September 3, 2024
August 2024
Editorial
As we enter August, global supply chains are under increasing scrutiny, with a growing emphasis on sustainability, corporate responsibility, and strategic growth. This month's newsletter highlights the key challenges and opportunities businesses face as they navigate these interconnected issues.
Sustainability is now a central element of business strategy, driven by the need to comply with new environmental, social, and governance (ESG) standards. Companies are under pressure to address human rights and environmental risks within their supply chains, not just to meet regulatory demands, but also to build a holistic business case that enhances both financial performance and social impact.
This month, we explore how businesses are responding to these pressures, focusing on the challenges of measuring sustainability efforts, the impact of technological disruptions on supply chains, and the importance of maintaining quality and efficiency in the face of global demand. Additionally, we examine the influence of geopolitical factors on supply chain resilience, particularly in relation to China's continued dominance in global trade. The need for innovation is clear as companies seek to adapt to these evolving demands. From vertical farming as a solution to food security challenges to sustainable shipping practices in the auto industry, businesses are exploring new ways to build more resilient and sustainable supply chains.
August is a pivotal time for companies to reassess their strategies, ensuring they are not only compliant with emerging regulations but also positioned to take advantage of the opportunities that sustainability and innovation present. By embracing these principles, businesses can create supply chains that are more resilient, transparent, and competitive in the long term.
Company Focus
Fashion retailer Shein finds child labour in its supply chain
- Shein's Supply Chain Issues: Shein, the online fashion retailer, admitted in its 2023 sustainability report that it found two cases of child labor and instances of factories failing to pay minimum wage in its supply chain last year. This admission comes as the company seeks to gain support for a potential £50bn listing on the London Stock Exchange. The report highlighted that Shein has tightened its supplier policies, making child labor or forced labor violations grounds for immediate contract termination.
- Concerns and Reactions: Workers’ rights campaigners and the British Fashion Council have expressed concerns over Shein's potential stock market listing in the UK, citing ethical issues and a lack of transparency in the company’s supply chain. Previous investigations have uncovered severe labor violations, including workers enduring 70-hour weeks and allegations of forced labor in China's Uyghur region. Shein’s previous plans to list in New York were derailed due to similar concerns, but the company has not yet faced formal opposition in the UK.
- CrowdStrike's Role in Global Outage: A global technology outage on Friday, one of the largest IT failures in history, was caused by a malfunction in an update to CrowdStrike's cybersecurity software, Falcon Sensor. This update disrupted systems worldwide, grounding flights, crashing payment systems, and blocking access to Microsoft services. CrowdStrike, a prominent American cybersecurity firm, acknowledged the issue and deployed a fix, stating that the problem was not due to a security incident but a faulty piece of code.
- Impact on CrowdStrike and Broader Systems: CrowdStrike, known for its work in preventing cyberattacks and investigating major breaches, saw its stock value drop significantly following the outage. While the company has apologized for the disruptions, the outage highlighted the interconnectedness of global systems, as another unrelated outage simultaneously affected Microsoft's Azure cloud services. Recovery from the CrowdStrike-induced outage may take some time, according to the company's CEO
- Birkenstock's Expansion Efforts: Birkenstock is heavily investing in doubling its production capacity over the next three years to support global growth. The company spent most of its 80 million euros in capital expenditures for the period ending Dec. 31 on ramping up production capacity. This included refitting factories in Portugal and Görlitz, Germany, which helped boost supply capabilities and meet increasing product demand.
- Impact and Future Outlook: While the investments temporarily reduced the brand’s margins, CEO Oliver Reichert emphasized that the benefits, including increased efficiency and global growth, will offset these costs in the mid-term. The company has already seen a 26% year-over-year revenue increase, partly due to expanded production capacity. Birkenstock maintains in-house production across its European factories, allowing better control over quality, inventory management, and supply chain reliability, which the company sees as crucial for quickly responding to demand increases and capturing market share.
- Motherson Group's Entry into Apple's Supply Chain: Motherson Group, led by Vivek Chaand Sehgal, is set to become the second major Indian conglomerate, after Tata, to join Apple's supply chain network in India. The company has partnered with Hong Kong-based BIEL Crystal Manufactory, a supplier of smartphone glass, to establish a manufacturing facility in Tamil Nadu. This venture marks Motherson's strategic move to diversify its business operations beyond the automotive sector.
- Investment and Expected Growth: The joint venture plans to invest Rs 2,000-2,500 crore in the new manufacturing facility, with an aim to achieve an annual turnover of Rs 8,000-8,500 crore within four to five years. The consumer electronics business is expected to launch in the third quarter of this year, aligning with Apple's broader strategy to diversify its supply chain amid geopolitical tensions. Other countries like Vietnam, Malaysia, Thailand, and the Philippines are also benefiting from Apple's efforts to reduce reliance on China.
- Impact of Temu and Shein on the Parcel Delivery Market: Temu and Shein, two rapidly growing e-commerce platforms, have significantly boosted the U.S. parcel delivery market by generating around 900,000 packages daily each in July. Their streamlined supply chain process, leveraging the "de minimis" exemption, has allowed them to maintain low prices, thus increasing volume for carriers like UPS and others. This influx of lightweight packages has been crucial for carriers as they recover from the post-pandemic slowdown in demand.
- Challenges and Future Risks: Despite the current benefits, the dependence on Temu and Shein's volume has led to profitability pressures for carriers, as seen with UPS, where increased low-value volume has resulted in a decrease in per-package revenue. UPS and other carriers are adjusting by implementing new fees on imports from specific regions, particularly China. Additionally, growing scrutiny from U.S. lawmakers and potential changes to the "de minimis" exemption could pose future risks. Temu and Shein may need to adapt their supply chains to avoid higher costs that could deter price-sensitive customers, potentially impacting the delivery market's current momentum.
Country Focus
India’s growing reliance on China poses challenge for U.S. trade strategy
- India's Growing Dependence on Chinese Imports: Despite efforts to position itself as an alternative manufacturing hub to China, India has become increasingly dependent on Chinese imports, particularly for components in industries such as electronics, solar panels, pharmaceuticals, and automobiles. This reliance complicates efforts by the U.S. and its allies to diversify supply chains away from China.
- Balancing Act Between Self-Reliance and Chinese Expertise: While India aims to boost its manufacturing capabilities, it still requires Chinese expertise and components to do so effectively. Indian policymakers and analysts acknowledge that in order to reduce dependency on China in the long term, India may need to strategically leverage Chinese imports and investments in the short term, despite geopolitical tensions.
- Severe disruptions in Bangladesh's supply chains: Civil disorder in Bangladesh has caused significant disruptions, with factories shut down for two days and exports nearly halted. Customs processes at seaports and airports are largely suspended, severely impacting the nation's garment industry, which is the primary source of foreign currency, leading to losses of around $270 million.
- Port operations hampered: The Chittagong Port, Bangladesh's main seaport, has seen a drastic reduction in container deliveries, with only 329 TEU delivered this morning compared to a normal day of over 4,000 TEU. The port's yard is now 80% full, hindering further loading and unloading operations, though there has been a slight increase in delivery orders issued by shipping agents today.
- Global Impact of China's NEV Industry Expansion: China's New Energy Vehicle (NEV) industry, which accounted for over 60% of global production and sales in 2023, is transitioning from "product export" to "brand export." This shift involves establishing overseas factories and exporting industrial capacity and supply chains to regions like Thailand, Central and Eastern Europe, and Latin America. By 2030, China, Europe, and the U.S. are expected to dominate the global NEV market, with China already holding about 70% of the world's battery production capacity.
- Challenges and Strategic Responses in NEV Supply Chains: The transition to brand export demands improved quality control and supply chain transparency. The industry faces significant supply chain risks, particularly in materials like lithium, cobalt, and nickel, which are projected to face shortages by 2030. Chinese NEV companies are mitigating these risks by diversifying supply sources, investing in resource-rich areas, and enhancing recycling efforts. Additionally, supportive Chinese government policies aim to bolster the global expansion of NEV companies by improving logistics, financial support, and international cooperation, particularly in green supply chain practices such as the use of autonomous electric trucks
- China's Economic Retaliation Threat: China has threatened severe economic retaliation against Japan if Tokyo imposes further restrictions on the sale and servicing of chipmaking equipment to Chinese firms, complicating US-led efforts to limit China's access to advanced technology. A specific concern for Japan, highlighted by Toyota Motor Corp., is that China could cut off Japan's access to critical minerals essential for automotive production. This mirrors a 2010 incident where China temporarily suspended rare earth exports to Japan, disrupting its electronics sector.
- US-Japan Negotiations and Global Impact: The US is pressuring Japan to align with its semiconductor export controls against China, but Japan is wary of potential economic backlash. The US has considered using the Foreign Direct Product Rule (FDPR) to enforce compliance, although it prefers a diplomatic solution. As tensions escalate, Japanese companies like Tokyo Electron, which are integral to the chip supply chain, face significant risks. The situation highlights the broader geopolitical struggle over semiconductor dominance, with potential repercussions for global trade, technology innovation, and supply chain stability.
- China's Resilience in Global Supply Chains: Despite predictions of a significant shift in global supply chains away from China due to trade wars, geopolitical tensions, and rising labor costs, recent research by S&P Global indicates that China's dominance in global exports remains stable. While some multinationals have relocated parts of their supply chains to emerging markets in Asia and Mexico, China's overall share of global exports has not significantly declined and is slightly higher than in 2019.
- Factors Behind China's Sustained Market Share: The report suggests that China's stable market share is due to the expanding role of domestic Chinese firms in global supply chains, which rely more on local suppliers and produce "normal" exports rather than just processing exports. While China's share of imports has decreased in regions like the U.S., Japan, and the EU, it has gained ground in emerging markets, contributing to its sustained global presence. Contrary to expectations, emerging markets and Mexico have only seen modest increases in exports and FDI, not enough to significantly diminish China's role in global supply chains.
Sustainability
How digitalization can drive sustainable supply chains in the least developed countries
- Digitalization for Sustainability in LDCs: Digitalized supply chains leveraging technologies like AI, blockchain, and IoT can significantly enhance sustainability in the least developed countries (LDCs). These technologies help improve efficiency, reduce waste, and increase transparency throughout the supply chain, contributing to a triple bottom line of economic, social, and environmental benefits. Examples include Bhutan's digital potato auction system, which increased price transparency and reduced transaction costs, and Bangladesh's CEOSH initiative, which trains the garment industry in adopting advanced technologies for better compliance with environmental and social norms.
- Paperless Trade and Traceability Initiatives: Successful initiatives in LDCs demonstrate the impact of digitalization on sustainability. In Vanuatu and Timor-Leste, the introduction of Electronic Single Window systems for paperless trade has dramatically reduced CO2 emissions and improved trade efficiency by minimizing physical paperwork and travel. Similarly, digital traceability projects in Ethiopia, Nepal, and Rwanda are enhancing supply chain transparency, allowing farmers to obtain organic certifications, secure better prices, and foster trust between producers and buyers. These efforts not only support environmental goals but also promote inclusivity and economic growth in these regions.
- Challenges in Measuring and Achieving Sustainable Supply Chains: A survey of 525 senior supply chain executives across various sectors reveals that while many organizations have long-term sustainability goals, they struggle with visibility and measuring the return on investment (ROI) from their sustainable supply chain initiatives. Although 80% of executives are increasing efforts towards sustainable operations, only about 37% have achieved significant visibility across their supply chains, and 33% lack a clear business case for these initiatives. This lack of visibility and measurable ROI is a major barrier to gaining funding and support for future sustainability efforts.
- The Business Case for Sustainable Supply Chains: Despite the challenges, the survey highlights that companies pursuing sustainable supply chains can achieve benefits beyond cost savings, including increased revenue, customer loyalty, and share price. To maximize these benefits, companies are advised to take a holistic approach to supply chain transformation, aligning with science-based targets, improving supply chain transparency, and expanding ROI measurement to include intangible impacts like brand reputation and employee satisfaction. Companies that excel in these areas, referred to as "trailblazers," have already seen improvements in revenue, employee quality of life, and shareholder value, positioning them ahead of competitors in the sustainability frontier.
- Transition to Low-Emission Shipping in the Auto Industry: Global automakers have more options for reducing carbon emissions in their supply chains beyond just focusing on electric vehicles and battery materials. One notable example is Norway’s Höegh Autoliners, which is investing $1.2 billion in building 12 environmentally friendly car carriers in China. These ships will initially run on liquefied natural gas, biofuels, and low-sulfur oil, with a goal to transition to ammonia by 2027. Although fitting these ships for alternative fuels increases costs by 5% to 10%, this is expected to add only about 1% to the cost of a car, making it a feasible option for automakers under pressure to reduce emissions.
- Regulatory Pressure and Future Demand: As regulatory pressure mounts, including targets set by the International Maritime Organization to cut shipping emissions by 70% by 2040 and eliminate them by 2050, automakers are increasingly exploring ways to reduce emissions, including those from transportation (scope-three emissions). Höegh Autoliners reports a growing interest from car manufacturers in sustainable shipping options, even though transportation is not the largest contributor to the auto industry’s carbon footprint. The demand for greener shipping solutions is expected to rise as companies prepare for stricter regulations and seek to improve their overall sustainability profiles.
- Impact of Climate Change on Agriculture and the Promise of Vertical Farming: Climate change is increasingly disrupting traditional agriculture with extreme weather events, leading to reduced crop yields and food availability. Vertical farming offers a sustainable solution by using advanced technology, robotics, and AI to grow crops indoors in controlled environments. This method significantly reduces water usage, enhances energy efficiency, and ensures consistent, pesticide-free produce, regardless of external weather conditions.
- Bowery's Innovative Approach and the Future of Agriculture: Bowery, led by CEO Irving Fain, is at the forefront of vertical farming in the U.S., aiming to transform the food supply chain. By building farms close to urban centers, Bowery ensures fresher produce with a lower carbon footprint. The company leverages technology like the BoweryOS to optimize growing conditions and maintain product quality. Fain emphasizes the need for a combination of innovation, government support, and learning from traditional practices to scale vertical farming and create a more resilient and sustainable food system.
- Increased Focus on Integrating Sustainability in Supply Chains: Businesses are under growing pressure from governments, consumers, and investors to integrate sustainability standards deep within their international supply chains. This includes complying with complex regulations like the U.S. Uyghur Forced Labor Prevention Act, Germany's Supply Chain Due Diligence Act, and the EU's Corporate Sustainability Due Diligence Directive, which require companies to address human rights and environmental risks throughout their supply chains.
- Best Practices for Sustainable Supply Chain Management: To navigate these challenges, companies should adopt a risk-based approach that prioritizes the most severe environmental and ethical risks, enhances supply chain visibility, and engages suppliers on compliance and sustainability standards. Strategies such as sustainable supply chain management, continuous measurement and monitoring, supplier assessment programs, and informed procurement decisions are key to building resilient, future-proofed supply chains that align with global sustainability goals.
Sources
- https://www.theguardian.com/
- https://www.supplychaindive.com/
- https://timesofindia.indiatimes.com/
- https://www.washingtonpost.com/
- https://theloadstar.com/
- https://www.scmr.com/
- https://www.bloomberg.com/
- https://www.investmentmonitor.ai/
- https://www.weforum.org/
- https://www.ey.com/
- https://www.supplychainbrain.com/
- https://www.forbes.com/