GLOBALIZATION
NEEDS REINVIGORATION
PART 7
2022 JANUARY ISSUE
By : Andrew Sia
From the Desk of the Publisher
Many of us have benefitted from the globalization, and I have seen a lot of businesses were built having this in mind. We have used the supply chain to connect all the points and have brought the merchandise to the hands of the consumers.
I have witnessed the veterans from the production lines being recruited for the brands and the retailers, they used their experience to build the supply chain in the most efficient way.
I experienced working relationships with them who at one time were responsible for their production roles in England and Japan, the two countries most famous with their industry. The soaring production costs had obsolete their operation. They used their talents in managing the operation and turned their skills into servicing.
This time the supply chains have caught in several glitches, the global pandemic, the war in Ukraine and the climate change have all brought the disruptions.
It is time for us to rewrite some of the procedures and get ready to receive some of the new normal.
Introduction
First of all, globalization and supply chain come hand-in-hand. In fact globalization needs the supply chain and it is like the arteries that run through our body for the supply of blood. Any clogging and blockage can bring disasters.
In time without turmoil, very few people would have thought about supply chains, especially when everything has been taken for granted, and when the shopping racks of the supermarkets have been stocked up. But in the past three years, we have seen our economy has been under stress. We begin to feel that our supply chains can be fragile under stress especially with the pandemic which started in the early 2020. Then the war in Ukraine in February of 2022 has been a challenge that we haven’t noticed before.
The Challenges
We have the Covid-19 pandemic that we have to solve. Then we have the climate change we will need to address collectively. Last and not the least, the war in Ukraine as triggered by Russia would have to be stopped. We are addressing them one by one as we get along.
Covid-19 – From the statistic report as provided by www.worldometers.info we have the following numbers on November 29, 2022 as:
Total cases – 646,699,525
Total deaths – 6,638,053
Total recovered – 625,125,536
Active cases – 14,935,936
We have noticed that the world has come out from this pandemic and most of the countries have resumed its normal life. We have all learned the way to live with the virus.
But the world’s number one most populous country, China, with the total population of 1,448,471,400 is still under its severe pandemic restrictions in China. Lately, its zero-Covid lockdowns have triggered into its social unrest will become another matter of concern if it hasn’t addressed it properly.
China, currently at number 103 among all the nations, is disclosing its cases as the following:
Total cases – 315,248
Total deaths – 5,233
Total recovered – 276,048
Active cases – 33,967
Compare this with Hong Kong, an island on the southern part of China, we have the numbers as the following. It has a population of 7,604,299 and it is number 46 on the chart.
Total cases – 2,109,435
Total deaths – 10,731
Total recovered 1,870,289
Active cases – 228,415
Taiwan, an island across the Taiwan Strait, with the population of 23,888,595 and it is number 17 on the chart.
Total cases – 8,295,652
Total deaths 14,297
Total recovered 7,939,598
Active cases – 341,757
Even with China’s friendly state, North Korea has the total cases of 4,772,813 and it is number 29 on the chart. Although it has only recorded 74 deaths.
The world is already worrying if China would insist on its zero-Covid policy, this world’s factory will be posting a threat to the global economy. It is holding up the production and the supply chain and not only that it will damage its own economy, but also the world would be affected.
War in Ukraine – Ukraine is the fourth-largest exporter of grain and seeds in the world, mostly corn and wheat. With its seaports, either occupied or blockaded by Russia, its ability to ship its grain has been sharply reduced.
Most of its grain would normally go to the developing countries who are now facing the worst food shortages. It is caught in a position that it is soon running out of space to store the grain which were already harvested.
With the war going on, sanctions on Russia and Belarus have curbed the world’s supply of fertilizer and potash. This has stopped India from exporting its wheat to make sure that its need is assured.
The war has caused the disruption of the food supply and also triggered the inflation. This has caused countries like Ethiopia, Nigeria, Somalia, Egypt and Yemen to be threatened by food shortages. This has set off protests in countries like Argentina, Indonesia, Tunisia and Sri Lanka, among other countries.
Unless there is any solution to reinvigorate the export of food from Ukraine and the fertilizers from Russia and Belarus, despite war and sanctions, the food crisis would continue.
We must not forget the oil and the natural gas that the European countries have been depending on Russia’s supply have been disrupted by sanction after it has triggered the war in Ukraine. Europe has retaliated by banning imports of oil from Russia and blocking insurers from covering its cargoes of crude.
But this has further split the world into three parts: the U.S. and other Western nations have used their massive economic and purchasing power as a political weapon; China and the emerging countries, such as India, Vietnam and Turkey, have rebuffed Western pressure and continue to do business with Russia; and Saudi Arabia and other Middle Eastern oil-producing nations have maintained neutrality, and in fact they have granted Russia to enter into the OPEC+ and be part of the members to help to boost oil prices.
We have to admit that geopolitics and energy have always been connected. We have seen the U.S. sanctions against Iran and Venezuela in recent years. A full EU ban of the Russian oil would mean a 2.8 million barrels of oil and 1.1 million barrels of oil related products flowing into Europe on a daily basis. For this, Russia would have to find new markets.
As for the Russian natural gas, it accounts for 30% of the EU supply and mostly it is supplied through pipelines. It is said that by the end of the year Europe will still receive between 81% and 94% of the Russian gas it imported in 2021. Although EU said that by 2027 it will end its reliance from Russia for both oil and natural gas.
With the Western world proclaiming to have zero carbon emissions by 2050, this time they are rushing over to Middle East for the oil supply. Saudi Arabia and other Gulf states have been under pressure to diversify their commercial activities from fossil fuels. Building up the renewable energy has been on everyone’s agenda. Now Russia is taking away its oil to the developing countries to realize its export business and we have seen the European countries are scrambling for cover.
OPEC and its allies have increased its output to meet the demand from the U.S. to ease its inflation for the fuel.
As for the natural gas, Russia exported 200 billion cubic meters of gas to Europe, and 33 billion cubic meters of gas to Asia for 2021. It has a massive infrastructure for the pipelines. But it has more projects for pipelines and also the liquefied natural gas which would require financial and technical backup. At this point, this won’t be happening during the war with Ukraine.
Chips Shortage – The world is already suffering from the two-year global semiconductor shortage and it is affecting the next-generation smartphones and electric vehicles, not forget to mention about the other electronics.
The shortage in producing the chips with the tiniest transistors and highest performances with the problems of finding the manufacturing equipment is going to come to the surface. The challenges would cause the shortfalls as high as 20% for the most advanced chips by 2024 and beyond. This would hinder the advance technologies such as those high-performance computing, artificial intelligence and more evolved forms of autonomous driving which are under development.
The problem is with the two companies, Taiwan Semiconductor Manufacturing Company (TSMC) in Taiwan, and Samsung Electronics Co., in South Korea. The industry’s two cutting-edge chips manufacturers are located in the most unsteady political region with China on one side and North Korea on the other side.
On the supply side, TSMC has already told its customers that its supply would not be able to meet their growing demand. Same for Samsung, the world’s second largest chip-maker, is seeing the slower-than-expected with the 4-nanometer process.
One nanometer, or one-billion of a meter, is about a hundred-thousandth of the width of a strand hair. It is the smaller the transistor, the newer and more advanced the chip, and the greater the number of chips that can be made on a single silicon wafer.
Both companies are prepared to produce the 3-namometer chips.
For instance that both of them are suppling to Qualcomm and Nvidia. And both companies are receiving equipment from ASML Holding NV, from Holland who is making a range of crucial machinery for manufacturing the most advanced chips. There is the equipment shortages on even the more advanced 2-nanometer production.
The chip-design companies are relying on contract chip makers. Qualcomm, for instance has mentioned that in order to developing and maintaining leading process technologies, including the transitions to smaller geometries, could bring down manufacturing yields and reliabilities. Currently, this technology is only in the hands of a few.
The production side can be incredibly complex. For instance a smartphone can have 3,000 to 4,000 parts. For an electric vehicle it has 20 moving parts compared with over 2,000 in a typical gasoline-powered car.
Climate Change – At the COP27, a new funding arrangement called “loss and damage” came up during the end of the meeting and it is a pooled fund for countries most affected by climate change. It is for countries who are most affected by the climate change and had lost everything.
In the past year, we have seen in different regions of the world the heatwaves, floods, wildfires and droughts caused by the climate crisis due to the global warming. The yearly gathering of thousands of delegates around the world at this time was held at the Sham el-Sheikh, a Red Sea resort.
Like all the past years, this kind of Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC) where any progress would be made in the most modest way. Perhaps it is too frequent, once every year where the delegates from 100 Heads of States and governments, and over 35,000 participants attended the COP27 from November 6 to 20 for high-level and side events.
And from the first COP1 in Berlin in 1995, carbon emissions have continued in new hypes. Instead we have seen the growth of participants and the 600 significant representatives from the fossil fuel sectors who were there to protect their businesses.
More work would need to be carried out before it is too late for the world to really react.
To Understand Supply Chain
In order for us to know more about supply chains, we have tried to explain by using the following principles:
Supply chains have two facets – There is the production side where it runs until the final assembling of the product has taken place. Then the distribution side would take over until it is into the hands of the buyers.
Production side can be very complex as we are talking about parts and accessories. The assembling can be done inhouse if it is not too complicate and can be managed under the same roof. Or it would have to be sent out for contract work on parts and the assembly can continue only after they have been processed.
The industrial engineer (I/E) would have to deal with the different tiers of supply and make sure that the production process can be managed or orchestrated accordingly.
Once this is all completed and passed the quality control then it would be handed over to the shipping department who would make contact with the buyers for what are the steps to follow. Normally the manufacturers would have to deliver the orders to the designated piers or the cargo terminals to be taken over by the buyers.
There the goods would be loaded for the shipment mode, whether it is by sea or by air. When it arrived at the piers or terminals on the counterparts, which normally would mean the other side of the world, where shipments would be cleared. They would be put on trucks and deliver to the distribution centers. And from there they would be breaking up into smaller batches and deliver to the separate stores. The receiving docks and the small storage areas would put the products on the shelfs in the stores and waiting for the customers to pick them up and checkout at the cashiers.
Only until this stage, the cycle can be closed. This can also mean five months-worth of flow in the supply chains. It is very costly already. But if this is not managed smoothly and effectively, this can eat into the profitability of the business especially if the products are seasonal.
Challenges of the supply chain in this last three years – Looking back in the last three years, from 2020 to 2022, we have encountered a lot of setbacks. We have encountered experiences that we have never seen before.
First of all, the lockdown came almost immediately in the beginning of March of 2020 when the world was caught in panics with the spreading of the pandemic. Only the essential retailers were allowed to open for business.
Retail shops were closed without any prior notice and we were able to look through the windows the messy situation on the shopping floors. The shops remained to be partially opened throughout the rest of the year.
The shipments were clogged in the supply chains, they were everywhere, in ports from both ends, on the water, stuck in the containers and some of them were already on their way to the distribution centers. They couldn’t find anyone to receive the shipments.
Not to mention all those orders still in the pipelines, we saw a lot of order cancellations.
Basically the retailers lost one year’s worth of sales with inventories they didn’t know what to do although they attempted to open a few of their selective stores in June 2010 by taking safety measures and observing social distancing.
That year we had seen stores filing for Chapter 11 and everyone was downsizing. For that year everyone was suffering.
In that Covid year, the pandemic made everything extremely tough. Every retailer was thinking how to survive by keeping the door open and doing online on the side to maximize the opportunities. WWD looked at ten major US fashion retailers and ranked them by their bottom line results.
Walmart Inc.
Net profit: $13.5 billion, down 9.2%
Revenue: $559,2 billion, up 6.7%
Target Corp.
Net profit: $4.4 billion, up 33.1%
Revenue: $93.6 billion, up 19.8%
Urban Outfitters Inc.
Net profit: $1.2 million, down 99.3%
Revenue: $3.4 billion, down 13.4%
Dillard’s Inc.
Net loss: $71.1 million
Revenue: $4.4 billion, down 30.1%
Abercrombie & Fitch Co.
Net loss: 114 million
Revenue: $3.1 billion, down 13.7%
Kohl’s Corp.
Net loss: $163 million
Revenue: $16 billion, down 20.1%
American Eagle Outfitters Inc.
Net loss: $209.3 million
Revenue: 3.8 billion, down 12.7%
Gap Inc.
Net loss: $665 million
Revenue: $13.8 billion, down 15.8%
Nordstrom Inc.
Net loss: $690 million
Revenue: $10.4 billion, down 31.6%
Macy’s Inc.
Net loss: $3.9 billion
Revenue: $17.4 billion, down 29.4%
For Q1 of 2021, we began to see them coming back with the picking up of their revenues. Their net incoming were crawling back gradually in the Q1 of 2021.
In 2022, we have seen the retailers are more careful this time and with their earlier on attitude of the missing of the merchandise, which could have been in the instance of being constrained in the bottlenecks of the supply chains. They were ordering more than what they need without knowing the inflation has caused the slow in sales for the non-essentials. Many of these excess goods ended up in steep sales or even with the liquidators.
For the fall season, they decided to buy less due to the loss of confidence about how the market would react. And because the demand is hard to predict, many retailers have turned to just-in-time production.
The benefit of the just-in-time production – This would mean that it is taking less time in anticipating the goods to be arrived at the retailers’ warehouse. By carrying the minimum inventory can maximize the business in its profit. But there is an important consideration that the suppliers and the factories would need to be fairly close to each other
The use of the importers and distributors would help to fit in this role which was eliminated when the retailers were all going direct to the factories to do the direct sourcing.
In those days, private label business was very much in the vogue. It is also more profitable as the retailers can dictate their margin and the merchandise can also become more exclusive. This will now need to be sacrificed.
We have seen department stores going back to the brands and start to procure their merchandise. They have increased the product-ratio with the brands and playdown with the private labels.
For the manufacturers this is not a bad idea and they can build their brands and start their distribution by building their beachhead. If they can build this successfully, they can be staying in this business in long haul without being pushed around and bullied by the retailers. If they have some hot items in their hand, they can call for the shots as well. And in this business format, the business service is very important.
The building up of the partnerships along the supply chains are important for making the business successful. There are expertise that one would need to look for.
An element for just-in-case if some scenario would come up would need to be planned. It can be helpful as this kind of contingency plan is always very useful.
Last and not the least, we would like to direct you to the Association for Supply Chain Management (ASCM), which is the global leader in supply chain organizational transformation, innovation and leadership. It is also the largest non-profit association for supply chain.
I recommend you to visit their website and enroll as a member. In our business, fashion and textiles, we don’t have 3,000 parts like the smartphone, we can find our way out in this challenging world.