Global Trade Financing Squeeze and Supply Chain Impact

Posted on October 29, 2011 by aviyer2010

An article in the Wall Street Jounral (Oct 29, 2011) describes the increase in the margins fior trade finance by a factor of thirty since 2008.  Trade finance provides letters of credit, export loans etc that finance global trade given long lead times.  Of the $ 5 trillion in financing,default rates are low, reported to be less than 3,000 out of 11.4 million transactions. Rates are expected to rise as Basel risk related requirements become more stringent. Given the increased costs to finance global trade, is that significant enough to shift manufacturing locations ? Will captive financing by the potentially larger buyers, sometimes called supply chain finance, replace trade finance sources ? If so, what will be the correspondng supply chain transaction information required to be incorporated into such financing  decisions ?

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The Details in Free Trade Agreements with South Korea

Posted on October 25, 2011 by aviyer2010

An article in BloombergBusinessweek (Oct24-20, 2011, page 30/31) describes details in the free trade agreement with South Korea that define a US made product. For instant hot chocolate, a US made definition requires at least 65 % of the sugar to be purchased from US growers. But for chocolate bars, there is no restriction on the sugar source – even a 100 % foreign sugar source can certify the product American. Similarly, to compensate for last minute auto standards changes, each foreign auto manufacturer is allowed to sell 25,000 cars that do not satisfy Korean safety specifications. Given the complexity of the free trade specifications, and the arbitrary nature of the rules, how should companies design products to avail of the flexibility in these rules ? Given the roles of companies on both sides to adjust the agreements to maximize their benefits, how will it impact assessments of the overall economic benefits to the two countries ? Given that the estimated impact is just $ 15 billion in export revenues, is it really fair to call the US-South Korea agreement a free trade agreement ?

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Apple’s use of supply chain as a strategic weapon

Posted on October 25, 2011 by aviyer2010

A New York Times article (24 Oct 2011) describes Apple’s low price strategy – iPhone 4GS priced at $199, iPads at $499 etc, with competitors barely managing to match prices for similar or lower specification products. The article suggests that this is a shift from the early pricing strategies for the iPhone, whose high prices provided a window for Android operating system based phones to gain market share. Is Apple using volume commitments to enable low costs for itself while driving up costs for competitors ? Is Apple’s volume growth rate and aggressive product introduction incenting suppliers to accept associated rampup costs and risk ? Is the consumer acceptance of frequent product changes enabling Apple’s global supply chain to deliver products at low prices ?  Or is it Apple’s strategy of significant component commonality across all of its products the key to its supply chain success ?

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Increased restructuring and manufacturing’s future

Posted on October 25, 2011 by aviyer2010

An article in the Wall Street journal ( Oct 24, 2011) states that while close to 70% of S&P companies beat earnings,  significant number are focused on restructuring operations. The size of this spend varies from $100 million at Danaher, to $300 million at United Technologies and Honeywell. Restructuring reasons range from capacity reduction to match demand, consolidation of service centers to increased use of technology. Does this structuring suggest an anticipated slower demand or a shift in demand sources ? Is this a case of technology being more effectively deployed to manage global supply chains ? Should one expect a shift in the reliance of technology to deliver services and thus lower overall employment levels globally as productivity increases ?

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Estimating the firm level impact of China Imports

Posted on October 25, 2011 by aviyer2010

An article in the Economist (Oct 15, 2011) describes attempts to understand the impact of imports from China on US jobs.  One study suggests that regions where manufacturers had a greater impact of Chinese imports showed greater job loss and lower wages.  But another study claims that every 10% increase in imports correlated with 12% increase in R&D and 3.2% increase in patent filing. Thus competition seems to push firms to higher value added activities.   Both thus focus on how to adjust skills to be consistent with these changes.  Should importers be required to anticipate these effects and create appropriate solutions or should that remain the individual’s responsibility? Is there a logic to regulate the pace of shifts in imports to provide sufficient time for communities to adjust? How should theTrade Assistance Act be deployed to maximize its benefit to affected communities?

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Cross State Pollution Rules and Impact

Posted on October 25, 2011 by aviyer2010

An article in the Economist (Oct 15,2011) describes the issues surrounding CSAPR or Cross State Air Pollution Rule. The rule by the EPA requires power plants in 28 states to  decrease sulphur dioxide emissions by 27% and nitrogen dioxide by 46% of 2005 levels. The EPA expects these changes to prevent between 13,000 and 34,000 pollution related deaths and generate $120 to $280 billion in health and environmental benefits each year.   But states most affected claim that utilities will shut plants and thus cut jobs.    How should the benefits of pollution reduction be shared with those incurring the costs ?      Should the costs of pollution be imposed as a tax, so that the supply chain impact is borne by polluters? Should technology to decrease pollution be subsidized so that adoption is due to self interest ?

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Strategies to decrease procurement costs – not just a price focus

Posted on October 23, 2011 by aviyer2010

In a talk by Mr Haaije van der Brug, Procurement Manager for Shell in Russia, on October 18, 2011, he described the 40/40/20 practice at Shell. The claim is that cost savings are generated only 20 % of the time through price reductions, but 40 % of the time through adjustment of specifications and 40 % of the time through demand management.  He describes an example involving Shell’s use of standby ships in Sakhalin (Russia). While the cost of the ships were stable and thus difficult to decrease, their fuel use cost $ 5 million annually. This fuel use was driven by the ships circling the island constantly throughout the year. Adjusting their routes to anchor when weather was good enabled cost savings of between $ 0.5 and $ 1 million, without affecting performance. His contention was that one should expect 3 to 5 % cost savings year-on-year through continued focus on such processes.  Do you agree that effective supply chain management i.e., adjustment of demand and specifications for supply significantly dominate prices in improving cost of goods sold ? Should suppliers be incented to discover such savings for appropriate rewards or is the continued right to supply sufficient incentive ? Could there be unintended side effects (such as potential future holdup) from continued specification adjustments to decrease costs from existing suppliers ?

 

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Tracking the US supply chain impact of new California Greenhouse Gas Emissions Laws

Posted on October 23, 2011 by aviyer2010

A New York Times article (Oct 21, 2011, A25) describes recent passage of greenhouse gas emissions laws in California that aim to impose stringent caps on emissions with the flexibility to trade with any other firm across the US for pollution credits.   A potential success is claimed by Clean Harbors, a company whose plant in Arizona destroys old refrigerants and thus gains pollution credits it can trade. Can unilateral actions by California generate genuine greenhouse gas reducing actions that would otherwise not occur? Should California restrict the pollution credit trades to companies in California alone ? Will the associated technologies that might be created to reduce emissions provide sufficient green jobs in California to provide a long term global competitive advantage?

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A Parallel between Japanese auto and Chinese solar manufacturers ?

Posted on October 23, 2011 by aviyer2010

An article in the New York Times (Oct 21, 2011, B3) describes a potential reaction to US solar manufacturer unfair trade concerns regarding Chinese competitors , a parallel to Japanese auto manufacturers in the ‘80s.  At that time, Japanese auto manufacturers set up plants in the US and employed US workers to make their cars, and then proceeded to gain significant market share with superior products.  Chinese solar manufacturers, who can set up final panel manufacturing and assembly in under six months,  have already started a similar trend. Given the lower lead time and capital requirements , should the solar industry be expected to follow similar trends  to the auto industry ? Given that manufacturing about 50 % of the content for solar panels commands a “Made in the USA” label and US subsidies, does the associated location based preference make  sense ?  Given the demand for solar panel manufacturing equipment exported to China from the US, should trade frictions for solar panels be expected to cause a shift in demand for equipment to German suppliers, thus hurting jobs upstream in the US ?

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Simple Labels or Comprehensive Nutrient Labels for Food ?

Posted on October 23, 2011 by aviyer2010

An article in the New York Times (Oct 21, 2011, B3) describes a new proposed food labeling system by the Institute of Medicine. The proposal would list calories per serving and up to three stars. Each star would be for “falling below the threshold for sodium, added sugar or saturated and trans fat”. The proposal aims to simplify food evaluation by consumers. But the Grocery Manufacturers Association claims to offer a “Facts Up Front” plan to list all nutrients and the percent of daily recommended dose the food serving would supply.  Should simplicity of labeling, at the cost of lost detail, and its potential use by consumers be the key to choice of an appropriate label? Should consumers expect GMA members to voluntarily choose a label that might harm sales to some of its members? Should overall societal concerns be the key to government regulators choice of food labeling or should it be consumer  marketing considerations  ?

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