The Supply Chain Matters blog provides our latest news capsule format follow-up relative to the updating of prior supply chain management related developments we have shared with readers.

 

This edition provides four supply chain focused updates related to the following:

IMF Once Again Trims Global GDP Forecast

Walmart Trims its Profitability Outlook

Airbus Reluctantly Announces Cutback in Monthly Production Goals

More Cloud Based Technology Providers Providing Cautionary Outlooks

 

 

IMF Once Again Trims Global GDP Forecast

Last week in  a prior published mid-year assessment published by our research arm, we revisited previous published 2022 predictions assumptions related to now prevailing global economic, financial and manufacturing outlook perspectives. Regarding the latter, we cited the latest revised economic outlook from the World Bank which trimmed this organization’s  forecast for expected 2022 global GDP growth to 2.9 percent, two percentage points lower than earlier forecasted.

This week, citing a “gloomy and more uncertain” global economy, the International Monetary Fund (IMF) once again cut its global GDP growth projections for 2022 and 2023. This agency now expects the global economy to grow at a rate of 3.2 percent in 2022, and 2.9 percent in 2023. This latest forecast amounts to a trimming of 0.4 and 0.7 percentage points from projections published in April. The original IMF forecast for 2022 GDP growth was 4.9 percent in the agency’s World Economic Outlook report published in October of last year.

The latest downward revisions were reportedly driven by developments occurring in the U.S., China and India, along with the continued effects of the Russia and Ukraine conflict on the Eurozone sector.

The forecast for U.S. GDP was lowered 1.4 percentage points to 2.3 percent for 2022, while that of China has been timed 1.1 percentage points to an unprecedented 3.3 percent GDP growth for 2022. The outlook for the Eurozone was trimmed 0.2 percentage points to 2.6 percent GDP growth, while the forecast for India was cut 0.8 percentage points to 7.4 percent GDP growth.

Global inflation is forecasted to track at 6.6 percent in advanced economies, and 9.5 percent in emerging market and developing economies this year.  The latter is especially worrisome from a global supply chain perspective.

The IMF forecast further points to a “plausible but less likely scenario” that could have 2022 GDP falling to around 2.6 percent in 2022, and 2 percent in 2023.

U.S. GDP Growth Fell in Q2

This week, the U.S. Commerce Department reported that GDP fell at an inflation and seasonally adjusted annual rate of 0.9 percent in the second quarter. That represented a further decline from the 1.6 rate of contraction reported for the first quarter. This latest GDP report pointed to high inflation, eroding consumer sentiment and continued supply chain volatility as contributing factors.

While the first half numbers technically meet a common definition of economic recession, namely two successive quarters of declining output, the National Bureau of Economic Research has the ultimate call as to the state of recession.

As of this week, the U.S. Federal Reserve Bank has raised interest rates a cumulative 2.5 percentage points in efforts to dampen the rate of inflation occurring in the U.S. economy.

 

Walmart Trims its Profitability Outlook

We published our commentary in late May regarding global retailer Walmart’ s report of Q1-2022 financial performance that badly missed on overall profitability. Walmart CEO Doug McMillon indicated to investors at the time that inflationary costs related to rising fuel and inventory costs created more pressures on margins than previously expected and that the retailer was now adjusting.

This week came the sudden and not anticipated news that the retailer has now cut its quarterly and full year profit expectations indicating in part that high rates of inflation within the U.S. were causing shoppers to spend more on food necessities and less on discretionary items. The influential retailer now anticipates operating profits for the full year to decline as much as 13 percent.

News of the profit downgrade prompted not only the decline of Walmart stock, but other retailers including Amazon, Target and others. Both retailers have surprised Wall Street with unexpected profitability performance, while Target also formally warned on declining expected profitability in the coming quarters.

Walmart executives now expect total sales to increase in this second quarter from higher shopper volumes as more consumers shop for lower prices, the company would post lower profits because of ongoing declines in discretionary item sales coupled with ongoing supply chain related cost increases.

In a related development, The Wall Street Journal reported this week that based on IRI data, more cost-conscious consumers are favoring lower cost store brands in grocery and pantry shopping sold by the largest grocery retailers in the U.S. to include Costco, Kroeger and Walmart. Store brands’ share of grocery sales are reportedly now at a reported rate of 21.6 percent, surpassing pre-pandemic levels, after losing ground to branded named items during the pandemic. One of the reported reasons is that generic food manufacturers are offering larger discounts after struggling with supply network issues during the pandemic.

 

Airbus Reluctantly Announces Cutback in Monthly Production Goals

In a Supply Chain Matters posting in early May we highlighted that leading commercial aircraft manufacturer Airbus had established even more aggressive plans to ramp-up production of the manufacturer’s industry’s high demand A320 single aisle family of aircraft. At the time, this aerospace manufacturer reiterated a forecast to produce at least 720 jetliner deliveries in 2022, even with challenges related to the Russia-Ukraine conflict and the ongoing Covid-19 restrictions occurring across major industrial regions of China. A reported revised plan at the time was move toward a monthly production target of 65 single-aisle A320 aircraft per month by the middle of 2023.

Bloomberg and industry media are reporting that Airbus on Wednesday revised this year’s delivery forecast to just 700 commercial aircraft, compared to the earlier target. Further, the planned monthly production rate of 65 A320 aircraft previously targeted for the summer of 2023 is being pushed back to early 2024.

Airbus CEO Guillaume Faury indicated in a statement to media: “We’ve come to the conclusion that the supply chain was not going to be able to support the previous plan. It would have been difficult to catch-up in the second half.

The revelation has been noted as unexpected since Faury had indicated more optimism at the recently concluded Farnborough Airshow event. The company reportedly has close to 100 unfinished new aircraft undelivered because of missing components.

The implication is that with current order backlogs, A321 family production capacity is likely sold out until 2027 at the earliest. The most obvious weak link has been the reliable supply of new aircraft engines required to meet accelerated monthly output, along with other electronic and airframe components.

News of this setback has caused the company’s stock to decline in equity markets.

Industry rival Boeing formally reported second-quarter financial performance this week headlined with the first occurrence of cash flow positive in many prior quarters and an indication that the manufacturer remains on track to achieve positive free cash flow for 2022. Aircraft deliveries were 121 in the second quarter compared to 79 in the year-ago quarter. Boeing reiterated plans for 737 family production to be sustained at 31 per month, and further reported working with regulators on final actions in order to resume deliveries of Boeing 787 wide aisle Dreamliner aircraft after months of delays due to manufacturing and engineering shortcomings. CEO David Calhoun has also indicated that engine delays, supply chain and labor constraints have hampered the ability to ramp monthly production levels.

 

More Cloud Based Technology Providers Providing Cautionary Outlooks

Supply Chain Matters along with other technology media has been highlighting increasing developments related to the more discerning signs of global economic slowdown and their affects on technology markets. We previously featured commentaries relative to the implications of a more conservative private equity funding environment in the coming months along with some selective head count reductions being undertaken by high flying providers.

Formal financial reporting among other high profile tech companies provides an added list of providers now undertaking financial assessments or belt tightening in the light of a more muted growth  Among some noteworthy reporting has been that of Alphabet, Microsoft and Shopify. A common theme has been foreign currency and suspended business headwinds as a result of the ongoing Russia and Ukraine conflict, some softening of Cloud business segments and prior aggressive market growth assumptions fueled by the pandemic now being dampened by new realities.

This week Google parent Alphabet Inc. reported its slowest quarterly revenue sales growth in two years, and a 14 percent decline in net income as economic conditions weighted on results for some business segments. Noted was a pull back in spending from major advertisers while the tech provider’s highly watched Google Cloud division recorded year-over-year quarterly sales growth of $36 percent to $6.3 billion, and an operating loss of $858 million. The loss was attributed to ongoing efforts to catch up with Cloud platform dominants Amazon Web Services and Microsoft.  Google CEO Sundar Pichai has indicated that hiring levels would be slowed for the remainder of the year and urged employees to work with greater urgency.

Microsoft reported its slowest earnings momentum in over two years as fiscal fourth quarter financial performance missed on top and bottom lines. The company recorded a 12 percent increase in revenues compared with 18 percent growth in the prior quarter. Foreign exchange headwinds reportedly reduced top line revenue growth by $595 million. Revenue attributed to Azure and other Cloud services reportedly grew by 40 percent compared to 46 percent in the prior quarter. According to reporting by The Wall Street Journal, the company has now imposed a hiring freeze on various divisions and as laid off a reportedly small number of employees, incurring $113 million in severance payments during the most recent quarter. Microsoft executives are maintaining a positive outlook for the coming months.

Retail Cloud platform provider Shopify indicated this week that it will trim its workforce by upwards of 1,000 employees, or 10 percent of its global workforce, as market growth projections have not lived up to this tech provider’s original estimates. In an internal memo sent to employees and reported by The Wall Street Journal, CEO Tobi Lutke indicated that layoffs were necessary as consumers have resumed their physical store shopping habits. The company had already warned investors that revenue growth is expected to slow in the coming months. These layoffs are reportedly the first meaningful cutting undertaken since the tech platform provider was founded in 2016. In May, we highlighted Shopify’s announced deal to acquire online order fulfillment services provider Deliverr for $2.1 billion in cash and stock, the largest deal in the company’s history. The plan is to reportedly integrate Deliverr with Shopify’s direct-to-consumer fulfillment operations including a prior acquisition of warehouse focused collaborative robotics provider 6 River Systems within owned and partner operated warehouses. Shopify acquired 6 River Systems in 2019 for $450 million.

 

 

© Copyright 2022, The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.