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Supply Chain Strategy Collides With Logistical Reality

Companies are focused on diversifying supply chains to keep goods flowing, but several challenges await those planning on reshoring.

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Companies are focused on diversifying supply chains to keep goods flowing, but several challenges await those planning on reshoring.

The nature of globalization is changing. Supply chains are challenged – from tariffs to the pandemic, and Russia’s invasion of Ukraine. The strategy recommendation is resiliency through diversification. The logistics are incredibly complex. We will look at some of the top factors driving this change.

Tariffs, Russia and Ukraine

Let’s start with the tariffs that were initiated by the U.S. in 2018 that led to businesses and consumers paying more for products imported from countries where the duties were applied. What started out as a trickle with tariffs on $8.5 billion on imports of solar panels and $1.8 billion in washing machines from China snowballed into tariffs on $350 billion of Chinese imports. Tariffs were then imposed on imports of steel and aluminum mostly from Canada, the EU, Mexico, and South Korea. 

What we have learned from the tariffs imposed by the different countries – the U.S., China, the European Union, Canada, Japan, Mexico, and others – is that such measures, once introduced, can remain in place even when the political climate changes. For instance, the Biden administration has yet to remove all of the tariffs that went into effect during the Trump years, although some of the tariffs are being removed in the wake of Russia’s invasion of Ukraine to help reduce inflation pressures. 

Russia is a major exporter of oil and food products like wheat. The U.S. ban on Russian oil imports helped rally futures prices to over $100 per barrel and gasoline prices at the pump to over $4 a gallon. The EU, which gets 26% of its oil and 40% of its natural gas from Russia, is considering banning Russian oil imports. The war has also elevated shipping costs that were on their way down after the big spike during the pandemic when demand for manufactured goods surged.

Shipping costs tick higher but are well below pandemic highs

Lessons From the Pandemic

The pandemic has taught us that different approaches to managing covid-19 have led to very different challenges for supply chains, depending on the location. Specifically, there are vast differences between China’s zero-covid policy and the less stringent approaches taken in the U.S. and Europe.

Millions of people in China are in lockdowns or have their movements restricted while hundreds of businesses have halted operations as the government tries to contain a new wave of the pandemic. The restrictions come at a time when China’s economic growth has slowed since the last quarter of 2021. By contrast, in the U.S., the mask mandate when traveling in public transportation has been struck down by a U.S. court, and attendance at open events is rising as spring weather coaxes people into going out more -- although attendance at public venues still remains far behind pre-pandemic levels.

Strategy Is Easier Than Logistics

From a strategy perspective, companies all over the world are rethinking their supply chains. Yet, from a logistical perspective, companies are rapidly realizing that shifting supply chains can be arduous. Two important points companies consider when reshoring are maintaining or improving market share, and managing operational costs effectively while trying to improve supply-chain resiliency.

Some companies may feel confident they can pass on the extra costs to their clients, but others could be concerned that if a major competitor stays with its old low-cost model, they can grab market share with lower costs. That is, shifting supply chains involves some game theory in terms of what one’s competitors might do.

The Organization of Economic and Co-operation and Development (OECD) said in a report that greenfield investments in emerging markets and developing economies in 2021 were below 2019 levels by 43%. Greenfield is a form of foreign direct investment where a parent company builds its operations from the ground up in another country. The decline in this type of investment reflects the difficulty of moving supply chains.

Challenges to Reshoring Operations

Let’s look at some of the cost and complexity considerations in uprooting a production center from one country to the next, or in setting up a parallel manufacturing center in a second or third country.

Input supply: In moving to another country to manufacture a product, a company needs to make sure the country it is relocating to has the raw materials to produce its product. For instance, if you are in the business of making furniture, you’d need to pick a country that has the relevant type of materials to build your furniture. The raw material typically has to be close to where your plant is located, and you’d need to ensure there are proper modes of transportation to get the raw materials into the plant. There also has to be a relatively low-cost workforce to ensure your competitiveness.

Output delivery: How do you get the finished product delivered to your clients? The company needs access to proper roads, rail lines, and ports from the new manufacturing site to deliver the products to customers in other countries. Shipping costs from the point of manufacturing to destination markets could also play an important role in setting up new operations in a second or third country.

Dependency on highly specific and single-source inputs: Some key inputs to certain manufactured goods are rare or are produced only in a few places. For example, the Republic of Congo is the world’s key producer of cobalt. Manufacturing processes dependent on highly specific inputs from relatively few sources will find it hard to hedge.

Input cost increases: Input costs (producer prices?) are currently rising more rapidly than the rate of consumer price inflation. This higher cost factor comes at a time when one may want to decrease manufacturing costs. The U.S. Producer Price Index for all final goods and services is running (as of April 2022) at 11% above a year ago, while the goods component of the producer price index is running at a more elevated 16%.

Skilled labor: Reshoring operations depend to a large extent on the availability of a trained workforce or a pool of workers that can be readily trained in skilled operations. The availability of labor in China has been one of its advantages, but that position is being challenged by emerging nations like Vietnam, the Philippines, Bangladesh, Mexico, and others.

Wages: Wages are rising in many countries, which also makes the process more expensive and difficult. Higher wages may also be accompanied by a higher probability of labor strife, strikes, and stoppages. For example, unions at U.S. West Coast ports are currently negotiating a new labor contract.

Prices paid by wholesalers have been rising
A tight labor market has pushed wages higher

Ability to pass on costs: Companies in different industries will have varying opportunities to pass on costs to their clients, and this will depend in part on their competitive environment. Companies with strong competition and tight margins are much less likely to shift their supply chains unless absolutely essential.

Unrelated, yet simultaneous considerations: Central banks are withdrawing accommodation, which has implications for foreign exchange. The Japanese yen had slumped to a 20-year low against the U.S. dollar amid a divergence in monetary policies between the two countries -- the Federal Reserve has raised rates by 75 basis points in two moves since March, while the Bank of Japan is easing monetary policy. The People’s Bank of China is also easing, with the yuan falling to a one-year low against the greenback.

Yuan’s weakness reflects concerns over China’s growth

Bottom line

From a strategy perspective, it remains to be seen whether we are entering a period of de-globalization and economic fragmentation. From a logistics perspective, the process of reshoring operations is difficult, complex, takes years, and is costly, with a relatively high risk to capital investment. Some companies might find it hard to pass on costs in industries with strong competition and tight margins, while also managing the impacts of inflation and changing central bank policies.

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How Inflation Changes Culture

How Inflation Changes Culture

Authored by Jeffrey Tucker via DailyReckoning.com,

The midterm elections are over (no Red Wave), but nothing…

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How Inflation Changes Culture

Authored by Jeffrey Tucker via DailyReckoning.com,

The midterm elections are over (no Red Wave), but nothing has changed. In fact, the Biden regime will probably become even more emboldened to pursue destructive economic policies because it will interpret the lack of a Red Wave as some kind of mandate.

Every day seems to be a day of spin, with every regime apologist assuring the public that inflation is getting better. Just look at the wonderful trend line! They point to the latest inflation numbers, which were down a bit from the month prior.

The regime insists that yes, inflation will vex us for a bit more time but will settle down in a few months. Plus, the president is working to fix this! And we know the American people are on board with him since no Red Wave materialized.

But in the footnotes, you’ll find the truth: it was a tiny drop and mostly for technical reasons and the main reason for the drop has already disappeared from the price trends.

Has any political propaganda on this topic ever been this ineffective? It’s truly a joke.

Where’s the Relief Coming From?

The producer price index that came out recently paints a clearer picture. It’s grim. It reveals no softening at all. In fact, it shows that there are plenty of coming price increases. Here is the index by commodities from 2013 to the present.

Remember how last year many people finally came to the conclusion that we had to learn to live with COVID? That was a smart choice because there was no way that the China-style suppression method could work.

Well, here we are now with a preventable inflation pandemic and the realization that we have to learn to live with inflation. Soon we’ll realize that we have to live with recession at the same time.

But what does this mean?

The impact will be felt not just in terms of economics but in culture. Inflation causes a society-wide shortening of time horizons.

True Prosperity

Let’s review some basics. All societies are born desperately poor, fated to live off foraging and just getting by. Prosperity is built through the construction of capital, which is the institution that embodies forward thinking.

To make capital requires the deferral of consumption: you have to give up some today in order to make tools that enable more consumption tomorrow. This means discipline and a future orientation. And it means, above all, savings that can be invested in productive projects. Only through that path can societies grow rich.

A key component of this concerns the stability of the medium of exchange. And not just stability: a currency that rises in value over time incentivizes saving and thus investing for the long term.

The late 19th century provided a good example of this. Under the gold standard, money grew more valuable over time, thus rewarding long-term thinking and instilling that outlook in the culture at large.

Live for Today

Inflation has the opposite effect. It punishes saving. It forces a penalty on economic behavior that is future-oriented. That means also discouraging investment in long-term projects, which is the whole key to building a complex division of labor and causing wealth to emerge from the muck of the state of nature. Every bit of inflation trims back that future orientation.

Hyperinflation utterly wrecks it.

Living for the day becomes the theme. Taking what you can get now is the method and the theme. Grasping and spending. You might as well because the money is only going down in value and goods are in ever shorter supply.

Better to live hard and short and forget the future. Go into debt if possible. Let the devaluation itself pay the price.

The Seeds of Destruction

Once this attitude becomes instilled in a prosperous society, what we call civilization gradually devolves. If inflation persists, this kind of short-term thinking can wreck everything.

This is why inflation is not just about rising prices. It’s about declining prosperity, the punishing of thrift, the discouragement of financial responsibility, and a culture that gradually falls apart.

Another factor in reducing time horizons is legal instability. This was my first concern when the lockdowns began. Why would anyone start a business if governments can just shut it down on a whim? Why plan for the future when that future can be wrecked by the stroke of a pen?

Many people had assumed that this new path would be short-lived. Surely the politicians would wise up and stop the madness. Surely! Tragically, it got worse and worse. The spending and printing began and ramped up over time. It was a perfect storm of sheer madness, and now we are paying the highest possible price.

The Hinge of History

We need to speak frankly about what’s happening to the global economy. It’s not just about supply chain breakages. Those can be repaired. It’s not just about inflation affecting every country. We are living amidst a fundamental upheaval in the whole world.

The most significant single danger to global prosperity now comes in the form of a devastating and deeply tragic wreckage of the country that was set to lead the world in finance and technology: China.

The WSJ summarizes the current pain:

China in 2021 accounted for 18.1% of global gross domestic product, according to International Monetary Fund data, behind the U.S. at 23.9% but ahead of the 27 members of the European Union at 17.8%. It accounts for almost a third of global manufacturing output, according to United Nations data from 2020. China’s economy expanded modestly at the beginning of the year but data for March and April point to a sharp slowdown.

The trouble there traces to the top. When Xi Jinping locked down Wuhan, the world celebrated him for achieving what no other leader in history had achieved: the eradication of a virus in one country. Even now, he gets accolades for this.

The rest of the world followed, and elites in all countries said that this path was the future.

Going Backwards

Now the virus is on the loose all over the country, and the eradication methods are intensifying. This is crushing economic growth and now threatening genuine economic depression in the country that only a few years ago was seen as the greatest economic engine of the world.

It’s truly the case that Xi Jinping has put his personal pride above the well-being of all people in China. The scientists in the country know that he is wrong about this but no one is in a position to tell him.

We cannot really trust the data coming out of China but officially the rate of infection in that country is one of the lowest in the world. Billions more people need to get the bug and recover in order to have anything close to herd immunity. This means that lockdowns are the way for years to come so long as the present regime remains in power.

American prosperity for decades has relied on: relatively low inflation, fairly stable rules of the game, and widening trade with the world and China in particular. All three are at an end. Yes, it is heartbreaking to watch it all unfold.

I’m not defending China’s human rights abuses. Far from it. But the best way to end these abuses is through engagement, not estrangement.

We all need hope right now but it’s very difficult to find, since we are on a course that is not likely to be fixed for a very long time.

Tyler Durden Wed, 11/30/2022 - 19:05

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Mish’s Daily: The Next Stop on This Fierce Bear Market Rally: A Global Recession?

Determining whether we are in a risk-on or risk-off climate is challenging, especially after a fantastic day of gains in every major US index.We should…

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Determining whether we are in a risk-on or risk-off climate is challenging, especially after a fantastic day of gains in every major US index.

We should be in a risk-on environment. The Chinese stock market even rose, with technology and electric vehicles leading, as investors hoped for a more liberal COVID-19 governmental policy. With a gain of 4.4%, the Nasdaq composite, which had been the slacker, led gains among major US indices.

The S&P 500 (represented above by the SPY ETF) also surpassed its 200-day moving average for the first time in seven months. Markets are also approaching critical technical levels, which can accentuate positive or negative data, so keep an eye out tomorrow for PCE, the Fed's favorite inflation gauge.

Regardless of today's market action, there are indications that a global recession is imminent, with part of Europe potentially already in a recession and the US possibly next year. In particular, a rare 20-year recession signal is flashing red.

Global bonds joined US peers in signaling a recession, with a gauge measuring the global yield curve inverting for the first time in at least two decades.

According to Bloomberg Global Aggregate bond sub-indices, the average yield on government debt expiring in 10 years or more has slipped below that on short-term bond yields. On the heels of Fed Chairman Powell's dovish remarks today, the stock market rallied with heavy volume. Yet global bond yields signal a recession ahead.

Market conditions are ripe with profitable trading opportunities. Investors should pay close attention to commodities, currencies, bond yields, and inflation. If the PCE print is higher than expected, one-third or even more of today's gains could be erased quickly. On the flip side, if PCE is lower than expected, stocks might continue to run higher.

It is crucial to proceed with caution, as there is the potential for significant volatility in the coming weeks and months. We believe this ferocious bear market rally still has some legs – but don't wait too long to make your move, or your portfolio might get clawed quickly. If you are looking to capitalize on this ferocious bear market rally, our team can help your trading to protect your portfolio while allowing you to benefit from bullish trends.

Rob Quinn, our Chief Strategy Consultant, can provide more information about our trading and Mish's Premium Trading Service. Click here to learn more about Mish's Premium trading service with a complimentary one-on-one consultation.

"I grew my money tree and so can you!" - Mish Schneider

Get your copy of Plant Your Money Tree: A Guide to Growing Your Wealth and a special bonus here.


Follow Mish on Twitter @marketminute for stock picks and more. Follow Mish on Instagram (mishschneider) for daily morning videos. To see updated media clips, click here.

Mish in the Media

Read Mish's latest article for CMC Markets, titled "Can the Commodity Super-Cycle Persist into 2023?".

Mish talks stagflation in her interview by Dale Pinkert during the F.A.C.E. webinar.

Watch Mish's appearance on Business First AM here.

Mish hosted the Monday, November 28 edition of StockCharts TV's Your Daily Five, where she covered some of the Modern Family. She also discusses the long bonds and gold with levels to clear or, fail.


ETF Summary

  • S&P 500 (SPY): 402 is support and resistance at 411.
  • Russell 2000 (IWM): 183 support; 191 resistance.
  • Dow (DIA): 342 support; 349 support.
  • Nasdaq (QQQ): 288 support; 302 resistance.
  • KRE (Regional Banks): 62 support; 66 resistance.
  • SMH (Semiconductors): 223 support; 232 resistance.
  • IYT (Transportation): 230 support; 237 resistance.
  • IBB (Biotechnology): 133 support; 139 resistance.
  • XRT (Retail): 64 support; 70 resistance.


Mish Schneider

MarketGauge.com

Director of Trading Research and Education


Wade Dawson

MarketGauge.com

Portfolio Manager

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Protests in China are not rare — but the current unrest is significant

Comparisons have been made to the 1989 demonstrations that led to the Tiananmen Square massacre. An expert on Chinese protests explains why that it half…

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Protesters march along a street in Beijing on Nov. 28, 2022. Noel Celis/AFP via Getty Images

Street protests across China have evoked memories of the Tiananmen Square demonstrations that were brutally quashed in 1989. Indeed, foreign media have suggested the current unrest sweeping cities across China is unlike anything seen in the country since that time.

The implication is that protest in China is a rarity. Meanwhile, the Nov. 30, 2022, death of Jiang Zemin – the leader brought in after the bloody crackdown on 1989 – gives further reason to reflect on how China has changed since the Tiananmen Square massacre, and how Communist party leaders might react to unrest now.

But how uncommon are these recent public actions? And how do they compare with the massive weekslong demonstrations of 1989?

Having written extensively on protest in China, I can attest that protests in China are not at all uncommon – but that doesn’t make what is happening now any less significant. Alongside similarities between the current street actions and more typical protests of recent years, there are also parallels between the demonstrations today and those in 1989. Yet differences in China’s international status and domestic leadership reduce the chances for liberal democratic transformation now.

Not so unusual, but still unique

The current protests are ostensibly about the Chinese government’s strict “zero COVID” policies. They were triggered by a deadly fire in the northwestern city of Urumqi on Nov. 24, with some residents blaming lockdown rules for hampering rescue efforts. Unrest has since spread to multiple cities, including Beijing and Shanghai.

The specifics are unique to the pandemic. But in many respects, what we are seeing is not new or unusual – protests, in general, are not rare in China.

In fact, from 1990 through the present, popular protests have been more frequent and widespread in China than they were in the years leading up to the Tiananmen Square-centered demonstrations.

According to Chinese government statistics, the yearly count of domestic “mass incidents” or “public order disturbances” – euphemisms used to refer to everything from organized crime to street protests – rose from 5,000 to 10,000 in the early 1990s to 60,000 to 100,000 by the early 2000s.

Despite the lack of official numbers since 2006 – which ceased to be published after that year – verbal statements by Chinese officials and research by scholars and nongovernment organizations estimate the number of yearly protests to have remained in the high tens-of-thousands.

When protests turn political

This is not to say the recent multi-city protests are unsurprising or insignificant. To the contrary, the current media spotlight is, I believe, well-deserved.

Nearly all the thousands of protests appearing every year in the post-Tiananmen Square period have been localized and focused on specific material issues. They occur, for example, when villagers feel they are unfairly compensated for land acquisitions, when private sector workers are not paid, or when residents suffer from environmental degradation caused by waste incinerators.

In contrast, the anti-lockdown protests have emerged in numerous cities – reporting by CNN suggests there have been at least 23 demonstrations in 17 cities. They are also all focused on the same issue: COVID-19 restrictions. Moreover, they are targeted at central Party leaders and official government policy.

For the the closest parallels in terms of size of protest, one has to go back to the late 1990s and early 2000s.

From 1998 to 2002, tens of thousands of state-owned enterprise workers in at least 10 Chinese provinces demonstrated against layoffs and enforced early retirements. And in 1999, roughly 10,000 members of the now-banned spiritual movement Falun Gong amassed in central Beijing to protest their suppression and demand legal recognition.

But these protests were directed at issues that specifically affected only these groups and did not critique China’s top political leaders or system as a whole.

The only post-1989 examples of overt collective political dissent – that is, public action calling for fundamental change to the mainland’s Chinese Communist Party-led political system – have been exceedingly small and transpired off the streets. In 1998, activists formed the China Democracy Party, declaring it a new political party to usher in liberal democratic multi-party governance. Though the party persisted openly for roughly six months, establishing a national committee and branches in 24 provinces and cities, its leaders ultimately were arrested and the party driven underground.

A decade later, a group of intellectuals led by writer Liu Xiaobo posted online a manifesto called “Charter 08” advocating for liberal democratic political reform. Liu, who later received the Nobel Peace Prize, was jailed as a result. He remained in prison until his death, from untreated cancer, in 2017.

And while the massive and sustained protests in Hong Kong over the past decade exemplify political dissent, protesters’ demands have remained confined to political reform in the Hong Kong Special Administrative Region of the People’s Republic of China.

Calls for change and for Xi to go

So how much do the current anti-lockdown protests resemble the demonstrations that shook the regime in the spring of 1989?

Both have involved urban residents from various walks of life, including university students and blue-collar workers.

And in each case, the demands of protesters have been mixed. They include specific material complaints: In 1989, it was the impacts of inflation; in 2022, it is the effects of lockdowns and incessant PCR testing.

But they also include broader calls for political liberalization, such as freedom of expression.

A giant white statue with arm aloft stand above 100s of people.
The Goddess of Democracy stood as a symbol of protest during the 1989 Tiananmen Square demonstrations. David Turnley/Getty Images

Indeed in some ways, the protesters of 2022 are being more pointed in their political demands. Those on the streets of at least two major cities have called on President Xi Jinping and the Chinese Communist Party to step down. Demonstrators in 1989 refrained from such system-threatening rhetoric.

That reflects the changing political realities of China then and now. In early 1989, Party leadership clearly was split, with more reform-oriented leaders such as Zhao Ziyang perceived as sharing the activists’ vision for change. As such, demonstrators saw a way of achieving their aims within the communist system and without a wholesale change in leadership.

The contrast with today is stark: Xi has a firm grip on the party. Even if Xi were to miraculously step down, there is no clear opposition leader or faction to replace him. And if the party were to fall, the resultant political void is more likely to bring chaos than orderly political transformation.

Yet if the Chinese Communist Party is a different entity now than it was in 1989, its response to unrest shares some traits. Central authorities in 1989 blamed the protests on foreign “black hands” seeking to destabilize China. The same accusations have been raised in online posts now.

In fact, the government response to recent protests follows a pattern that has played out time and again in post-1989 protests. There is little to no official media coverage of the protests or acknowledgment by central Chinese Communist Party leaders. At the same time, local authorities attempt to identify and punish protest leaders while treating regular participants as well-intended and non-threatening. Central criticism – and possible sanction – of local officials portrayed as violating national policies follows. Meanwhile, there are moves to at least partially address protester grievances.

It is a messy and inefficient way to respond to public concerns – but it has become the norm since 1989.

Teresa Wright does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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