GLOBALIZATION
NEEDS REINVIGORATION
PART 5
2022 JANUARY ISSUE
By : Andrew Sia
Globalization is today upended by the Covid pandemic and the war in Ukraine. It is the situation never experienced by anyone of us. The straining of the container ships at the sea ports, shortage of shipping containers, shortage of longshoremen, lacking of the trucks and the drivers, the storage of goods ……….
We have no solution until we have brought our readers to read about the robotic manufacturing where there is a hope. We brought out Singapore, a country of less than 6 million inhabitants, as an example. There success can always be used as a case study.
The War in Ukraine and the Lockdown in Major China Cities
The twin perils slowdown growth and introduce high inflation, or “stagflation” to be more precise, have hit the global economy for 2022. The Russian war against Ukraine on February 24 was unexpected. The war still drags on until this writing is further making the matter complicate.
Most of the countries in the world have started to see themselves coming out from the lockdown of the Covid, if it is not the zero-Covid policy is still pushing ahead in those major cities in China. Again, this was unexpected until China started to lockdown its largest city Shanghai in April.
All these will pose the threat to the global recovery.
For the past three decades we have seen abundant supply of textile goods, electronics, toys and many other things that have helped to keep the price low. Globalization helped to build the supply chain from the cheapest source where the merchants can find.
But as the pandemic started two years ago, with the recent Russian war in Ukraine, has disrupted the supply chain and certain countries are blocked out from supply. Merchants have to reinvigorate their supply chain and for the immediate term they have to put up with the sourcing of the products and stocking of their inventory which have already brought them the higher cost and the low efficiency in their operation. We have already seen implications for inflation and have affected the global economy.
If we look back, from 1980s onward, we have seen prices of consumables keep on coming down, those durable goods and equipment have been steady and holding down the inflation. Since the outbreak of the Covid, it has affected the stability of supply and things are going to the old formula and determined by supply-and-demand.
We are experiencing the latest situation as pressures on global supply chains have started to get worse when Russia declared the invasion on Ukraine. This led to sanctions from the U.S. and very quickly joined by the European countries. China expressed their support of Russia in their invasion and it has been warned by the western power not to work against them. It seemed as if it wasn’t bad enough, China locked down its 24 cities including Shanghai in April and made it more difficult for the products to flow in the supply chain.
This leads the world economy towards a very grim period as the rising costs, shortage of supplies in food and commodities, and if the war is not going to stop between Russia and Ukraine, and if China is not coming out from its net-zero Covid policy, this will bring the world economy to a global slump.
Central banks around the world are beginning to raise interest rates to help to control rapid inflation. Global growth is expected to slow to 3.6% this year as predicted by IMF in April, down from 4.4% before Russia’s invasion in Ukraine and China zero-Covid lockdowns. Europe Commission revised the economic forecasts to 2.7% from 4% earlier on and inflation is hitting an all-time high of 6.8% for the year.
Actually the inflation for the U.K. jumps already to 9% with Poland, Estonia, the Czech Republic, Bulgaria and Lithuania exceeding 11%. The inflation rate in Russia is expected from 18 to 23%.
Such sanctions are all for the moral justification, but they have exerted a very heavy economic toll that in return would have the domestic political consequences on all the nations. Already the U.S. Congress is passing a $40 billion aid package for Ukraine, and the EUs are doing the same.
The EU countries have absorbed five million Ukrainian refugees and out of this three million of them went for Poland. Immediately Russia took revenge and stopped their supply of natural gas. Not to forget that Europe has been depending on oil and gas from Russia and it is difficult for them to switchover to another supply and to change to renewable energy.
The rising food cost is due to the interruption of wheat exports from Ukraine and Russia, and together they are accounted for 28% of global export. The drought in India has caused the country to ban its export of grain. The lockdowns in China are causing the increase of the food price as well as the supply. All these things are not helping the world economy.
Group of 7 nations held their conference in Bonn, Germany for finding ways to avoid a slowdown of the world economy.
Dilemma of the Shipping Containers
Uncertainty and disruption is becoming new normal under this pandemic. Successive lockdowns have accelerated radical shifts in fashion’s business model and to recalibrate its supply chain will become very important.
Suppliers typically operate on a lead time of 90 to 120 days. But under the current situation with the pandemic and the outbreak of the new variants, the retailers are very shaky when placing new orders. The lockdown is still ongoing in major markets.
We have read that by July of last year, about 400 manufacturers closed their operations in Cambodia, In Bangladesh, the world’s second biggest garment exporter after China, 348 factories closed between March and April 2020. The order level compared to last year is down by 30%.
In order to remain in business, it is not unheard of that manufacturers have accepted orders below cost since the pandemic started. It is to keep the operation going and not to lose the skillful labors. The factory operators would in return squeeze the workers for the labor costs and the situation can get from bad to worse as it can create the humanitarian crisis.
The garment is using predominantly female workforce and it is already an industry that is less formalized, even more exploitative form of employment, it has worsened the female labor’s working condition.
The apparel industry has been moving away from the wholesalers who used to hold the stock and inventory for the retailers. But in recent year the retailers tend to go direct and place their business with the manufacturers. There is one very important buffer going away.
With the emerging of the tech companies, the introduction of the ultra-fast, online fashion business that makes the retailers look clumsy, and certainly inefficient. Orders are in nibble-size and e-commerce emphasize in a test-and-repeat business model. Their order minimum is a nightmare to the manufacturers who have to haggle with their fabrics and trims suppliers, and it is not just the order minimum but also the color minimum. It is becoming a very costly operation before you can get the production off the ground.
The reorder will only happen when the test order has proved to be successful. And then the nightmare will start all over again.
For countries who don’t have the complete supply chain, I mean those with the upstream in fabric and trim production, by only providing CMT is inadequate, and this can make countries like Bangladesh, Vietnam and Cambodia, extremely difficult to survive. This can mean longer lead time and higher order minimum, and when everything was “yesterday” it can make the negotiation almost impossible.
The labor is also another part that can be very difficult to handle, in some days the factory can find itself with too many workers but not enough order loading for it to produce. And in other days, the loading can become overloaded when the deliveries are all required at the same time.
In this time, there are many factories being closed because of the cost-effectiveness and the efficiency and normally those factories who have been around for a longer time with the labors who are no longer young anymore will need to be replaced.
Even if China has been caught in the trade war, but China is indispensable as it has the most completed supply chain from all kinds of trims, zippers, threads, and you name it, China is well equipped with it. China is also known for knowing how to get around its cost even if it has the highest labor cost in that region.
Bangladesh and the countries can’t get fully self-sufficient as they have no knowledge of textiles.
Robotic Manufacturing
More companies are using robots in their shop floors for manufacturing. Orders for the robots have increased by a record 40% during the first quarter from the same period in 2021. This also means orders for robots valued at $1.6 billion, increased by 22% in 2021.
According to the Association for Advancing Automation in the U.S., rising wages, worker shortages, absenteeism from Covid, have changed the manufacturers’ attitude about robotics. The days when the labor-intensive operations could solve by adding more laborers were gone.
The use of industrial robots in North America for years have been concentrated in the automotive industry. Robots take on repetitive tasks, such as welding on assembling lines. In the 2016, 71% of robot orders were coming from automotive industry and auto components. Today their share declined to 42% and robots are used in the food industry, consumer products and pharmaceutical industry. Robots are programmed for more-complex tasks require a mixture of strength and nimbleness. They can increase the capacity, shorten the production time and lower the costs.
The technological advancement allows the robotic arms that once could only move in one or two directions can now make nearly the same rotations as the human arm. This can allow a wider range of tasks and allow the robots to work 24 hours a day, more precise, leading to higher yield and fewer errors.
We would like to take Singapore as an example. Singapore is a country with almost no natural resources and moved away from manufacturing in the 1970s and become a financial hub in the 2000s. With a population of less than 6 million, the country has to depend on imported labor to support its manufacturing sector. It was at 27% of the GDP at one time in 2005 and fall to 18% in 2013.
In recent years, we have seen Singapore reentering into manufacturing , but this time they have become most advance by engaging robotic and it has the most advanced semiconductor facilities. The country is now making a comeback, rising to 21% in 2020. Already its data showed the manufacturing made up 22% of its GDP in 2021.
Since Singapore has aggressively promoting highly automated factories by offering tax breaks, providing research partnership and even subsidizing worker training and giving grants to local manufacturers to upgrade operations to support foreign national companies.
Singapore has more factory robots per employee than any other countries other than South Korea. This is in according to the International Federation of Robotics. Because of the fix-asset investment commitments of $8.5 billion Singapore received in 2021, and $12.5 billion the year before, the policy-makers of Singapore said that they need to focus on microchips and aircraft avionics. They need advanced machinery and highly educated technicians. As a result, Singapore is the world’s fourth-largest exporters of high-tech goods. The top three are China, Germany and South Korea and followed by the U.S. in the fifth position.
Singapore is centrally located in Asia and has a wide free-trade agreements signed with the international trade allies. It has a high standard of intellectual-property protection laws and Singapore is an ethical country and it can be trusted with the intellectual-property protection. Robotic is part of the manufacturing which can be around for a very long time and can fit into the globalization for the going forward as robots work 24 hours a day and are more precise, leading to higher yield and fewer errors. Singapore is relying on robots for production.
Retail Lead Time Needs Reinvigorate
Production cycles—taking from design to production, and bring the apparel and footwear to the store shelves, an average of eight months, but today it is easily stretch over one year. Already the retailers are saying that the longer the lead time, the less accurate is the sell-through rate for the merchandise to sell at the first cost.
Actually a year for the products to arrive at the shelves is already something that can be more manageable. We have heard longer lead time, a year-and-a-half is common and it will add more uncertainty.
At this time of the Covid, retailers are already struggling to plan better and try to buy closer to the market by moving production closer to its proximity. Moving garment production to the western hemisphere would mean a limited selections of fabrics and trims, and the loss of skillset of the workers. They simply cannot compete with their counterparts in Southeast Asian countries. Unfortunately, customers can tell the quality and they can be selective if not picky.
With the logistic being blockaded by shutdown, it is adding more challenge to a business which has never been easy. More basics and less fashion, more seasonal than something seasonless, more exclusive in quantity than high volume, all these are challenges to the retailers. And because of all these risk factors, they have to be taken into account which is something that the suppliers would be squeezed for the time and also the cost. In the end there is no winners but only losers.
Henry Ford’s Supply Chain Revisited
Henry Ford, the godfather of mass production, who was very skeptical of his suppliers, used to stockpile enough materials to ensure that his assembly lines could continue operating without dealing with any shortage. He owned his own coal mines in Kentucky and Virginia, railroads to carry the coal to his factories. His fleet of ships in Great Lakes would carry a steady supply of iron ore and lumber harvested from Michigan’s Upper Peninsula. Outside Detroit, he had an enormous plant for producing spare parts for the use of the automobile.
Today, Ford Motor found that they haven’t enough semiconductors for their use in production. They are heavily dependent on a single chip supplier located more than 7,000 miles away in Taiwan. In fact, the shortage of chips have been going through the global supply chain, and automakers have been forced to stop their assembly lines.
Ford, with its most popular F-150 pickup trucks stashing away in parking lots waiting for the chips to arrive. This has never happened before and we can blame it to the global pandemic that has disrupted the supply chain and has brought many companies down on their knees. The Great Supply Chain Disruption is becoming a leading source of inflation and product shortages.
The F-150 pickup trucks are using more than 800 types of chips for each vehicle and the chips have shelf lives and it is hard to stockpile them unfortunately.
It was once not too long ago, almost all the manufacturers were keen for the just-in-time manufacturing, and have kept their inventory to the minimum. Everyone was obsessed by the return of investment as pushed by the capital market. It was driven by those financiers from the stock market who want to see profit and pay out lucrative dividends. Any contingency plans were disregarded. Perhaps we can borrow the quote from Henry Ford that in his days he was saying, “Business is a service, not a bonanza.” But I would I like to coin it differently now, “Business is a bonanza, and not a service.”
In his days, Henry Ford never tolerated the greed of the investors pressing for dividends, and used the money for business expansion and gave better pay to the workers. It was an uphill battle but he was able to squeeze out his first investors, the Dodge Brothers, and bought back their shares.
But today more than half of the shares are controlled by Wall Street institutions, Vanguard—the mutual fund company, and BlackRock—the world’s largest asset management company. The two of them are overseeing more than $10 trillion assets.
In these three years, Ford distributed 70% of its profit, reaching $70 billion. The company has shown great inclination to limit dividends and preserve capital to deal with challenges.
Making its own chips in the U.S. is perhaps not being ruled out by the board.