As Supply Chain Matters readers are acutely aware, industry supply chain and global trade developments related to the ongoing global COVID-19 pandemic and escalating trade tensions continue to move at a rapid clip. In this end of business week Friday posting, we update readers of some of the most significant developments.
Semiconductor and High-Tech Supply Networks
We have previously alerted our readers to significantly escalating tensions involving semiconductor supply networks and the potential bifurcation of global smartphone and telecommunications supply networks over time.
Business Network CNBC now reports that after TSMC’s announcement regarding plans to build a new 5 nanometer fab facility in the United states. China’s largest chipmaker, Semiconductor Manufacturing International Corporation (SMIC) has filed a listing to raise upwards of $2.8 billion in order to invest in added technology and production capabilities. The move was in addition to a roughly $2.2 billion investment received from state-owned investors. According to the report, SMIC’s move is part of the broader push for China’s semiconductor industry self-reliance.
The Wall Street Journal reported that just as we mentioned as a possibility, the U.S. semiconductor industry is gearing-up for a lobbying push towards influencing billions of dollars in U.S. federal funding for factory building and research with the goal of keeping the U.S. ahead of China and other countries on production process technologies. The Semiconductor Industry Association reportedly has $37 billion in proposals that include $5 billion for subsidies for U.S. chip production construction, $17 billion for research, and $15 billion in block grants for U.S. states seeking to attract semiconductor industry investment.
Finally, a report published by the South China Morning Post, How Covid-19 changes the geopolitics of semiconductor supply chains, authored by two global researchers succinctly describe four global supply network risks:
Concentration– Semiconductor industry suppliers having risk exposure to single countries.
Overspecialization– Because of very high capital costs, industry companies are highly specialized within a few geographic regions.
Business Continuity– in the area od specialized semiconductor manufacturing equipment, one supplier can be the global supplier.
Geopolitical Risk– the specific mention of the heightened trade and technology tensions among the U.S. and China.
We highlight these four described risks because it behooves high-tech, consumer electronics and semiconductor supply management teams to pay very close attention to ongoing developments in these areas, and to build risk mitigation plans concerning specific countries, regions and/or component areas.
U.S. and China Escalating Trade Tensions
Developments over these past few days point to escalating trade tensions among the U.S. and China.
Last week, President Trump announced a series of actions related to stripping Hong Kong of special trading partner status, as well as a series of tighter trade restrictions concerning China.
Earlier the week, both Reuters and Bloomberg reported that China’s government leaders ordered state-owned firm to pause large-scale purchases of major U.S. farm and pork products that were outline in the termed Phase One trade agreement signed in January among the two nations.
Various reports indicate that from the lens of China, the ongoing coronavirus outbreak has dampened China’s domestic demand for such products, as Chinese consumers cutback on overall spending. A report by the South China Morning Post cited sources indicating that Beijing was evaluating the ongoing escalations of tensions. That report indicated that the Phase One trade deal might be in jeopardy amid the tensions over China’s crackdown on Hong Kong.
Again, of coincidence is that such purchases were part of the trade ideal to appease U.S. Midwest farmers, who represent an important voting block for Trump in the November election.
Various trade and commodity experts have attributed these moves as re-escalated tensions with Hong Kong developments now being the flashpoints. There are now building concerns for yet a return to added tariff actions and the timing is not good given the fragile state of multi-industry supply chains at this juncture.
Another brewing conflict involves re-authorization of commercial airline flights from Chinese flagged carriers flying to and from the United States, and foreign airlines flying into and out of various Chinese major airports. The Trump Administration initially announced an order suspending Chinese passenger airlines from flying to the U.S. followed by China’s Civil Aviation Administration indicating it would allow foreign carriers to increase flights starting June 8, but with limited frequency. As we publish this commentary, both countries continue to go back and forth with announcements. Since upwards of 60 percent of air shipments from China fly in the cargo holds of commercial aircraft, this area needs to be watched for added tensions.
Commercial Aircraft Demand and Supply Networks
Adding to our multiple updates regarding the significant disruption to both Airbus and Boeing’s aircraft and demand networks, is a further development regarding European based suppliers.
The Financial Times (Paid subscription required) reported this week that three former and highly respected senior Airbus executives are being recalled from retirement to: “defend the industry’s fragile supply chain against a devastating collapse in demand.”
The goal is to bring together aerospace manufacturers “to plan for the survival of their shared domestic suppliers.” The report cites some industry supplier executives as indicating that overall supply network capacity, including major aircraft engine suppliers, may need to be reduced by a minimum of 30 to 40 percent for the next several years, not just months.
The other concern is that there exists in the lower tiers of Europe’s industry supplier networks, a proliferation of smaller companies with fewer than 100 employees in supplying critical machining, structural and surface treatments. One statistic shared is that in the United Kingdom, 725 out of 820 specialty suppliers have fewer than 50 employees, and the magnitude of the industry aircraft demand disruption will likely place many of such suppliers into a financial crunch. The risk is literally survival.
The reported objectives for these three recalled senior executives are to win government support: “for a radical restructuring of their highly fragmented domestic supply chains, so Europe’s three biggest aerospace industries will be competitive when demand eventually returns.”
Online Customer Fulfillment
On Monday we highlighted that the surge in online ordering activity is taxing carrier networks and performance, and how UPS announced added surcharges and FedEx, daily shipping volume restrictions for retail shippers. The result was the risk of even higher costs related to online customer fulfillment for major retailers, while online volumes soar.
Rival parcel carrier Fedex was likely not going to miss an added revenue opportunity, and on Wednesday, announced its own added surcharges to offset increased package volumes, joining the UPS rate hike. Once again, the surcharges are targeted at some of the largest online fulfillment shippers at a time when many consumers are relying on online for the bulk of their shopping needs. The FedEx r surcharges go into effect on Monday, June 8 and include surcharges related to residential deliveries including SmartPost shipments, and a hefty $30 surcharge for deemed oversized goods deliveries.
Once again, online retailers will have to decide as to whether to adsorb such added costs or pass them along to consumers in added shipping charges.
The bottom line is that multi-industry supply chain management, procurement and logistics teams have added developments to concern themselves with, as events continue to evolve on a daily and weekly basis.
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