to-end. Going through the changes and because of the impact of the pandemic, the scale will be very big. That is why we included the shipping industry and the challenge it is facing. In the coming months, we will see more adjustments to deal with the business challenges and we feel that for what we have seen is perhaps only the tip of the iceberg.