At the start of the Chinese Lunar New Year, the Supply Chain Matters blog reflects on faster-moving changes in global supply and customer demand networks and on the implications for a year of constant challenge.

Tomorrow marks the start of the Chinese Lunar New Year and initiation of the Year of the Pig celebrations. The 11-day celebration begins with the Spring Festival that extends from February 5 thru February 19th. That is followed by the Lantern Festival that extends from February 16 thru February 19th.  The New Year is celebrated all across China and other Asian nations, and most businesses are closed as workers make their traditional pilgrimage to the cities and towns of parents and relatives.  Year of the Pig

Certain traditions are practiced during the celebration period which might include not uttering negative words, refraining from cleaning the household, not demanding debt repayment and resolving any disputes peacefully.

Industry supply chain management teams factor various China based supply and demand network planning assumptions to muted or inactive during this period, perhaps with the exception of certain consumer goods.  Supply planning often reflects pre-ordering and shipment of needed components prior to the New Year celebration.

The 2019 Year of the Pig has special significance for a number of other reasons.

Looming trade and tariff actions among China and the United States prompted many business sales and operations (S&OP) teams to initiate pre-ordering of component or finished goods inventory and safety stocks to avoid the imposition of steep tariffs commencing at the beginning of 2019. Some initiated such actions in the Q2-Q3 2018 period.

Normally, S&OP and global transportation provides plan for a surge in supply network shipment activity right after the Lunar New Year celebration. The year 2019 might well be different, without any discernable surge.

 

Economic Slowdown in China

Headlines continue to echo that China’s slowing economy is sending shock waves across global supply and customer demand networks.

Global manufacturing and supply chain activity as reflected by the J.P. Morgan Global Manufacturing PMI, published by IHS Markit Ltd. reached a two-year low by the end of December 2018. The index fell to a 27-month low of 51.5 with the narrative reflecting cascading impacts for both China’s de-acceleration and the U.S. and China tariff actions. Tensions and a global trade and tariff induced slowdown are having an effect. Signs of overall economic slowdown across China are more overt, as is the cascading impacts to other global regions.

Supply Chain Matters, along with broader global media highlighted Apple’s embarrassing and sudden warning of a $5 billion revenue shortfall for the fiscal Q4, a thud heard around the world, mostly attributed to iPhone sales shortfalls across China.  The Apple revenue and profit warning was followed by Samsung, LG Electronics and other firms. The Internal Monetary Fund (IMF) has subsequently revised its Global Economic Outlook  downward also citing concerns that global economic growth is losing momentum.

Global-based manufacturers such as Caterpillar, Ford and 3M have in-turn, warned of slowing sales involving China.

German-based manufacturing and capital goods producers continue to feel the effects of decreasing demand for their products and services across China.

 

More Visible Tariff Impacts

Many high-tech and consumer electronics industry suppliers, many of which were suppliers to the likes of Apple and Samsung, are indicating increased supply costs along with reduced revenue expectations.

Regarding the imposition of higher steel and aluminum import tariffs by the Trump Administration, U.S. auto and equipment manufacturers continue to quantify the cost impacts of added tariffs. Ford Motor indicated $1.1 billion in higher steel and aluminum costs for all of 2018. Caterpillar’s cost increases were pegged at  $100 million while Whirlpool indicated $300 million. At the same time, business media reports that China’s Q4 exports of steel products increased 3.5 percent, reportedly to offset slowdowns in domestic production.

U.S. based farmers and agricultural goods producers continue to smart from dramatically reduced Chinese demand for soybeans, cranberries, fruits and fish products brought about by the imposition of Chinese import tariffs.

 

Post New Year Supply and Demand Network Implications

Rather than any post-February pick-up in either supply and demand network activity levels involving China, we believe that industry supply chain management teams will be more occupied with having to manage the implications of lower revenues from a key growth regions, along with added supply network costs.

Such implications lead to a stark reality of lower overall revenues and added costs. It may mean raising end-item pricing, if the specific market can tolerate such increases.

Some manufacturers are pressuring suppliers to adsorb the bulk of added tariff costs, not necessarily a wise longer-term strategy. Suppliers located in China are already dealing with ongoing economic stress.

There are now more discernable signs of businesses in the process of moving component or finished goods sourcing to other Asian or domestic sourcing. The December global-wide PMI indices show positive activity momentum involving India and Vietnam.  Foxconn, at the behest of major customer Apple, is reportedly actively pursuing an expanded iPhone production presence in India.

 

Year of The Pig Connotations

The last occurrence of the Year of the Pig was in 2007, just before the onslaught of the global recession of 2018-2009. We certainly should not dwell on such history or omens.

It is thought that this Lunar Year of the Pig may not be overly fortunate. It is supposedly not a good time to make investments or to try your hand at gaming. However, if individuals or perhaps teams, can avoid potentially large pitfalls, they will escape the year relatively unscathed and in great position for next year.

We submit, this may be the implication for industry supply chain management teams, both residing in China and globally. The implications of a decelerating Chinese economy and added supply network costs must be balanced with an optimism that perhaps the United States and China can come to some resolution of trade, market access and intellectual property protection policies.

In the meantime, the normal playbooks for post Lunar New Year activities are likely not applicable in the year 2019.

We extend to our China and Asia based readers a Happy New Year. Enjoy the celebrations of family and dear friends.

For global industry supply chain teams, the Year of the Pig implies different thinking and different operational strategies for coping and mitigating compounding forces of change and actions.

Bob Ferrari

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