How Supply Chain drives Competitive Advantage

Article extract from Mark Millar’s new book Global Supply Chain Ecosystems

Supply Chains are the arteries of today’s globalised economy – they enable the international trade flows that empower global commerce. Supply Chains have evolved to reflect the increased complexity of world trade – highly competitive, super connected and changing fast, amidst a volatile global environment.

No wonder that Supply Chain has become an essential topic across all spheres of management and a strategic agenda item in every boardroom.

Twenty-first-century supply chains have transformed into world-wide inter-connected supply-and-demand networks - with profound inter-dependencies and exposed to the vulnerabilities of our uncertain world. This has led to greater deployment of collaborative partnerships, frequently involving outsourcing and off-shoring, creating elongated networks encompassing multiple stakeholders. Consequently, supply chains have morphed into today’s multi-layered, inter-woven distribution networks that enable companies and countries to trade more effectively.

Confirming how these networks enable commerce in an increasingly connected world, the Financial Times’ (FT) lexicon describes how “businesses operate in a broader network of related businesses offering particular products or services - this is known as a business ecosystem”. They further define this as “a network of interlinked companies, such as suppliers and distributors, who interact with each other, primarily complementing or supplying key components of the value propositions within their products or services”.

From the supply chain perspective, Cranfield’s Dr Martin Christopher adopts an end-to-end view, articulating the supply chain as “the network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer”.

This notion of networks is particularly important, with Dr Christopher reinforcing the key message that modern supply chains are no longer simply linear chains or processes, “they are complex networks - the products and information flows travel within and between nodes in a variety of networks that link organisations, industries and economies”.

The linear concept of a chain is therefore no longer adequate to describe today’s complex international networks of suppliers, partners, regulators and customers – all collaborating to ensure the efficient and effective movement of products, services, information and funds around the world.

These extended multi-stakeholder networks continue to develop as supply chains have become progressively more global, complex and strategic - we are firmly in the era of Global Supply Chain Ecosystems!

Connected Supply Chains drive Competitive Advantage

In today’s complex connected world, supply chain is more and more recognized as a key source of competitive advantage and differentiation. Companies strive to build powerful supply chains that will enable them to get their products to market faster, more efficiently and more economically than their competition.

For many businesses – particularly those in high tech, consumer electronics, pharmaceutical and fresh produce - time to market and effective distribution channels are critical success factors, and therefore supply chain management competencies and capabilities are what drive competitive advantage.

In that context, there are exciting and evolving synergies between the supply chain and marketing functions, as together they become the principal business drivers for companies in the modern era.  Each of them is both a functional discipline and a profession. Taking the broadest perspective of the two disciplines, these functions together embrace all of the mission-critical business activities of a company, with IT, HR and Finance playing important supporting roles.

With marketing comprising the four P’s of Product, Price, Promotion and Place and supply chain encompassing the five operational activities of Plan, Source, Make, Deliver and Return, then Logistics becomes the point of intersection and convergence - the essential linkage between the Deliver function of supply chain and the Place (distribution) function of marketing.

Together therefore, supply chain and marketing are becoming the primary engines that drive the business – hugely influential in driving business growth, increasing market share and generating revenue and profits. The Chief Marketing Officer (CMO) and the Chief Supply Chain Officer (CSCO) will become the most critical leadership roles to sit alongside the CEO and CFO in the enlightened C-suite of the future.

Supporting this concept that supply chain drives competitive advantage for your business, the FT lexicon explains how “Ecosystems also create strong barriers to entry for new competition, as potential entrants not only have to duplicate or better the core product, but they also have to compete against the entire system of independent complementors and suppliers that form the network”.


Any chain is only as strong as its weakest link – and it’s the same with a supply chain, except that within a supply chain ecosystem the linkages are not consecutive and not linear; there are numerous multi-dimensional connections with profound inter-dependencies.

Nevertheless, the strategy of achieving continuous improvement through consistently and persistently working on strengthening the weakest link(s) still applies, and companies adopting such an approach will leverage their global supply chain ecosystem for competitive advantage in our complex, connected world.

Learn more about the latest supply chain trends and developments in Mark Millar’s new book Global Supply Chain Ecosystems in which he examines several critical elements of a supply chain ecosystem - including visibility, resilience, sustainability and collaboration.

Author: Mark Millar / Publisher: SCMO

Riding the Silk Rooster

China Merchants has a knack for catching themes. China Merchants Holdings has been a decently managed company in the China context, holding decent port assets. But investors, mainland and foreign, always seem to get taken away by some idea of golden returns. In the late ‘00s there was all this fanfare about its Vietnam investment with billions of HK$ market cap added pretty much on the back of the concept. 

Having Shanghai Port Group shares take off in the late ‘00s also helped propel the shares into the stratosphere for a while, as owning a stake in a Shanghai listed company offered investors participation in China rallies. 

Yet, we know what happened to plans for Vietnam development. It was a total dud due to massive overbuilding of port assets. China Merchants let the project die quietly after a few permutations. Sri Lanka port expansion also was not without its controversies.

Ultimately Shanghai Port after 2008 turned out to be a little less exciting for 5 years or more – Until September 2014. Since then shares have doubled.  This is one reason why shares of HK China Merchants Holdings perked up recently. But there is also the fanfare of China going big in global infrastructure as a result of a “new” Economic Silk Road initiative, which was laid out in NDRC in late March 2015 in a paper entitled Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road.

COSCO Pacific has not had it so easy since the late ‘00s. It hasn’t been able to recover from the perception of being a passive patsy for the poorly run COSCO parent and having a few more passive port investments as well as a boring container leasing business (which it sold parts thereof more than once).  But, in its defense, it has always maintained 1) good disclosure, and 2) a good dividend distribution.

Port and infrastructure companies are certainly companies to look at as beneficiaries of the “new” economic silk road.


The Silk Road Economic Belt theme and policy statement out this time (see official China announcements and speeches) is different than the 20 year old “through train concept” for Asia to Europe via Central Asia (and not the money and share trading conduit between China and HK…). This was the old version for new trade growth avenues.

Over the last few years China has been backing a number of global infrastructure themes, from ports in Suez and Sri Lanka, to potentially theme parks in Cambodia, and ultimately to road and rail buildouts in SE Asia and new military bases and drilling rigs in disputed waters in the South Pacific. 

China now is wrapping this in a comprehensive plan, seeking to show that the growth in the international strategic footprint is about increasing RMB transactions, and ultimately participating in a Chinese Economic Sphere that will even come with its on multilateral bank, which many countries are now warming up to. 

It is a total package, marketed as global business expansion but also comprising a significant geo-political element with military sideshows.  Move over Pax Americana. Here comes the Silk Rooster. It makes perfect sense. And it is not new. It is simply more front burner due to new focus from Xin Jinping.

China Merchants didn’t just invest in a new global footprint ports last month. It’s been growing around the world for a decade or more, as have Shanghai Port and COSCO/ COSCO Pacific. 

What’s more China didn’t just start building military bases in the middle of the South Pacific. It’s been laying down asphalt and train tracks in Laos for awhile. And if it can find financing that is supported by multilateral agencies, like its new Asia Infrastructure Bank, it will be building theme parks/property projects and roads, rail networks, ports, canals across the globe. 

And a new surprise for some may be how substantial its influence in Thailand has become. The PLA and connected Communist Party members have been buying up and producing from jade, precious stones and metals mines in SE Asia for a long time. And one could not have done this without support from the authorities and the military. Recently CITIC (ultimately PLA linked) raised more funding for its re-capitalization from parties including Japanese trading houses and Thai Chinese. The Japanese are another key constituent of Thailand’s industrial base. From a Chinese perspective it is even more important to box in Japan’s influence around the Malacca Straits. 

In some cases, China may have picked the wrong horse, such as Noble Group, which likely expanded too rapidly into commodity asset bases in places such as Brazil toward the top of the commodity cycle. And China has so far missed the boat on acquiring logistics companies rather than simply buying more container ships, bulk vessels and tankers. But it will figure it out.

Because China needs global expansion to replace stagnating China growth, China will pour a lot of resources overseas. And its large state owned companies will benefit immensely. For the moment these companies often don’t get the right cultural mix on international infrastructure projects, and they tend to go into projects in massive waves with too many Chinese workers, while leaving many behind along with support infrastructures. But this is 1) on purpose and 2) may get better regulated in future. 

Imagine 50,000 workers descending on a small economy. The backlashes will eventually force some redirections. But at the same time China will have built a new mainland Chinese diaspora far larger than ex-Communist Party members who fled China with potentially as much as a trillion dollars.

Many countries, not just SE Asia, Japan or the US need to figure out how to integrate into China’s new global political economy. On the one hand investors can participate and benefit, while keeping tight leashes on credit policies. On the other hand, sovereign nations need to quantify and de-limit Chinese incursions into their national territory.

Author: Charles de Trenck / Publisher: SCMO

China’s Infrastructure Made Alibaba’s IPO Possible

Article published on September 25, 2015 in Quartz and reproduced by courtesy of Parag Khanna

Alibaba’s recent IPO and early market capitalization of US$230 billion brought repeated reminders that its value has catapulted ahead of that of Amazon. and eBay combined. What has allowed the Chinese e-commerce giant to grow so massively is the confluence of urbanization, infrastructure investment and digital connectivity, together providing the foundation for an efficient network across hundreds of first-, second- and third-tier cities.

Over the past decade, both of us have traveled extensively in all corners of China and witnessed this “next China” emerging. Visiting China’s next urban tier scattered about the country reveals the flaws in the Western economic critique of China. While prominent economists continue to deride China’s over-investment in infrastructure, it is precisely what makes rags to riches stories like Alibaba possible. As the World Bank demonstrated in a report published in 2013, high-speed rail, for example, has been a crucial factor in promoting geographic and thus social mobility in the aftermath of the financial crisis when many export-dependent jobs suddenly evaporated.

One should think of China not as a monolithic empire but a lattice of cities whose increasingly dense ties follow Metcalfe’s Law: the value of a network increases exponentially as the number of connections grows. Alibaba’s investors certainly see it that way.

Currently, according to research by McKinsey, 600 urban centers represent 60% of the world’s GDP. By 2025, 100 of the world’s top 600 economic cities are projected to be in China. While this is proportionate to China’s share of the world population, the urban base means a significantly accelerated capacity for economic growth, which occurs much faster in cities — and particularly in connected cities. Importantly, China has 200 cities with a population of at least one million, the minimum population required for sustained economic diversification.

Given China’s massive urbanization campaign, there is much more still to build. Yet visiting China’s thriving interior second-tier cities reminds of how quickly the image of China as the world’s factory floor is being superseded. While millions of poor migrants still sweat long hours on assembly lines producing cheap goods, new industries in the technology and services sectors are rapidly replacing traditional manufacturing as the driver of employment and wage growth. Just think of PC-maker Lenovo and telecoms giant Huawei.

It has surprised many foreigners that China’s new vanguard of global companies are not even based in Beijing or Shanghai. Alibaba was founded and remains headquartered in Hangzhou, while Tencent (which operates the popular WeChat messaging service) is based in Shenzhen, as is Huawei. SunTech Power, the world’s largest solar panel producer, is located in Wuxi, which has become a hub for China’s renewable energy industry.

Companies fall into a spectrum in their dealings with China. Some are already deeply embedded, with significant product development, manufacturing, and sales in China — examples include Siemens, Hewlett-Packard, Coca-Cola and others. Some are limiting their exposure to China and seeking alternative production centers. Taiwan’s FoxConn, for example, is building new assembly plants for iPads and other electronics in Indonesia and even the US (but aims to staff them with robots, not humans). A very large swath of multinationals, however, is just now in the research phase about where to build (or build out) their footprint on the mainland. For these companies, a whole new urban geographic vocabulary awaits.

Indeed, even as net foreign investment into China decreases as multinationals seek lower-wage production elsewhere in Asia, multinationals are also flocking into China to expand sales into the emerging urban middle class. Expats moving to China to promote exports and sales will increasingly find themselves, in addition to the aforementioned cities, living in Tianjin, Guangzhou, Chongqing, Nanjing, Wuhan, Shenyang, Suzhou, Foshan, Dalian and other currently second-tier urban centers whose populations and economic gravity are steadily rising on the back of multi-industry cluster strategies.

These cities have also launched intensive campaigns to attract domestic and foreign talent. While Shanghai has no trouble recruiting the best and brightest, Foshan, a manufacturing hub in southern Guangdong province, has just hired five foreigners to work in the government exclusively on luring fresh FDI and residents. Bear in mind that as China’s industry cleans up, southern China will get a fresh look. Fuzhou, for example, in Fujian province, is the ancestral home of many overseas Chinese diaspora in Southeast Asia looking for a foothold back on the mainland, and is also ranked one of the most livable cities in China.

Upon his election as the new Indian prime minister, Narendra Modi immediately announced plans to construct 100 new cities from mixed-use developments to special economic zones to stimulate Indian urbanization, job creation and growth. If America was home to the “consumer of last resort” in the twentieth century, in the twenty-first century it will be urban Asia whose consumption propels world economic growth.

Authors: Parag Khanna and JT Singh / Publisher: SCMO




Supply Chain Global Governance

Article published in The Economist Management Blog | September 16, 2013 and reproduced by courtesy of Parag Khanna

Could corporations replace national governments?

Five years since the collapse of Lehman Brothers, the post-financial crisis world has played out quite differently from the dominant narrative of the immediate aftermath. Then it was predicted that globalization could rapidly unravel, export-led emerging markets would slump, and the private sector would be massively re-regulated. Instead, cross-border trade and investment have exceeded 2007 levels, emerging market growth has been robust, and corporations have proven quite nimble in limiting overly onerous regulation.

Still, the world economy is fragile and expectations are high—from governments, the public (“the 99%”), and a growing chorus of shareholders—that companies play a role commensurate with their resources and influence to advance agendas ranging from environmental sustainability to reducing income inequality. The debate has moved beyond clichés about “the market” being necessary to solve all problems towards a more sophisticated approach that I call “supply chain global governance.” This combines the “do no harm” mantras around limiting operational externalities with a proactive strategy to leverage supply chains wherever possible to improve standards and quality of life. I believe that this regime-based approach is likely to replace “corporate social responsibility” in the coming years.

Some of the world’s largest firms have taken notable steps in the direction of progressive supply chain governance. Walmart, the world’s largest retailer, has partnered with the Environmental Defense Fund (EDF) to reduce emissions across its vast footprint of warehouses, distribution centers, and outlets. In May this year it blacklisted almost 250 Bangladeshi factories after the tragic building collapse in Dhaka, sending ripples throughout the garment industry. Apple has worked with the Fair Labor Association (FLA) to identify dozens of improvements in worker safety and other areas now being implemented in Foxconn factories in China. DHL works closely with customs officials in dozens of countries to smooth customs processing, bringing efficiency gains that alone can boost global GDP by 5 percent according to a recent study by Bain Capital.

While examples from the Fortune 100 are numerous, within those same ranks many questions remain such as how this approach differs across public and private firms, and how it will (or will not) scale across state-owned enterprises and SMEs—particularly from the developing world. Some emerging market companies like Petrobras and Vale, both of Brazil, have established solid track records in the sustainability arena, but more opaque Chinese SOEs are far further behind the curve.

Then there is the deeper challenge of the incredible complexity of supply chains themselves. The European horsemeat scandal, the tainted New Zealand baby formula in China, and the BP Deep Water Horizon oilrig in the Gulf of Mexico are just several of the major supply chain crises in recent memory. These complex meta-national structures therefore require far more scrutiny and analysis even as we come to rely on them as tools of delivering public goods.

Still, corporations and their supply chains are already critical players in global governance. The highest body in commercial arbitration, for example, is the privately run International Chamber of Commerce (ICC) based in Paris, which simultaneously helps craft collective business positions on international policy issues such as WTO trade negotiations. A nascent effort has begun to apply international humanitarian laws to business actors. The UN Voluntary Principles seek to regulate the activities of corporations operating in zones of conflict. While on the surface this appears to be an example of states strengthening their leverage over corporations, it should instead be viewed as a mutually beneficial process: firms are intimately involved in crafting the regulations, for which the UN is a repository, but its ultimate effectiveness ultimately hinges on the participating companies themselves.

Over the past several years I’ve been involved in the U.S. National Intelligence Council’s Global Trends 2030 process that earlier this year published a major report titled “Alternative Worlds.” It includes a very plausible scenario titled “Non-State World” in which urbanization, technological advance, and capital accumulation accelerate the rise of private players that bend rules to maximize their productive power, particularly through the creation of special economic zones within and across national borders. As the scenario describes this trend, “It is as if the central government acknowledges its own inability to forge reforms and then subcontracts out responsibility to a second party. In these enclaves, the very laws, including taxation, are set by somebody from the outside. Many believe that outside parties have a better chance of getting the economies in these designated areas up and going, eventually setting an example for the rest of the country.”

My only quibble with this fine analysis is that it describes the world of 2013, not 2030. Supply chains, like globalization itself, are a complex system that is a whole greater than the sum of its parts. They are already integral to global governance. Corporate leaders must get accustomed to being CEOs, diplomats and statesmen at the same time.

Author: Parag Khanna / Publisher: SCMO

The Independent Republic of the Supply Chain

Published by Quartz on March 19, 2013 and reproduced by courtesy of Parag Khanna

Each week brings new revelations in the scale of the European horse meat scandal and yesterday came news of faulty, too-sheer yoga pants, but there is a common theme: the complexity of untangling the supply chains of producers, distributors and vendors spanning a dozen countries. From Romanian abattoirs to IKEA in the Czech Republic to frozen lasagna meals in Britain’s Tesco grocery stores, the process of tracing the origins of the horse meat, conducting food safety tests, and enforcing standards has overwhelmed regulators, laboratories, consumers, and food vendors. When HSBC’s airport jet-way campaign featured a panel that read, “In the future, the food chain and supply chain will merge,” this is surely not what it had in mind.

The horse meat scandal pertains to one sector, food, and one geography, Europe. But the supply chains of energy, finance, electronics, and much else have driven the matrices of business to envelop the world. Ever more, not less, multinationals depend on foreign markets for parts and profits. In many sectors, supply chains have become nearly impossible to untangle, even within just one or two countries. Whether BP, Transocean or Halliburton is responsible for the sinking of the Deep Water Horizon oilrig and massive subsequent Gulf oil spill in 2010 is still being arbitrated. Every day brings new headlines about supply chain confusion, exploited loopholes, and messes to clean up: in late February a Taiwanese company making Apple iPhone casings at a plant outside Shanghai was accused of polluting a local river.

Supply chains—the systems and networks of producers of goods and services that transform raw materials and components into products delivered to customers—are now an autonomous force in the world. Like globalization itself, they are greater than any one nation or economy. Some are entirely private, while others are hybrids of public and corporate actors. Many now connect Western and emerging market firms into a sprawling nexus that lacks a single headquarters and thus obeys no one jurisdiction. Supply chains have widened and deepened to such an extent that we must now ask ourselves: do we control the supply chains, or do the supply chains control us?

The new empire

With their cash reserves and legal protections, corporations act with greater agility than governments or households, who face greater constraints on their movements. In the 1980s, before “political economy” became a vogue graduate school major, the legendary London School of Economics professor Susan Strange coined the term “triangular diplomacy” to describe how multinational corporations (MNCs) have become so powerful that they engage on equal footing with governments, that are often mere “supplicants” to firms as they seek the capital, technology, and knowledge they cannot themselves generate. China’s rise is largely owed to its integration into global manufacturing supply chains, while India’s economy would not grow at all without liberalizing in ways that favor the expansion of private commercial supply chains.

Supply chains have effectively become their own form of governance, varying widely in nature depending on geography and sector, and with differing degrees of involvement by states, but undoubtedly transnational units of authority in their own right. The supply chain’s ambition is not territorial aggrandizement, but access to markets. They seek to oversee the greatest share of the flow of goods, capital and innovations. Expanding and improving supply chains is more important that boosting trade for the future of global growth. According to a new study by Bain Capital, if countries reduced border administration delays and improved telecom and transport infrastructure to just half the global standard, global GDP would rise by 5%. For supply chains, the extended market is the empire.

The paradox of the growing power of corporations is that even as their autonomy grows, their role as co-governors (or suppliers of governance) does as well. More than ever before, corporate supply chains shape and even create government regulation where they are lacking and provide public goods governments don’t. European hydropower companies write the legislation to govern their own industry in Nepal, since no such laws exist; private hospital chains in India enter poor backwaters and provide basic medical services where the government never has, as do private or philanthropic schools spreading literacy. As states come to depend more on corporations, the distinction between public and private, customer and citizen, melts away. Nowhere is this more true than a country like Nigeria, whose budget depends so existentially on Shell’s oil extraction, yet whose population expects public services to come from Shell as much as from its own government. In Nigeria, it is never clear who is in charge or who is exploiting whom.

Our dependence on many supply chains is nearly absolute. DHL can get any item anywhere in the world faster than anyone—even than the US military, one of its biggest clients, who uses it to transport everything from mobile battle stations to Halloween candy. When China suddenly banned the export of rare earth minerals in 2010, politically oblivious disk drive manufacturers woke up to their reliance on Chinese suppliers of these precious but essential components. The tsunami/earthquake that devastated Japan in early 2011 forced Taiwanese semiconductor manufacturers to scramble to new suppliers. With lagging Indian investment in the extractive sector, its diminished iron ore production has led to a spike of greater than $40 in the key ingredient for steel-making, swelling profits for BHP, Vale, and other mining giants. Commanding supply chains, not geography per se, is how winners and losers are determined today.

The tug-of-war between public and private power is far from settled. Indeed, it is just one symptom of far deeper shifts in global order that is still in the early phases of unfolding. With this complexity comes the need to re-assess, even supersede, some of the bedrock concepts of modern international relations, particularly the primacy of state sovereignty and territoriality. Instead, we need to appreciate how non-state actors are building global authority on the basis of wealth and resources, how loyalty can be horizontal to communities beyond vertical states, and how a wide range of players operate with increasing autonomy to pursue the own interests. Governance, both local and global, are open to all, and governments have to prove their utility to matter.

The global mobility of money

There is an adage that “who has the money makes the rules.” Sovereign wealth funds, currency traders, hedge funds, dark pools, institutional investors, asset managers, private equity firms, bond holders, and debt vultures are major independent players in driving, shaping, and pushing the world’s $225 trillion of global financial stock. The countless public and private players in the financial world compete for profits, ride each other’s waves, and discipline each other at the same time. Hedge fund managers spotted the weakness in the US housing market while Fannie, Freddie and mortgage lenders advanced the sub-prime mortgage policy. Hedge funds face less regulatory oversight than public companies, and are thus attractive to the wealthy. As the Economist recently reported, the re-privatization of public companies has restored financial control over to private hands. The total market value of privatized firms grew from less than $50 billion in 1983 to almost $2.5 trillion in 2009—roughly 10% of the world’s aggregate market capitalization, and 21% of the non-US total—and overall private capital assets are estimated at $21 trillion.

Globalization has dramatically enhanced the financial autonomy of even the world’s largest and seemingly most rooted multinational corporations. Whereas it was once an article of faith, as articulated in the 1950s by GM president Charles Wilson, that “What is good for the US is good for GM and vice-versa,” today it is far less clear. American multinationals increasingly enjoy the rule of law, investor protection, and innovative environment of the US, but derive over half their revenues from emerging markets. This applies across the spectrum from Hollywood films to automobile and pharmaceutical sales. As a result, MNCs can grow even during downturns at home while growth continues abroad. But globally distributed enterprises such as Apple, GE, IBM also hold massive assets offshore where tax rates are lower or nil – and sometimes relocate headquarters altogether as Halliburton did in moving to Dubai.

For nations, geography is fixed. For firms, it is an arbitrage opportunity. The Financial Times reported that Starbucks, Google, Amazon and other mega-companies pay less in tax to the UK than their share of revenue from it by using offshore holding companies from Belgium to Bermuda. An important component of a firm’s resiliency today is its capacity for regulatory arbitrage, the capacity to be geographically agile in mastering jurisdictions and regulations.

Of the 100 largest economic entities in the world, approximately half are companies, even excluding state-owned companies. Wal-mart has a market capitalization greater than all but the G-20 economies. Its annual revenues are greater than $446 billion (2012). In 2006, it alone was responsible for 12% of China’s exports. It is also the world’s largest private employer with a workforce of over 2 million people. Apple’s $600 billion market cap is larger than the GDP of over 120 countries. Its cash on hand is sufficient to bail out several ailing euro zone economies. In South Korea, Apple’s rival Samsung accounts for 8% of the national tax revenue.

Exxon Mobil, the largest energy company with a market cap of about $400 billion, represent how private energy companies like Shell and Chevron deliver stable global supply to the market while also providing local populations with employment and welfare—outlasting dozens of failed governments in the process. As Steve Coll points out in his recent book Private Empire, Exxon is the largest taxpayer in Chad, while Shell accounts for more than 21% of Nigeria’s total petroleum production of 629,000 barrels per day in 2009. In Iraq, Exxon’s direct dealings with the provincial government of Kurdistan could very well trigger an Arab-Kurd civil war that will force the country’s disintegration.

There is no doubt that the surge in state-owned enterprises in banking, energy, and other sectors represents a countervailing trend, especially given its prominence in crucial states such as China, Russia and Saudi Arabia. But it is also a trend that has reached its high-water mark for significant reasons. One is the suspicion of hostile state intent and subsequent blockage of cross-border state-owned enterprise (SOE) activity. Recent examples range from Dubai Ports World in 2006 to Huawei in 2011, and Australia’s blocking the merger with Singapore’s stock exchange. Another is the quality of corporate governance, whereby SOEs are often inefficient and slower to respond to changing market conditions. They also tend to lack the technological sophistication of private players. Because SOEs are bound to national governments, they cannot relocate when domestic circumstances worsen. Only private firms have agility when nationality becomes a liability.

We should be grateful for this trend. As Paul Midler documented in his supply chain tell-all Poorly Made in China, China’s SOEs face no market accountability; their only aim is to cut costs, often at the expense of standards. Witness the melamine contaminated pet food and baby milk scandals, and Mattel recall of baby bear toys whose eyes could fall out and choke children. The trust networks of factory managers and workers never extend past the next link in the supply chain, let alone to the broader Chinese or global consumer population. It was 6,000 Chinese babies poisoned by the melamine formula, not foreigners.

Western firms too want to cut costs; that is, after all, what drives outsourcing in the first place. But they face consumer pressure points that can have impact where government regulation falls short. Consumer activist and NGO expert groups have been crucial to certifying supply chains for diamonds and timber, and labeling dolphin catch-free tuna and GMO-free organic produce.

Auret van Heerden, head of the Fair Labor Association (FLA), gave a prominent TED talk in 2010 in which he used the phrase “Independent Republic of the Supply Chain.” He provided striking examples of how the outsourcing of outsourcing to suppliers for the production of mobile phones and pharmaceutical has led to large-scale human rights violations, drug contamination, and deaths from Congo to Bangladesh to China. But van Heerden is not an anti-corporate activist. The FLA has over 4,000 corporate members who work with NGOs, regulators, and other bodies to make supply chains safer and cleaner. It has pressured Apple, for example, to improve working conditions at FoxConn factories while Chinese authorities preferred efficiency at the lowest price.

Accountability means knowing where the buck stops—something that is increasingly complicated in a supply-chain driven world. Governments can’t fully control what they do not own. They need supply chains to carry out their own functions, and they need to partner with corporations and NGOs if they want to protect and serve their citizens. A franchise business can be more accountable due to strict rules set forth by a powerful parent company. McDonald’s has more capacity to inspect itself, and more incentive to do so to protect its brand, than any government can devote to monitoring efforts. All consumers worldwide are simultaneously citizens of the Independent Republic of the Supply Chain.

Diplomatic agency and responsibility

As multinational firms acquire wealth and market access through overseas expansion, their economic footprint and diplomatic reach becomes larger than many countries’ diplomatic services. The world’s largest democracy and a rising power such as India has fewer than 1,000 foreign service professionals, less than the number of lobbyists employed by a handful of multinationals in Washington and Brussels alone. Some African countries have foreign services that number only several hundred at the largest, many of whose primary task is to woo investment from such companies.

The Arab Spring has revealed a far deeper challenge than the corruption of Arab regimes. It is in fact just a symptom of the much broader entropy gripping much of the post-colonial world, from Africa through the Near East to South Asia. Dozens of states have squandered the last half-decade since independence. Cold War alliance politics takes some of the blame, but across these regions a succession of corrupt regimes have presided over populations that have tripled and sometimes quadrupled in size without building or refurbishing the requisite infrastructure, whether power lines, railways, housing, hospitals or schools. These conditions of general neglect have given rise to the reality of corporations serving as de facto “public” service providers.

Particularly in Latin America and Africa, supply chains serve as governance due to the absence of meaningful government. In Congo’s “copper belt” of Katanga, mining enclaves have become a new kind of post-colony that scarcely belongs to a country that barely exists. Mining companies in the Andean region educate and train their local managers who would otherwise be illiterate; oil companies in Guinea-Bissau fund AIDS treatment; and bottling companies provide housing for workers in Indonesia. There are no doubt many abuses of power, even crimes such as Chiquita’s usage of paramilitaries in Colombia to target union activists, but these take place within the context of supply chain service provision as compared to the outright neglect of the state. Even for what seem like the obvious sectors for resource rich countries to invest their scarce capital in, the private sector still does the public’s job. To this day, if you want to scope out a location for a mine in Zambia, you’ll need to lease a private plane from a company like K5 aviation to get to the site, still inaccessible by road. Public airports haven’t been built yet outside major population centers.

The privatization of major infrastructure, from American ports to British airports to the Panama Canal, applies de facto the world’s newest and most pervasive infrastructure: telecoms and the internet. Thirty corporations today control 90% of world internet traffic. Mega-grids that span entire regions connect once “off-grid” territories to world markets faster than any inter-governmental negotiation. Want to hire some techies to program African apps? Better hire them from Google-sponsored computer training centers in Nairobi, rather than public universities.

Even powerful nations face the paradox of being wealthy on paper, but unable to muster the fiscal investment to meet basic needs. Across Russia, the infirmed and elderly volunteer to be guinea pigs for Western pharmaceutical companies’ clinical trials given the precipitous decline in the country’s healthcare system. Even in America, rehabilitating once mighty Detroit has fallen on the shoulders of a troika of corporate moguls such as Dan Gilbert, founder of Quicken Loans, who along with the owner of the Detroit Redwings and CEO of Pensky Tires is funding myriad real estate redevelopment projects and a light-rail for the city’s downtown area.

Whether or not certain governments are in retreat, private-private diplomacy is becoming increasingly important to provide for global public goods. Private actors increasingly network with each other in ways that improve their overall effectiveness. For example, the Environmental Defense Fund (EDF) now works directly with Wal-Mart along its supply chain to reduce carbon emissions. Neither is waiting for an inter-governmental climate treaty. Business for Social Responsibility (BSR), another NGO, has a staff of over 30 in China who are full-time consultants to Western and Chinese companies on improving labor conditions in factories. In the new supply chain diplomacy, form follows function: whoever can get the job done gets the deal.

Does it all add up?

The convergence of post-war Western economies created the conditions for the rise of the modern transnational corporation, and there is very little that can be done to reverse it. Protectionist policies that would undermine the international presence and standing of one’s own national champions by evoking painful reciprocal measures from other states. Inter-state diplomacy enabled our current phase of globalization and interdependence, but multinationals have become the key driver. Even the strong regulations imposed on Wall Street banks in the aftermath of the financial crisis have severe loopholes, and calls are growing stronger to revise aspects of the Dodd-Frank legislation that have harmed competitiveness.

There is no doubt that inter-state regulations and international law provide both the crucial opportunity as well as the ultimate constraint on the rising global power of private actors. Yet we must be careful not to assume sovereignty as a trump card when it clearly matters only where it is meaningfully enforced. There is also the claim that global firms require the stability and rule-in-law that is only provided by Western nations. But this fails to notice the rise of hundreds of globally competitive multinationals emerging from Brazil, the Arab world, and Asia that meet the criteria of product standards and corporate governance to be listed on stock exchanges worldwide. Furthermore, many global firms increasingly act as international partnerships, diminishing the centrality of any single headquarters, even in the US, in favor of local joint ventures and tailored strategies for each market.

Corporations and their supply chains are already critical players in global governance. The highest body in commercial arbitration, for example, is the privately run International Chamber of Commerce (ICC) based in Paris, which simultaneously helps craft collective business positions on international policy issues such as WTO trade negotiations. A nascent effort has begun to apply international humanitarian laws to business actors. The UN Voluntary Principles seek to regulate the activities of corporations operating in zones of conflict. While on the surface this appears to be an example of states strengthening their leverage over corporations, it should instead be viewed as a mutually beneficial process: firms are intimately involved in crafting the regulations, for which the UN is a repository, but its ultimate effectiveness ultimately hinges on the participating companies themselves.

The newly published Global Trends 2030 report of the National Intelligence Council titled “Alternative Worlds” includes a very plausible scenario titled “Non-State World” in which urbanization, technological advance, and capital accumulation accelerate the rise of private players that bend rules to maximize their productive power, particularly through the creation of special economic zones within and across national borders. As the scenario describes this trend, “It is as if the central government acknowledges its own inability to forge reforms and then subcontracts out responsibility to a second party. In these enclaves, the very laws, including taxation, are set by somebody from the outside. Many believe that outside parties have a better chance of getting the economies in these designated areas up and going, eventually setting an example for the rest of the country.”

America—and its companies—can only strengthen regulation where they participate in supply chains, such as th rough the Foreign Corrupt Practices Act (FCPA), which holds sway over American companies and those doing business with American companies. For better or worse, supply chains are the answer to supply chains. Supply chains, like globalization itself, are a complex system that is a whole greater than the sum of its parts. The food chain and the supply chain have indeed merged—as has much else.

Author: Parag Khanna and Ahmed El Hady / Publisher: SCMO

Big Steel, Price Swings of Yesteryear… and Dominance Role Reversals

Reproduced from a 19 April 2010 article by courtesy of "Transport Trackers"

Given the recent stories on steel and price hikes we took a quick look sample historical reactions to price hikes. In April 1962, John F. Kennedy panicked after US steel companies proposed to raise steel prices $6/ton, as the proposed rises threatened his economic program. He went on TV, after earlier planning a multi-pronged campaign against Big Steel, to denounce the steel companies price change decision (“in ruthless disregard…” Please refer to‐sIYl5C4mY). ...

If one thinks about it, a ton of steel was $20 ‐ $40 in the 1920s while an ounce of gold was fixed at $20.67/oz before the Fed appeared to get a present from Roosevelt in 1933 through the re‐fixing of gold at $35/oz. Steel per ton could loosely be put at $600 ‐ 800/ton today against about $1,100/oz for gold. Just an observation: Steel is up by a factor of about 20x in a century; gold is up by a factor of about 40x... We are not experts in steel and commodities, simply interested bystanders wanting to know more about many of the products going on ships, and their drivers.

Margins for the US steel industry were estimated, in an article of the day citing AP Business News, 10 April 1963, at about 4% net profit margin in 1962, down 15% from 1963. In comparison, US steel in 2009 had a negative EBIT margin over 15%, though this had come after a five‐year streak of EBIT margins averaging just under 10% prior to 2009.

Kennedy’s 1962 frontal assault on Big Steel led US steel companies to drop prices even below levels they had tried to raise them from (the attack coming when margins were 4%). By 1963, a number of papers came out on economic effects in the steel industry, with none other than Townsend’s Greenspan (remember Greenspan’s consultancy firm?) preparing a paper for the Society National Bank of Cleveland, among other papers, showing that US GDP between 1955‐62 increased 20% in real terms but that the steel industry, one of the centerpieces of the US economy at the time, was slowing in real terms, given only a 5% expansion during the period.

The article citing Greenspan (an analyst at Wellington submitted to the Financial Analysts Journal for November 1963) went on to speak of the US loss of market share to foreign producers. … In other articles we saw talk of 2.5 – 3.5% wage increase complaints from steel bosses. But overall, we got the feeling from most discussions that a lot of people walked around assuming flat costs, especially raw materials sourcing. Another thing people/ organizations did, as seen in many articles of the time available for viewing today via Google, is repeat verbatim press blurbs, so quite often price rise announcements simply stated the quantum of rise with no reference to base price (ie, it’s difficult to get one’s bearing on price points).   … From reading articles from the 1920s on steel, on comparatively more turbulent times for steel prices than the late 50’s and early 60s, the price of steel had about doubled between pre‐ and post‐ WWI from about $20/ton to about $40/ton.

We had noted in recent weeks, some research reacting to iron ore price increases without appropriately adjusting for cost increases 1 . We still think more work needs to be done on this front, but some, among others, have flagged the impact of higher spot iron ore and quarterly contracting for some of the mills that historically relied more on annual contracting. Margin squeezes and demand patterns after price rises appear important questions/topics...

1 We could not believe one note we read from a large broker in late March ‘10, which raised steel price estimates for 2010 by LSD percentage points and put the average forecast for steel/ton for 2010 far below current price, with barely a mention of margin squeeze or indication of forward iron ore pricing views given the numbers laid out…. But we have seen other notes more recently doing a better job of forecasting margin squeezes. Still we would like to have seen a theme piece on steel looking at elasticities of demand in China and globally based on higher ore, coal, steel, etc..No doubt, someone is doing it. … Our long term view is that China needs to bring down production and demand which feeds into the construction of empty or low vacancy buildings, and stop stimulating for the sake of stimulating…China has taken baby steps in this regard, though in some sense even these steps have at times appeared more than that of the US Fed…But that’s just our view.

We have sourced stories from market reports and every effort is made to reflect news items fairly and accurately. However we can make no warranties of any kind as to the contents of reports and we shall not be held liable for damages. Our views represent our current opinions with respect to available data and information. Transport Trackers ©is a subscription‐based service for paid clients, therefore re‐transmission of our reports is not permitted. For more information please contact us atsales@transport‐ or charles@transport‐
So what’s changed in 50‐100 years of looking at price data and relationship?

Short answer: Not much, and everything. Today, repeating of press blurbs and sensationalism in headlines is perhaps still based on similar practices as in past. There are a lot more moving parts, to be sure. In the past, we could go years without a price change in an input. Later (in 60s, 70s??), some of that price stickiness was even down to command economy features, even in the US economy…Back then you’d get a US president dedicating speeches against price rises. Today we have infinite price changes of inputs and outputs, issues of over‐demand out of China, cheap capital from central banks, and…2The politics of steel perhaps haven’t changed as much as one would think, though. The politics were bad in the 1960s… and they are bad now.

What’s changed the most, in our view, is the order of things not just turning upside down (which Hegel or Marx would have understood/liked), but steel (and oil, etc) geopolitics are going in multiple directions at the same time.

In the heyday of the rise of the US as a superpower, it was about US dominance taking over from the British, etc. Everyone “knew their place...” 3The new good guys (US) were producing and dominating the market for key outputs. Sourcing contracts were in place and it was done more efficiently than the new bad guys (USSR) were doing it. Today, China (which was briefly aligned with the then bad guys) is producing more, if not most, efficiently, yet. And now it is sourcing at spot rather than on contract from developed and developing countries alike.

US Hot Rolled Midwest Avg $/ton, 1980 – Current (Monthly Series)

Source: Bloomberg

Source: Bloomberg


1 We could not believe one note we read from a large broker in late March ‘10, which raised steel price estimates for 2010 by LSD percentage points and put the average forecast for steel/ton for 2010 far below current price, with barely a mention of margin squeeze or indication of forward iron ore pricing views given the numbers laid out…. But we have seen other notes more recently doing a better job of forecasting margin squeezes. Still we would like to have seen a theme piece on steel looking at elasticities of demand in China and globally based on higher ore, coal, steel, etc..No doubt, someone is doing it. … Our long term view is that China needs to bring down production and demand which feeds into the construction of empty or low vacancy buildings, and stop stimulating for the sake of stimulating…China has taken baby steps in this regard, though in some sense even these steps have at times appeared more than that of the US Fed…But that’s just our view.

2Thisremindsus   of   a   versionof   “Stay”  mostnicelyupdatedby   JacksonBrownebackin   the‘70s…  (today…  “wegottruckerson   CB…”) from (1978 performance linked here)

3 …Until we got thinks like the Leontief Paradox… This takes us back to the Leontief Paradox on Heckscher Olin theorem problems, which was based on Leontief in 1954 (quite early on …) finding that the US, the most capital‐abundant country in the world, exported labor‐intensive commodities and imported capital‐intensive commodities in contradiction to the Heckscher‐Ohlin, which held that “a capital‐abundant country will export the capital‐intensive good, while the labor‐abundant country will export the labor‐intensive good.”

Author: Charles de Trenck / Publisher: SCMO

So you want to be an Intra-Asia Trade player?

Reproduced from a 12 March 2010 article by courtesy of "Transport Trackers"

Container veteran Niels K Balling contributed this think piece on Intra-Asia containers. We leave his title in place as it reminds us of the song by the Byrds, and later sung by Patti Smith (So You Wanna Be a Rock and Roll Star). Mr Balling notes, in passing, that the intra-Asia market is so big and complex that trying to boil it down in this fashion perhaps does not do it justice, so he apologizes in advance...

The Southeast Asia/North Asia countries comprising the core Intra-Asia market have become the largest container trade in the world, by far (despite some over-counting a few years back in a now infamous looking at the market by a well-known report we refer to sometimes). We exclude the Asia/Australia and Asia/India and Middle East trades as they are independent trades served by independent assets.

Key issues:

Total REAL profit pool of the core Intra-Asia trade is destined to remain miniscule

Only niche operators will be able to cover the cost of dedicated capital deployed to this theatre

Roughly 1/3rd of the trade volume is handled by main line operators on trunk routes

Rest evenly split between dedicated major services, feeder services, niche operations and domestic protected trades

The Main Line Operators (MLOs) provide negative marginal pricing to offset equipment positioning needs they have anyhow, and to build container terminal volumes that generates lower total terminal handling cost. In other words sunk cost discounted to zero (or less), combined with marginal pricing for growth purposes to achieve lower variable cost. That's not entirely crazy as the volume gain often will generate more value through terminal handling discounts than the real Yield of Intra-Asia cargo. And the discount may apply to the TOTAL volume thus leveraging the discounted Intra-Asia business to great effect.

Any dedicated operator (as some of the traditional Intra-Asia shipping companies will tell you) can never recover the cost of normal operations against such network economics.

Next come feeder (about 15% of Intra-Asia volumes) and the quasi feeder operations. The latter comprises about 55% of dedicated Intra-Asia services. These are services deployed for combined Intra-Asia trade and MLO network purposes. The feeder and quasi feeder operations work on the same discounted cost basis.

The only reason for existence of 3rd party feeder operators is that they can do it cheaper than the main line operators despite the latter counting on their own sunk cost. How can the 3rd party operators survive? In most cases it comes down to lower asset and capital costs - for as long as it lasts.

In other words on a net, net basis a relatively large part of the major Intra-Asia trades are served based on dedicated shipping services to their operational scope without any hope of rate or cost differentiation against the main line operators' network economics. They cannot bring specific financial value to the table that can support a dedicated operation. And they die – and get reborn – regularly.

Overall Intra-Asia has a negative profit pool due to the sunk cost approach by main line operators. That's a great trade facilitator and may continue to support rapid volume expansion of Intra-Asia container volumes.

But where's the money for the shipping investors?

There's a lot of money available in this profit pool. If one knows where to look. There are several niche opportunities as well as classic arbitration windows available.

The niches are fairly obvious, especially within the Refrigerated foodstuff area. This is becoming an interesting niche because of slow steaming by main line operators. Certain products, like bananas, are highly transit-time sensitive and need fast, reliable transport. The arbitrage opportunities are however an even more interesting and growth opportunity generating.

The Intra-Asia trade to a large extent is an outgrowth of the coastal economic development within Asia. Part of the success of Asia is that logistics costs were always low. This is no more a given. Redistribution within Asia is becoming more costly, though sea represents the cheaper option and contributes to reducing costs. Just think of haulage cost in Japan to outlier areas. Or Taiwan, Korea cost for trucking to other consumer areas. And/ but... China is now joining the game.

The Intra-Asia trade regionally is essentially similar to domestic haulage in the US and Europe.

There are no major green issues yet except Japan, where basic economics already make it very compelling to distribute to say Southern Japan via China by ship rather than paying huge costs over road and ferry via Tokyo or Kobe. In other words, use shipping to avoid domestic land based transport.

Intra-Asia will continue to provide growing opportunities for transport arbitrage opportunities, for new entrants. And Intra-Asia transport costs will continue to remain low based on intelligent MLOs going beyond normal yield management to leverage their network for ever better marginal cost throughout their global operations.

For both types of operators Intra-Asia will continue to expand in value.

For new entrants the advice is that deep understanding of their market of choice will make the difference between survival and quick demise.

Author: Niels K Balling / Publisher: SCMO



How Inflation Hits Asia’s Traders

Reproduced from a 2008 article published in the <em>Far Eastern Economic Review</em> <em>(now deceased</em>) — Reproduced by courtesy of <em>Charles De Trenck</em> — At the time, Mr. De Trenck was head of Asia transport research at Citigroup and had been following shipping since the mid-1990s.

A piece I wrote for the <em>Far Eastern Economic Review</em> last year (“Shattering Shipping Myths,” June 2007) might have seemed overly pessimistic at the time. I sketched out a scenario where demand for manufactured goods from Asia and China fell off steeply as a result of a property bust in the United States, as food andenergy costs rose further. Events have unfolded faster than I expected, largely because shipping demand in Europe slowed quickly and there was a sharp decline in U.S. inbound volume. The one bright spot has been a healthy rebound in U.S. exports.

Shipping, as ever, is a window into global trade and the global economy. Looking deeper into the global container industry can today elicit a better understanding of shifting trade patterns, rising production costs and declining consumer demand. And in comprehending the current slowdown in Asian exports and in global trade in general, we should now be looking at the slackening pace of economic activity and its impact in terms of how far along we are on the downward slope, and more importantly, how might growth trajectories shift us further down or back up.

Right now, we should be close — a matter of months perhaps — to a bottom in terms of export deceleration from Asia to the U.S. As for the European side of the equation, we are perhaps another six to 12 months away from a bottoming of export growth rates. Yet there are likely to be some notable differences from previous downturns. In?ation — coming after a long period of low interest rates — combined with China and commodity booms and a shifting role for the dollarare all part of this potent cocktail.

Using the economic slowdowns of the 1970s and 1980s for comparison is not straightforward given that global supply chains for manufactured goods were still relatively embryonic back then. Even so there is much to learn from what happened to bulk and tankers after the 1970s boom. What we should try to track is the difference between trade growth by volume and value, focusing on the ?ows of manufactured goods. Today, containerized trade transports far higher amounts of high-tech goods, as well as steel parts and agricultural commodities than was the case 20 years ago. With container trade tracking, we can look at both container port performances and vessel transport growth in order to better triangulate patterns.

China’s container port volume growth is slowing more than nominal trade statistics indicate. Total port volumes grew 17% in May and 15% in April, this level representing a signi?cant slowdown from the 23% levels one year ago. Shanghai, Shenzhen, Hong Kong and Qingdao have all seen overall volumes signi?cantlybelow the current average. Trade export values in dollars grew 28% in May and 22% in April (versus averages of around 28% one year ago). The difference represents a decline of about four percentage points.

China container ports have seen volume growth rates shift down from percentages in the mid-20s range to percentages in the mid to high-teens (when we exclude Hong Kong), representing a decline of about seven percentage points. The change in differential is at least a few percent, with the issue of the yuan only indirectly related. When we adjust to include Hong Kong in the calculation,  which we must do at some stage given that Hong Kong still handles substantial chunks of China trade, up to 10 percentage points of growth are lost in the differential between value and volume.

Since 2007, trade volumes on container ships out of Asia have slowed to low single digit growth, but the value of trade relative to the volume of trade — the rise of prices in the system — has shifted up. The Asia export value data taken against container export volume growth, shows a distinct pattern: The value of goods’ exports is increasing faster than the volume of goods. The China export data, which of course represents the single largest component of Asia exports, shows the trend even more clearly.

The China trade and Asia container data for May give a clear warning that the value-volume differential is growing rapidly in 2008. This is starting to look a little like inflation with Chinese characteristics — which takes us back to the potent in?ation cocktail of low real rates and high commodities prices brewing in recent years.

That China volume growth would slow down somewhat was expected. And yet everyone has continued to think of China as the world’s workshop for cheap goods without realizing that volumes can lose out to higher prices. China’s input costs have shot up as have transport costs, of which one-third are fuel costs, while developed country demandin volume terms is shifting down more rapidly than can be seen using conventional terms such as store sales. Could it be that in?ation as glossed over with cpi-adjusted statistics is the wrong measure to use? Our tracking of the value-to-volume gap tells us instinctively this has been one of the built-in problems in tracking trade for years. It did not matter when volumes and values were similar. But it matters now.

The markets recently learned the U.S. consumer has shifted down demand, especially in volume terms. No doubt the U.S. consumer will stage rebounds in demand, especially if oil prices come back below some magic number such as $100. But what if the American consumer is forced to dispense with his or her disposable consumer society behavior for a couple more years because the pocketbook has shrunk and goods are structurally higher in price?

Inflation that has progressed from commodities to ?nished goods — higher steel prices to higher ship prices, to higher prices of Chinese goods — should work in reverse once demand slows. But not before bringing down average volume demand growth rates further. Until 2007, long-term growth of volumes from Asia to the U.S. was about 10%, with 2007 itself already coming at zero. The current run rate for 2008 is looking to be minus 2% if we stop decelerating in the ?rst half of 2008. To put that in perspective, long-term global containerized trade has runningaround 9% to 10% , with the U.S. driving the largest portion of that growth until 2006 and 2007, and Europe taking over in 2007.

Now the picture we are getting in 2008 is worse than expected in volume terms. Into the U.S., growth not only has slowed into ?at or negative year-on-year growth for a few months, but we are now down for the last 12 months on average. We have to go back to 1995 and 1996 to ?nd the same kind of volume slowdown. And Europe inbound container volume, which has seen long-term growth closer to 15% and about 19% in 2007, has also decelerated rapidly and is now running at the 10% level in 2008, and even that level is thanks to some continued pocketsof strength in the newer markets of Eastern Europe. The areas of weakness encompass most of old Europe.

To make matters worse, new ships are increasing the supply of shipping capacity. Demand in volume terms has decelerated about 10 percentage points on the key Asia-export trade lanes, while the more expensive recently ordered ships (regardless of operation speeds) will only be coming on line faster in the coming two to three years.

In?ation is still on the rise. Input, production and transport costs have all gone up. The question is when and how prices might fall as excess capacity forces shippers to compete for scarce customers. For the moment, we can’t assume cost pressures will ease soon. Thus we can’t assume demand volumes are finished declining — though we can speculate as to a potential deceleration in declines. As demand declines, there will be great opportunities to lower transport costs, and also to identify investment opportunities once lower growth gets priced in. But Asia needs to face the fact the run rate of demand is shifting down and that we don’t know just yet how this story will end.

Author: Charles De Trenck / Publisher: SCMO


More China in early 90s… and the beauty and madness of working for a small company

Reproduced from a 1993 article by courtesy of "I am an analyst"

Working for a smaller company is a great way to get work experience. Combine that with a wild west experience like China’s budding stock market of the early 90s, and you get turbocharged learning experiences. Today, you might have had to go to Vietnam, Cambodia and parts of India to get equivalent experiences.

By 1993 I was an investment analyst at Kerry Securities doing China research. The trips that left their biggest impression on me were very similar to my experiences in late-80s.

The single strangest experience I had around 1993 had been to take a big bus full of Japanese fund managers from Kokusai Asset Management to visit factories just outside Shenzhen. It was springtime and the rains were simply incredible downpours. At the same time, outlying Shenzhen areas were just in the process of building many of its highways.

I still remember the look on the fund managers faces as they looked out the bus window at the impact of the rains. There was no talking, as all their jawbones dropped and their eyes popped out of their heads as they stared at what reminded me of a scene from the film Terminator.

We were driving on mud roads, and all we could see everywhere was mud. Mud on the half-built highways, mud on the roads to the sides of the highways, and mud up to and into the small side-shops by the roads. The entire outskirts of Shenzhen were one mud pool construction site.

A related trip around the same time was when I rented out a car in Shenzhen for the day to take a group of Swiss fund managers between Hong Kong and Guangzhou. The purpose was to visit a few factories and tour the economic situation of Guangdong north of Shenzhen up to the Dongguan area (the most concentrated industrial area in Guangdong).

We traveled over parts of the Hopewell Superhighway that were built, and then around the side roads. The investors were shocked at the quality of the work being done. Typically Shanghai infrastructure projects were known, even in the 90s, to be generally good quality. But what we saw in Guangdong in 1993 looked like it would fall apart by 1997. The cement work for the highway flyovers just looked terrible. I explained to the managers stories circulating at the time that Gordon Wu had blown his cover with locals when he bragged about the profits he was going to make (anything over 15% annual returns came to be a no-no, and Wu bragged returns far higher), and also a contracting system that forced separate contract work to be done every two or so kilometers.

The Hopewell construction contracts were negotiated with multiple local parties. And every contractor brought different, generally low quality, work to their part of the highway. When we tried travelling over parts of the road at higher speeds, the car’s suspension would swing up and down to reflect the road bumps the suspension was absorbing. During the same period more stories surfaced about PLA army trucks being one of the main modes of freight transport on highways, and how overloaded and damaging they were to the roads…. The army trucks by-passed tolls and destroyed the roads at the same time. What a joke that was.

Author: Charles De Trenck / Publisher: SCMO