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World’s Largest Democracy: India’s New Government

Industry Insights / / , , , , , , ,

government elections india

 

India has recently kicked off the world’s largest democratic exercise to elect the new Central Government. It is a significant undertaking. With a population of around 1.3 billion people (India’s population is expected to surpass China’s within the next few years), the number of eligible voters accounts for roughly 10% of the world population. Out of those 900 million voters, 100 million are first time voters with the major parties spending big to garner their support. The elections will take place in seven rounds lasting from April 11 to May 19th as 1 million poll workers traverse the vast country to ensure each registered voter can place their vote.

As the world’s second most populous country, the elections are being closely watched. The country’s growing economy, young emerging workforce and sector specific opportunities suggest it should become an economic powerhouse in the near future. The outcome of this election will therefore not only shape India’s future but the global landscape.

 

mass population india elections
More than 10% of the global population will have a chance to cast their vote in the 5 week democratic exercise.

 

The First Term

Modi’s first term in office was ushered in on a wave of hope and opportunity. Months after taking office in 2014 he had stood under the shadow of a large logo of a lion, unveiling his economic vision for India to become a manufacturing powerhouse (similar to China’s aspirations around the turn of the Millennium). He set a target for the manufacturing sector to be 25% of India’s GDP by 2025, which would create millions of new jobs along the way.

The Indian economy, although changes have been implemented, is not quite where he wanted it to be with the manufacturing sector accounting for approximately 16% of Indian GDP. His demonetization initiative severely set back the manufacturing sector.

What Will Be Determined?

The elections are to decide the 543 elected seats in the lower house of India’s parliament called the Lok Sabha. A party must win at least 272 seats in the house to create a government and gain the right to nominate the prime minister and fill the cabinet. If no one party can win the majority, the party with the most seats has the opportunity to build a coalition to form a government for the next five year term.

From a manufacturing standpoint, it is worth looking at the leading parties’ manifestos to understand what the possible implications will be.

Modi & The BJP

Of note, the BJP is committing to investment in artificial intelligence, block-chain and data analytics and specifically references implementation in the manufacturing sector and industry 5.0.

As with the past 5 year term, there is again further commitment on the manufacturing sector but importantly with the added emphasis on the utilization of technology. Similar to China’s current smart manufacturing investment for ‘Made in China 2025’, the BJP are looking at investing in technology (investing in up to 150 technology centers by 2024) as a means to enhance the competitiveness of the manufacturing sector.

It remains true, however, that the past five years have been mired by a lack of investment in infrastructure, regulatory vagueness, bureaucracy and an inability to bring in the foreign direct investment required to support the growth in manufacturing. In 2017-18 FDI growth was a mere 0.23%. “Made in India” was supposed to bolster the countries manufacturing, however, only 14.66% of FDI was in manufacturing sectors such as automobile, power, drugs and chemicals. On the other hand, FDI in non-manufacturing accounted for 60% from 2016 to 2017.

While “Made in India” has yet to create much for the manufacturing sectors, India’s economy has grown within the last five years; but many wonder at what cost. Modi and his party have lost some popularity as voters are concerned with the current state of unemployment and distress felt in the agricultural sector.

 

india government elections
Modi’s BJP is committing to investment in artificial intelligence, block-chain and data analytics to improve the Indian manufacturing sector.

 

Gandhi & The INC

His main opposition, Rahul Gandhi is the face of the Indian National Congress party (INC) and is the scion of Indian political dynasty. While the BJP is pro-business, pro-liberalism and socially conservative, the INC has a broadly secular, socially democratic manifesto. Although not specifically referencing artificial intelligence in their manifesto, it is evident that they also are looking to bring technology to the forefront of Indian industry. Within the tech sector, relevant to manufacturing, they plan to establish a National Mission focused on sunrise technologies. These include big data, Internet of Things, 3D printing and manufacturing and knowledge networks.

The Manufacturing Sector

Both leading parties see infrastructure as the key to increasing manufacturing. The congress party seeing it as “a basic weakness of the Indian economy… Flawed design, inefficient execution, insufficient capacity and poor maintenance of infrastructure have dragged India’s growth rate down” (as by the INC manifesto). At the same time, Modi and the BJP party have promised to double the length of all highways by 2022, finish their freight corridor project by 2022, double port capacity in 5 years, and double the amount of airports. Gandhi has made similar promises, specifically targeting highways, railways and electricity. In addition to augmenting the total length highways and modernizing the railway system, he promises investment in clean, green energy.

Likewise, both parties see technology, and its ability to create efficiencies within manufacturing that will allow it to compete on the global stage, as a key pledge. Whether it can keep pace with China, remains to be seen.

 

india government election results
Both leading parties see infrastructure as the key to increase manufacturing. Will the Indian Tiger outpace the Chinese Dragon through different development focuses?

 

Trade Relationship with the US

Once the ballots are counted, the new government will confront lingering trade issues with Washington. With the United States current strong-handed international policies, the new government must navigate the tensions of the US-India trade relationship. Like with the US-China trade relationship, issues include intellectual property right protection, “forced” localization, and capped FDI. In March of 2019, President announced his intent to terminate India’s GSP eligibility, an action likely to disturb trade between the two nations.

Summary

There is no doubt that the current election will have a significant impact on India’s development over the next 5 years.

Export Manufacturing has always been a key sector for developing economies where there is an opportunity to tap into low cost labor; this economic model has been tried and tested. The Indian manufacturing sector is incredibly diverse, from handmade wooden tools, garments and shoes through to automobiles, aerospace and OTC drugs. Both parties, perhaps unsurprisingly, have identified manufacturing as a key sector to invest in. The ability to address domestic issues such as regulation and infrastructure along with the implementation of technologies will ultimately determine how attractive India will become as a destination for sourcing. It is an incredibly complex business environment to operate in and there is still much work required to overcome some of these hurdles.

Whichever Party wins the election, there is perhaps an opportunity for the Tiger to finally emerge and compete with the Dragon beyond its Northern borders. For all Indian manufacturing inquiries, please contact us.

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The United States – China Trade War

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usa china tradewar

 

Like with Brexit, uncertainty is on the rise as negotiations continue with no finite deadline. As the two largest economies in the world, the United States (US) and China trade war have put large amounts of pressure on the global economy. The tit-for-tat tariff battle has cost both economies billions of dollars, disrupted supply chains and rattled financial markets. In February, President Trump, for the second time, delayed his plans to increase tariffs on Chinese goods to 25 percent from the current 10 percent citing the amount of progress achieved in discussions. As both countries continue with discussions, the world waits in anticipation.

What is Next?

US Treasury Secretary Steven Mnuchin told reporters within the last couple of weeks that talks are progressing well, but there is still much work to be done. He stated that the current agreement would go “way beyond” previous efforts to open China’s markets to US companies and hoped that the two sides were “close to the final round” of negotiations. While no details of the deal have been disclosed, Washington is seeking changes to China’s economic and trade policies, particularly around their IP practices, while China wants more access to US markets, specifically finance. The big question everyone is asking: will there be deal and what will happen next?

Experts seem to agree on one point; a deal does not mean this trade dispute is over. Even if there is a “comprehensive” deal, it likely only marks the beginning of such negotiations between the two nations. The broad headline terms appear to have been determined based on media reporting. These include a mutual tariff rollback and softer US stance towards China. In return, China will no doubt have to commit to broad purchase commitments for goods and services. The inevitable sticking point is reported as being the framework on protecting foreign intellectual property rights. Negotiators are still grappling over its terms and how they will be enforced.

Alternatively, if neither side can compromise (and both sides politically likely need a deal) and a deal falls off the table, then there is a risk of further tariff increases which will have a significant impact on goods from China to the US as well as any reciprocal tariffs raised by China on US exports. Whether or not Trump will choose to enforce his tariff increase is yet to be seen – it has to be a last resort – but it is clear that the US will continue to hold the threat of tariffs over Beijing to ensure its commitment to the final deal.

 

usa china tradewar
Completion of a trade deal is likely only the beginning of further negotiation between the two countries.

Is Vietnam the Winner?

Inevitably, there has been debate as to which Country is likely the beneficiary for US Buyers to reallocate their dollars. Vietnam appears to have been mentioned the most times given how its manufacturing sector has developed over the past five years and has actually taken relative market share away from China; more so than any other Asian nation. However, there is still a lack of evidence to directly support this claim. The country, along with Southeast Asia as a whole, was expected to benefit from the lack of a resolution. One commentator told CNBC earlier in the year that it was still a bit early for Vietnam to be benefiting in any significant way from the trade disputes. Some reports have indicated companies have begun shifting production from China to avoid tariffs; however, others say this is just a continuation of the ongoing trend towards diversifying production outside of China.

From our perspective, although there are certainly opportunities to leverage what is an evolving export manufacturing sector, the ‘elephant in the room’ is likely going to be capacity in the short term. It takes time to develop. At Factory level, the commercials need to make sense before the investment is made available and that needs to be more than simply the imposition of temporary tariffs. There needs to be a structural shift.

To provide some insight, we recently visited a furniture factory in Vietnam who had just met with a large US retailer looking to relocate some production out of China. Although the meeting was positive and there was a clear commercial opportunity, the factory owner, when asking about volumes, realized that one SKU for this retailer would be 110% of their annual capacity. Compared with China, capacity in some of the other Asian markets is an issue in the short term.

 

vietnam FDI tariff tradewar
Recent figures on Vietnam’s FDI show accelerated growth in the recent year, source from Trading Economics.

 

Diversification of Sourcing Location

There is no doubt that US Corporations manufacturing products in China, if not producing in alternative markets already, are looking for alternative locations.

According to a recent survey by the Swiss Investment bank, UBS thirty-seven percent of respondents had moved some production out of mainland China in the past year. Another thirty-three percent noted they plan to move some production within the next six to 12 months. A part of this was driven by the imposition of tariffs and the need for diversification whilst the import duties were in place.

The location of alternative manufacturers will be dependent largely on the products and the complexity of the supply chains to be able to make those products. This will include raw material availability, infrastructure, regulatory and compliance requirements, labor force and capacity to name a few points that must be addressed.

 

usa tariff response tradewar
Overview by UBS on US’ companies considerations and actions towards tariff response

 

What to Consider Before Leaving China?

The US-China trade war has added new energy to shifting production out of China. Whether companies are moving due to the trade war and or are looking to diversify their sourcing locations there are many factors to consider:

  • Feasibility and risk of shifting out of China
  • Costs of moving existing supply chain
  • Ease of doing business in a new location
  • External expertise to help mitigate disruptions

 

Summary

The outcome of the trade war is yet to be determined. The current information from both sides appears to be at least framed in a positive light but there is no certainty as to what the conclusion will be. Many commentators are suggesting that both sides need a deal although the one thing that is certain is the US administration can be unpredictable.

At ET2C we are dedicated to building close relationships with our clients and ensuring we are not only informed but well versed in sourcing trends. We are currently working with our US clients to assess and look at alternative markets within Asia for their production. We offer multi-industry sourcing, procurement, and quality control solutions that help our clients get the most out of their Asian manufacturing base. Contact us for a discussion about your current supply chain.

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Entering New Markets: The Challenges of Social & Ethical Compliance

Industry Insights / / , , , , ,

social and ethical sourcing compliance

 

Asian sourcing markets are in a state of flux. With the rise of protectionism, currency volatility and emerging manufacturing economies, companies are increasingly looking to pursue diversified sourcing strategies. Whilst the old adage of ‘not putting all your eggs in one basket’ rings true, entering new sourcing jurisdictions is not always easy. Not only must suppliers meet the quality, capacity, price and delivery requirements, but also all relevant compliance requirements. Certain markets present their own unique issues with regards to compliance expectations. Whether cultural, regulatory or standard business practices, having an insight will help mitigate the risk of buying from these countries.

New Sourcing Trends

In recent years, social and ethical compliance has become increasingly important for any purchasing decision, as issues like worker safety, modern-day slavery, fire safety and working hours have gained attention from not only NGO’s and consumers, but both governments and investors alike. ‘Corporate Social Responsibility’ strategies are widespread and ethical audits are not only common place anymore but mandated.

China’s manufacturing base has already been through an extensive compliance transformation, due to the audit requirements that have been in place for many years (backed by the Government recently on environmental practices). Similarly, Vietnam also has years of experience in the compliance arena; even to the point where new technologies are being invested in and the wider story is compelling. For example, one Vietnamese garment factory’s dye treatment plant is so good that they are using it to clean the local communities drinking water. That’s not to say that there is not any non-conformance in these markets, but just that the manufacturing base is well developed and generally understands the requirements to export products.

What about other markets that fall further from the China basket though?

Where is Sourcing Going?

Cost has always been a driver in determining emerging low cost manufacturing markets. Industries that have a reliance on cheap labor, such as garments and textiles in particular, are often the earliest entries into these markets. Many companies are therefore looking towards low-cost countries in Southeast Asia, such as Bangladesh, Cambodia, Indonesia and Myanmar, where there is an abundance of low cost labor, while others are focusing on newer locations in Africa, specifically Ethiopia.

 

cheap labour markets compliance
Industries such as garments and textiles often rely on cheap labour markets.

 

Clearly, Asia as a continent has its own idiosyncratic operational and regulatory business practices that provide an overlay of complexity when working in this part of the world. Corruption, language, cultural differences, developing fiscal and monetary policy are all often referred to. However, when entering new emerging manufacturing markets, which are not as experienced with exporting products, there are often additional challenges as the nascent manufacturing sector emerges. Being aware of such challenges in these alternative sourcing destinations should be an integral part of working with suppliers from these markets.

Bangladesh

Bangladesh’s large population, low minimum wage and high capacity strategically places the country as a great option as an alternative sourcing location. Although it has seen significant growth particularly in the traditional ‘cut and sew’ categories over the past five years, this has only seen an increase of 0.9% in exports of global market share .

Ever since the devastating and tragic collapse of Rana Plaza, workplace safety has been a key focus with the emergence of the internal initiative, the Accord on Building and Fire Safety. The accord has been responsible for the upgrading of just under 2,000 factories including fire door installations, compliant electric wiring and sprinkler systems. The Government is now looking to take over from the Accord even though some media outlets are reporting that they are not in a position to. The concerns around building safety persist with a spate of deadly fires breaking out in recent months. The decision is currently with the High Court as to whether the Accord can extend and continue its work.

 

sourcing compliance in Bangladesh
The Accord on Building and Fire Safety has been responsible for the upgrading of fire door installations, compliant electric wiring and sprinkler systems in Bangladesh.

 

Myanmar

After years of Junta rule, Myanmar does not have developed laws and regulations that support the manufacturing sector. While their fellow Asian counterparts have had exposure to social and ethical compliance requirements, many factories in Myanmar simply lack this knowledge. There have been multiple reports of underage workers and inconstant policies with minimum hiring age. Although child labor is illegal, companies have faced issues with proof of age and tampering with age verification.

The Sourcing Journal reported that many factories have found their employees regularly working more than the permitted weekly limit, usually without correct compensation, as employees do not know how to calculate their wages. Factories tend to lack compensation packages or have ones that conflict with Myanmar law for overtime and paid leave. The factories also lack experience with fire safety and emergency procedures leading to unsafe working environments and proceeds. The country’s limited rule of law and underdeveloped regulatory regime therefore make Myanmar a riskier sourcing destination as it is more susceptible to land disputes, corruption and general social and ethical compliance. There has also been the recent case of the treatment of the Rohingya People and the broader impact on international perception of doing business with this country.

Cambodia

Cambodia, like some other South East Asian countries, has duty exemptions on shipments to the EU. It is part of the ‘Everything but Arms program’ which allows what the bloc calls “vulnerable developing countries” to pay fewer or no duties on all their exports to EU bloc. However, the EU is considering revoking the special trade deal as they say the Cambodian Government had engaged in “serious and systematic violations of core human rights and labor rights”, which is one of the programs stipulations. According to Ecotextile, The American Apparel and Footwear Association (AAFA), Fair Labor Association (FLA) and six other apparel industry organizations have written letters to Prime Minister of Cambodia urging action. These letters highlighted problems linked to criminal charges and convictions of labor leaders, the Trade Union Law of 2016, and the diminished role of the Arbitration Council. Each cited as a factor for hindering progress towards improving workers rights. Beyond these, the country’s manufacturing sector also faces poverty wages, gender inequality and violence, and the potential impact automation may have on the further degradation of workers’ rights.

Ethiopia

Ethiopia offers a lot of opportunity for sourcing companies with low costs and the ability to become a source of raw materials. However, social and ethical compliance has been a significant issue. Like many Asian sourcing locations Ethiopia has many health and safety, workers compensation, and corruption concerns. However, unlike the Asian destinations mentioned, Ethiopia lacks a minimum wage. Companies already invested in Ethiopia have faced issues with land disputes as the Government has assigned land that communities consider to be jointly owned grazing land. This raises concerns of potential land grabs in Ethiopia and other potential social compliance issues. As one would expect, the general understanding of compliance is less widespread and therefore increases the risks to those investing in Ethiopia.

Summary

There is no doubt there is, to a certain extent, a commonality of issues around compliance when operating in Asia. It should also be remembered that there are examples of social and ethical non-conformance in developed markets as well. It is all of our responsibility to ensure that we are engaging with businesses, wherever they are located, that understand social and ethical compliance.

Ultimately, price will always be a driver. And with that, new markets can in certain industries provide cost savings but it is important to remember that there will generally be a higher level of risk in low cost markets. Often companies will look to leverage an established factory (such as Chinese, Taiwanese or Korean) that is relocating or opening a new facility in a new market. In these cases, there is often a presumption of similar compliance practices being transferred to the new site.

At ET2C we are committed to social and ethical compliance. We are constantly monitoring our Asian supplier base and are in the process of setting up our own Code of Conduct at all our vendor sites to reinforce the practices we expect of our partner factories. We continue to stay up to date with new sourcing destinations through our network of partners where we do not have our own offices. For more information, please contact us.

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The Price of a Better Future: IMO 2020

Industry Insights / / , , , ,

IMO increases costs of freight in 2020

 

In the wake of the many “green” movements striving to secure a healthier and more sustainable future for future generations, some costs have emerged that we must endure. In the process of disrupting an unsustainable status-quo, the International Maritime Organization (IMO) has voted to reduce the amount of sulfur in bunker fuels from 3.5% to .5% by 2020. This declaration will have an impact on shipping costs but a necessary cost in what is a polluting industry, particularly when there are greener alternatives being developed.

Why the IMO 2020 was Passed

To provide some context; bunker fuel is a term that describes the type of fuel used by ships. Hence, the name “Bunker” comes from the part of the ship in which the fuel is stored. These fuels are derived from the residue of crude oil distillation, which contains sulfur. When a ship travels, it burns these heavy fuels and creates emissions that hold high levels of sulfur. These sulfur emissions, according to the IMO, cause health and environmental damage, including widespread lung disease, the creation of acid rain, and increased acidification of the oceans (IMO, 2019). Without the regulations in place, the IMO estimates that up to 570,000 premature deaths could be caused between 2020 and 2025 along with the extinctions of many marine species.

 

IMO regulation to protect biodiversity
The IMO’s regulation aim to protect the rich biodiversity of the oceans we travel across and the future generations that depend on us for a healthy planet.

 

The IMO 2020 rules apply to multiple jurisdictions on fuels used for ships crossing the open oceans, which ultimately represents 3.9 million barrels a day, according to the International Energy Agency (Liang, 2019). These regulations have shipping companies debating over which options they should pursue in response to the IMO 2020 regulations. Some of these options include:

  • Use of Low Sulfur Fuels
    But…This creates significantly higher fuel prices. While refineries still must determine how to price the new low-sulfur fuels, they will undoubtedly be more expensive than current fuels being used due to the complexities of their creation.
  • Scrubbers and the Increased Use of Scrubber Fuels
    Yet… The installations of scrubbers create high investment costs and require dry-docking, a time-consuming and resource-intensive process. It also comes with some regulatory uncertainty about the use of scrubbers in creating low-sulfur fuels.
  • Use of LNG (“clean gas”) propelled vessels
    But…This can only be used on new vessels since it is too expensive to replace the parts of old ships required to utilize these products. It also creates more complex fuel handling, causing cargo loading to possibly be limited during fueling as well, creating a larger time commitment and increasing the opportunity costs. The use of these fuels will also add a $400,000-800,000 cost per voyage to each ship once all the modifications are made to comply with the new regulations.

What It Will Do

Although there are a range of options, none of them are without risk and additional costs. Refineries will be on the receiving end of the increased demand for low-sulfur fuels, impacting margins for simple refineries and giving larger margins to complex refineries that can already produce the low-sulfur fuels. As for high-sulfur fuels, their value will most likely collapse until it is able to find lower-value end-uses, where it would compete with coal for electrical power generation, reducing its price to roughly a third of its 2018 value (Hamilton, 2018). This cross-sector ripple from the IMO regulations threatens to impact not only the prices of bunker fuels but also the costs of shipping goods around the world, with an estimated $30 Billion cost to the US shipping industry (Poskus, 2018).

 

economic costs due to IMO
Many ship owners and refineries will feel both the accounting and economic costs of the new IMO regulations.

 

The cost of the IMO regulations will have a broad impact. Firstly, compliance with the IMO 2020 regulations is set to increase the costs of port-to-port shipments by 20%, most of which will be paid for by the end user (i.e. the consumers). For instance, the site Flexport.com states that shipping 40” TVs from Shanghai to Los Angeles will cost shippers an additional .50 cents per unit. With enough scale, this increase in landed cost could potentially have an inflationary effect. Furthermore, the regulations may cause freighters to reduce their carrying capacity by 4-5% in the short-run and up to 2% permanently. This will also lead to the practice of “slow-steaming,” where a ship reduces its speed to save fuel, to possibly become more common, which may lengthen delivery times for businesses ordering goods from abroad (Poskus, 2018). Overall, the costs of the IMO2020 movement will be felt around the world, from shippers to consumers.

Closing Remarks

From the 1st January 2020 these new regulations will come into effect. The shipping lines are already taking measures to accrue the additional investment in their fleets and, if not already, you should anticipate shipping rates to start increasing in the near term. Although a reduction in sulfur will only have a positive impact on the environment in line with some of the United Nations Sustainable Development Goals, there are also other technologies being developed that will hopefully not only reduce emissions altogether but potentially lead to cost reductions as well.

At ET2C, we have a range of partners including within the logistics sector and would be happy to provide additional insights on this topic or contacts. Please contact us for further inquiries.

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The Dawn of the Machines: Automation in East Asia

Industry Insights / / , , , , ,

automation in east asia

 

When the word “automation” is mentioned, what comes to mind? Is it self-driving cars that allow you to catch some extra sleep on the way to your job? Or is it some futuristic notion of a robot butler who is able to clean your house, walk the dog, and maybe even do the laundry? Well, the concept of robots doing our work for us is not as far off as it may seem. According to the Brookings Institute, 25% of American jobs are already at “high risk” for being overtaken by automation. And that number has been expanding from factory line jobs to more white-collar professions like accountants, data analysts, and even HR directors.

What is automation?

Automation is defined as “the technique of making an apparatus, a process, or a system operate automatically.” In other words, it’s creating a machine or utilizing artificial intelligence (“AI”) to do the job that person or team of people would normally do. Today, jobs centering around food prep, production, and office administration are among the highest risk for automation, with AI being sufficient to cover 70% or more of the occupation’s responsibilities. While workers in the United States and Europe may be nervous for the rise of AI, many countries in East Asia are already experiencing mass automation.

Robotics & AI in Asia

In 2017, Asia led the world with the highest population of robots. With over 1 million robots within the region, Asia has already started to experience the economic and social benefits and risks associated with massive-scale AI and automation. To capture the sheer scale of these advancements, the IMF has estimated the world’s robot population in all continents. Here, Asia far outnumbers all other regions by claiming 65% of the world’s robots, 50% of which are located in China.

Robotics in Asia, reflecting automation
Asia (more specifically, China) claims a majority of the world’s Robotics population. Source IMF, 2018

As far as robot density is concerned, Korea and Singapore are global leaders, followed closely by Germany and Japan (IMF Blog, 2018).

Within Asia, China is automating its manufacturing capability whilst the rest of its Asia neighbours are slow to follow. This is aligned to Beijing’s 2025 initiative of “Made in China”, which focuses on Smart manufacturing. This should lead to additional productivity gains and ultimately reduce the competitiveness of some of the smaller emerging exporting countries.

Smart manufacturing is a broad term that describes manufacturing processes that use technology such as robotics, AI, digitisation to drive efficiencies and increase the levels of agility within the production cycle. Importantly, in line with the ever-evolving consumer, this will enable mass customisation and enable Brands to create more personalised experiences for their customers.

Robotics: Here to Stay

When viewing some of this data, some skeptics may wish to point out that automation is simply a niche market or fad. They believe that human labour, with all of its flaws and risks, will prevail in the long term. Yet, world-recognized authorities on economic trends, such as the IMF and WEF, seem to forecast otherwise. The World Economic Forum stated in an article published in September that “More robots than humans doing technical work may bring down the cost of business, including labour costs, significantly.” Using conventional economic knowledge that firms will try to maximize profit and reduce costs, it seems extremely likely that many businesses could adopt automation into their manufacturing processes. This is especially the case if the cost of robots continues to fall and the opportunity cost for not adopting automated processes increases.

Robotics and Manufacturing as part of automation
Will the usage of Robotics become more and more common in Manufacturing?

Hi-tech Manufacturing: less variability in production

Manufacturing also stands to gain from increased automation. Most companies using robotics justify their decision to make the switch with increased productivity and producing more outputs. Automated systems are usually able to produce with less variability than human beings, which often results in greater control and consistency in quality (Groover, 2019). It’s clear that robotics and automation offer many advantages to a firm. Yet, there are still some costs associated with phasing out human labour.

Brands themselves are also investing in hi-tech manufacturing. Nike, Adidas and Under Armour are investing millions of dollars in new technologies that will revolutionise how and where they make their products. It is estimated that by Nike using ‘Flex manufacturing’ to manufacture Nike Air shoes, they will be able to reduce the cost of labour by 50%.

advantages of Manufacturing and thus advancing automation
Manufacturing also stands to gain from increased automation, greater control and quality consistency for example offer many advantages.

Clearly the level of automation in a manufacturing plant is highly dependent on the products being made. The Garment sector, for example, still to a large extent relies upon low-value added manual labour. This has enabled the industry to globalise to many different emerging manufacturing countries around the world. As a result, it is likely that the clothes that you are currently wearing are made in multiple different export markets. The cost advantages of broad automation within the Garment industry is not therefore immediately obvious versus the capex required. In stark contrast, automated production lines for car manufacturing are now common place.

Summary

There is no doubt that Robotics and AI will continue to develop and become more common at manufacturing plants across Asia. China is leading this evolution, supported by Central Government. Therefore, expect to see levels of automation broadly increase in factories to drive productivity gains and more agile production. The rise of the machines is a reality, but do not expect to hear the phrase ‘I’ll be back’ quite yet!

We are constantly speaking with our factories to understand what automation means to them and what the future holds. To learn more, contact us.

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“Brexit means Brexit”?

Industry Insights / / , , ,

Brexit and the EU

 

Ever since the United Kingdom’s 2016 vote to leave the European Union, Brexit has had the world on the edge of its seat as the country attempts to negotiate its removal from the EU. The roller coaster was set to end on March 29th. However, the EU has had to agree to grant a short extension that provides additional time (12 April or 22nd May deadlines) depending on the type of Brexit.

If you feel confused or concerned, you are not alone. The two and a half years of negotiations have caused citizens and businesses alike to question the certainty of the UK’s future and how it will impact them. With uncertainty on the rise and a volatile Sterling, how is Brexit affecting the supply chain? Single Market or Customs Union? May’s Deal, No-Deal, Norway plus plus, Backstop or more negotiations? British politics has never been caught in such paralysis and the haze of uncertainty continues to cloud the way forward.

A Leap into the Unknown

This has not helped general market confidence. The prolonged negotiations have adversely impacted companies operating in the UK as well as the appetite for any foreign investment. The Bank of England has suggested that Brexit is costing the UK economy $1Billion a week as market sentiment and consumer confidence drops. According to the BBC’s poll of 2,500 firms, the “persistent lack of political clarity” is highlighted as one of the leading economic costs of Brexit. Many national and multinational companies are beginning to prepare for the worst outcome as they are unsure of the UK’s future. Businesses are expecting to see lower sales in the long term, which is having a significant impact on sourcing, investment, employment, and overall productivity.

Foreign entities concerned with political uncertainty are questioning whether or not to maintain or continue investing in the UK. Companies, such as Nissan and Honda have announced they would be lowering their production in the UK. Nissan specifically noted they are looking to focus on sales in North America and China while moving production of their Infinity Q30 and QX30 to Japan where the model is selling better. Other companies are also beginning to create “avoidance” plans to limit the effects of the Brexit “drama.” Businesses are becoming leaner and more aware and concerned about decision making.

 

Brexit from EU
Banksy’s artwork in Dover: a workman chipping away at one of the 12 stars on the flag of the European Union – Photo credits: Dunk

A Volatile Pound

The British pound (GBP) hit a 31-year low dropping over 15% against the United States dollar (USD) immediately after the June 2016 Brexit vote and remained weak for the remainder of the year. Volatility and weakness were themes throughout most of 2017 and 2018 as the Politicians worked through the implications of what Brexit meant, and without much success. The GBP volatility is expected to remain high, at least for the near term, due to the possibility of a no deal Brexit on April 12.

As currency hedges expired, the weak Pound had an immediate impact on the cost of importing products from Asia, where USD is the currency of choice. On a relative basis, this had the effect of adding up to 20% to the cost of goods where there were no natural USD hedges available.

This at a time when the UK retail sector is already in a state of disruption and the ‘High Street’ is in decline. There has been a reluctance to therefore pass these price increases directly to the consumer, or at least be the first mover among the competition in order to retain as many customers as possible.

Inevitably, this has forced British businesses to adopt leaner inventory management (smaller and more frequent orders) if they were not already whilst also pushing back to the suppliers to identify additional cost reductions. Whether a product can be re-engineered or the supplier can absorb some of the cost, British companies buying from Asia have found themselves not only up the Creek but having their paddle taken by the self-interest of British Politicians.

The UK without the Customs Union.

One of the big talking points of the negotiations focuses on whether the UK should remain part of the Customs Union. As a member of the EU, the UK currently participates in around 40 free trade agreements with over 70 countries. Should there be a complete break, the UK’s status at the WTO would change and EU trade agreements would cease to apply to the UK once it officially leaves. Without the customs union, the UK will have to negotiate their own bilateral trade agreements. The UK has already signed eight transitional trade agreements and three mutual recognitions, one of which is with the United States. These agreements are considered in effect when the EU agreements no longer apply to the UK, either at the end of the implementation period or on April 12 if the UK leaves without a deal.

Trade Agreements

Where trade agreements are not in force, trade will likely take place on World Trade Organization (WTO) terms using a new applied UK ‘most-favored-nation’ (MFN) tariff schedule. From a pure importing perspective, this may reduce some anti-dumping tariffs imposed by the EU on certain products and may create a potential upside.

Trade agreements aside, there are practical implications that companies are trying to also grapple with and plan for; the actual movement of goods into UK ports, or how to clear customs into the EU, or what additional documentation needs to be prepared etc. The level of uncertainty has resulted in companies having to invest time and resource into a smoregus board of eventualities.

Ultimately, it is not clear whether being outside of the Customs Union will allow the UK to negotiate better trade agreements with the likes of China, India and Vietnam. Counter arguments on this point have been a feature of the past 1,000 days and although the UK will no doubt have less bargaining power (compared with the EU bloc), it may be possible to negotiate deals more directly relevant to the UK economy.

 

Brexit between EU and UK
Brexit shambles ever onward destination unknown

What Happens Now?

 

Soft Brexit

A soft exit is preferred by most to prevent economic shock to the UK’s economy and would see more positive effects.

  • GBP likely to rebound and stabilize.
  • A decrease in uncertainty leading to more confidence.
  • Retained access to Single Market and Customs Union.

Hard Brexit (no-deal)

While no one wants Brexit to end with a no-deal, it is still a possibility as it is the default if an agreement cannot be reached by April 12. A no deal would cause immediate short-term effects.

  • Trade will then take place on WTO terms using a new applied UK MFN tariff schedule.
  • British importers and exporters are likely to experience more red tape and increased prices.
  • Importing or exporting through the UK to the EU will become increasingly difficult.
  • Continued downward pressure on the GBP.
  • Loss of Customs Union and Single Market.
  • Opportunity for the UK to negotiate new trade deals and FTAs.

Summary

It is impossible to predict the outcome of Brexit. After 1008 days since the Brexit vote, not even the Politicians are any clearer than the morning of the ‘leave’ vote. At the time of writing, the British PM is offering to fall on her own sword as a last-ditch attempt to push through her ‘deal’ at the third time of asking. Uncertainty is never a good specter to have lingering in the background for business and being as well prepared as possible is the only option available. It is just a shame that being prepared was something that British Politicians took all too lightly as they invoked Article 50.

At ET2C, we seek to understand our client’s needs and understand how these impact their individual supply chains. We are continually staying up to date with the latest Brexit developments to help our clients maneuver the ever-changing Brexit landscape.

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It’s Not Just a Phase: Why the difference between Greenwashing and Sustainability is Important

Industry Insights / / , , ,

greenwashing and sustainability

 

Hip… tubular… fly… slammin’… At one point, these words were a mark of being one with the times; status symbols displaying social aptitude. However, over the years and through thousands of uses, these worn words are more likely to prompt an eye-roll than a positive response. Today, Could the same be said for the word “sustainable?” How about “green?” Perhaps even “environmentally-friendly?”

If you have ever felt overwhelmed or exhausted walking through any grocery store as labels and signs proudly boast the words “all natural ingredients” accompanied by pictures of bucolic landscapes with welcoming farmers smiling with their products in the foreground, you may be experiencing what is known as Green Fatigue.

Green fatigue, as defined by the website EcoWho, “becoming tired with some of the constant messages of corporate green credentials and tales of impending global doom” (EcoWho, 2018). In today’s world, it’s easy to feel a bit of green fatigue. Nobody likes being told the world may be ending or that the food they’ve been eating all their lives comes from some nightmare-inducing industrial plant. This may cause some to look away from the promises of sustainable practices. The word gets used so often, how is the average consumer supposed to know what it means or if the company is really helping the environment?

difference between greenwashing and sustainability
Pictures like this are common in outlets that support sustainability. But what does it mean?

What Happened to the Word “Sustainable?”

A lot of things happened to the word “sustainable”. While environmental friendliness picked up steam as a widespread social movement in the 1960s counterculture era, words like sustainability didn’t start popping up so much in business rhetoric until the 1970s. In the 70s, various companies capitalized on the fresh environmental policies in the US at the time, such as the National Environmental Policy Act of 1970, the Clean Water Act, and the Endangered Species Act, in order to gain favor in the eyes of the public and government.

 

Sustainability in Politics

However, it wasn’t long till the word sustainable began to become politicized. Politicization of science is nothing new in the United States, so once green policies became popular among democratic politicians, the opposite side of the political spectrum became skeptical about the legitimacy of the evidence used to back up these policies. A report by political scientist, David Karol, states that:

“Endorsements and campaign contributions from environmental groups now overwhelmingly go to Democratic candidates, while economic sectors frequently at odds with environmentalists, including fossil fuel producers and much of agribusiness, increasingly support Republicans. Divisions between Republican and Democratic voters on the environment, while not as great as among political elites, have grown as well” (Karol, 2018).

The result of this growing divide has seen more eye-rolling at the word “Sustainable” by those who fall on the conservative side of American politics. Right-wing news sources are often quick to decry companies promising more sustainable practices or environmentalist policies passed by the government as part of an agenda to weaken other businesses or increase taxes. Hence, these sentiments have radiated out from this community, influencing the minds of many to doubt the credibility of the word “sustainable.”

 

Sustainability Becoming Greenwashing in Marketing

Most people in business are familiar with the term whitewashing, which is used in reference to an entity covering up certain vices by utilizing biased investigation techniques or data. However, not as many are familiar with the term greenwashing, but they definitely have experienced it in one way or another.

So what exactly is this…Greenwashing? Business News Daily defines greenwashing as, “when a company or organization spends more time and money claiming to be “green” through advertising and marketing than actually implementing business practices that minimize environmental impact.” The article continues to mention that this is rarely caused by evil intentions but usually occurs by overexcited marketers who desperately want to sell to the rising number of environmentally conscious consumers (Edwards, 2018). And the numbers provide a good reason for enthusiasm:

environmental impact and sustainability
Shoppers in the US are becoming more environmental conscious. And so are marketers (Walker, 2013).

However, there are also good reasons for nervousness when it comes to buying products that claim to be sustainable, even if one does support the concept. For instance, in 1991, DuPont, a chemical company, used an ad portraying animals rejoicing as the company showed off its new sustainable double-hulled oil tankers. Consumers who viewed the ad had their visions of a green DuPont dashed in front of them when it was discovered that the company was the largest polluter in the US that year.

So does this mean we should give up on companies that promise to be eco-friendly? Not at all. Like in most things, the bad minority of news tends to reach us before the good majority. For the most part, businesses that promise sustainability are making a difference.

 

A cliché, but a Good Cliché

Still, the word sustainable draws a lot of confusion. Are there any requirements for a company to call itself sustainable? What are the motivations to actually become sustainable? Is it all just a bunch of corporate jargon or are there results to back up these claims? These are all valid questions that any consumer doing their due diligence should be asking themselves. Nonetheless, most of these smart shoppers would be happy to report that, for the most part, there are hopeful answers.

Guidelines Exist for Responsible Marketing

For starters, there are many strategies companies can follow when becoming sustainable. One of these procedures was released by the U.S. Federal Trade Commission, which offers voluntary guidelines for green marketing claims including processes like “qualifications and disclosures should be clear, prominent and understandable,” “not [to] overstate, directly or by implication, an environmental attribute or benefit, “ and “to avoid consumer confusion about the comparisons” (Investopedia, 2018).

While these tips are voluntary, following these guidelines is great for risk management when marketing sustainability. Marketing responsibly, a company can avoid lawsuits, community outrage, or a multitude of other problems that could arise from greenwashing.

Interestingly, there is growing evidence that for a company to market ‘sustainability’, it needs to be an integral, innate part of the company’s strategy. It needs to resonate with the organization to the extent that all the stakeholders engage within the initiatives. The modern consumer has to believe that it is a genuinely held and executed mantra within the organization for it to have an impact on the brand/product resonance.

Sustainability Helps Companies Grow

The data-collection company GlobeScan points out that, “continuing the trend of the last few years, most high-ranked companies are consumer-facing brands” This means that more now than ever before, companies really do care what their consumers think about them.

The increased transparency of markets and increased access to information has boosted the practice of sustainable standards. Realizing this is companies such as Unilever, Ikea, and Patagonia, that follow through on their sustainable values which retain and capture audiences through their reputation as global leaders of sustainability (GlobeScan, 2018). This should send a clear message to marketers that the best way of selling the idea of sustainability is through actual implementation. This correlates with GlobeScan’s survey data which displays a majority of marketing experts agreeing that “Integrated sustainability values are the best way for a company to become known as a sustainable leader” (GlobeScan, 2018).

values for sustainability
Data from GlobeScan’s survey shows a majority of experts agree that integrated values are the best way for a company to become a leader in sustainability

Even so, the benefits of sustainability can help companies in more departments than just marketing. An article from McKinsley and Company presents executives of various and diverse industries sharing the benefits sustainable practices have offered to them, such as risk management, systematic management of value chains, and returns on capital through decreasing operational costs through better resource management (Bonini, 2011). So whether companies are trying to market to certain demographics or not, walking the walk for sustainability still offers many benefits for both big and small enterprises. Philip Kotler recently suggested, at Sustainable Brands 2018 – Madrid, that companies that ‘do good’ do better financially, even if there is an initial cost’. It can actually make the company more profitable.

 

Walking the Walk in Sustainability

So, has sustainability become a buzzword? Unfortunately, there is no denying that it has. Politicians and marketers have sucked a lot of the meaning out of the standalone expression. However, this could be for the better. It is displaying to companies that they need to go the extra mile to win over the increasing number of environmentally-conscious consumers.

Consumers are getting more detail-oriented when it comes to buying “green products,” which may come off as a chore for companies to cater towards. Evidence shows otherwise though. For instance, Walmart, number one on the Fortune 500, has saved $12 billion in global supply chain savings in 2011 through a packaging “scorecard” that lowered packaging costs throughout the company’s global supply chain by 5 percent from 2006 levels (Bonini, 2011). Walmart displays what walking the walk in sustainability can do for your company, especially in the way of supply chains.

AT ET2C, we’re serious about sustainability and it’s benefit to our existence as well as the ultimate commercial benefits for purpose driven companies. We are therefore looking into different aspects of sustainability within the supply chain and what it may mean to some of our clients. If you want to talk to us about your own sustainability objectives and how to implement them, contact us.

It’s Not Just a Phase: Why the difference between Greenwashing and Sustainability is Important Read More »

A Local Presence is a MUST for Companies Sourcing from Asia

Industry Insights / / , , ,

local presence is a must for companies sourcing from asia

 

Asia has been an export powerhouse over the past decade. Although the manufacturing base is increasingly fluid across country borders (labour costs, tariffs etc), this will continue for some time yet. In 2017, East Asia exported 5.2 trillion dollars of products to locations like the European Union, the United States, and other East Asian nations like Japan and South Korea.

It remains that sourcing and manufacturing products in Asia can be advantageous and a benefit to your company. However, there are considerable risks of buying from overseas markets; the internet and platforms such as Alibaba have created a massive market (a positive) that can often ‘brush over’ the risks inherent with distance, new cultures, languages and foreign laws and regulations (a negative).

 

Develop relationships

Anybody who has conducted business in Asia will stress the importance of meeting the manufacturer face to face. Companies operating in overseas markets do not always have this luxury. This is where some form of presence is an integral part of benefiting from your Asian supply chain. The ability to develop relationships, monitor production and relay information to the decision makers should not be underplayed.

Depending on product category, volumes, markets and product value, a company has a variety of options to establish a presence. Setting up one’s own office and operation in Asia is at one end of the spectrum. This requires a considerable amount of capital investment and understanding of the local laws and regulations. It is also relatively inflexible and in a fluid market entrenched with global uncertainty there is an argument that now is not the time to be establishing entities in Asia.

 

Work with local partners

Alternatively, one can look to work with local partners, such as sourcing companies and trading houses. Of course, there is a cost to this, but there is also a service being provided where often the communication piece is managed in your local market. With the right partner, it is possible to alleviate the risk, leverage product and operational expertise and provide the visibility that you require to manage your suppliers.

sourcing from Asia
A Buying Office is an Integral Part of Any Business Looking to Source from Asia

Some of the key points to consider when looking at strategic options to have some form of presence in Asia are as follows:

On the Ground

There is no point visiting a factory today, for you to drop down their list of priorities once you have left and are on the plane back home. To develop a relationship that is meaningful, there needs to be some form of constant presence that can be actively engaged with the supplier. We have seen factories in the past change the names on the side of the building for the arrival of their customer!

You need to be able to deal with your key suppliers in their language and in their time zone to ensure clarity and efficiencies (applies particularly for US companies given they are between 11-15 hours behind Asia). It will also help with the development of medium term relationships that are that much more meaningful than arm’s length interactions.

 

Visibility Across Production

If your company was manufacturing products ‘up the road’, you would constantly be visiting the factory to understand how production was going, whether the raw materials were received on time, spot checking in-line quality, and likely doing a final inspection before shipping the goods. It should be no different when buying from Asian suppliers. Having this level of visibility across your production is primarily possible through some form or presence be it an office or a partner in the region.

The ability to identify issues early means that you can put in place solutions. That can be something as simple as the raw material being late and therefore the critical path being extended. Understanding this at the outset means that different parties from logistics, to the ultimate client can be engaged with and expectations managed.

sourcing from asia
Visibility on suppliers at home is usually taken for granted, but visibility from suppliers abroad is just as important.

Risk mitigation

Clearly ensuring that you are getting your products on time and to the requisite quality ultimately enables companies to drive profitable sales. There is nothing worse than receiving goods in your local market that are not compliant and therefore not salable (particularly when you have paid the factory and they are no longer responding to your calls!). Addressing this risk upstream means that there is greater leverage in any discussions required with suppliers given the goods are still on site.

Another part of risk mitigation relates more to establishing an entity in the region and the potential risks that this can come with. Particularly, in China and India, the bureaucracy and regulations and complexity inevitably result in incremental costs building up and time lines being pushed out. These often become a significant distraction to the business when the primary function will be to source and manage the Asian supplier base. Scale of business and expertise will clearly be a factor when establishing your own entity in Asia, but in a lot of instances the costs and other implications can be prohibitive to a business. Just make sure that this is the right solution for you before you move forward.

 

Cost Effective

We are stating the obvious that any option needs to be cost effective. We have seen numerous companies go down a chosen route without a clear understanding of what the final costs will look like and have ended up tripping up down the line as a result. This is applicable whether you a setting up your own office or working with a trading house.

Look at dollar spend on a granular basis rather than get stuck discussing the difference between ‘capex’ and ‘opex’ budgets as a justification for the $100,000 being spent setting up a new office. Understand the full cost implications of establishing an entity before setting it up. For example, there are considerable costs associated with closing a WFOE in China that not many companies are fully aware of at the time of establishing a local buying office. Lastly, leverage solutions that allow a mix of fixed costs versus variable costs (potentially buying some products through sourcing houses).

 

Speed to Market

As the well-known adage says: “Time is money.” When setting up a buying office, a quick set-up is essential to maximizing profitability while minimizing risks in the production process. Given the bureaucracy, establishing an entity in Asia can take longer than anticipated. Build in time to make sure everything is taken into account and you know when the entity is fully operational.

 

Our Solutions

At ET2C, we recognize every client has different needs and we therefore look to tailor our solutions to your individual requirements. Whether it is creating a dedicated team in Shenzhen or working on a sourcing basis, we are here to help you source from Asia in the most cost effective and transparent way. Having operated in Asia for almost 20 years, we understand the complexities of doing business in this part of the world. We know the pitfalls, we know the ‘real’ costs of operating an office in China, Vietnam and India.
Still have more questions or want to learn more about our offerings? Take a look at our website , or contact us at any of our many offices across the world . Our supply-chain professionals are standing by, ready to take your call!

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3-D Printing: Fad or Future?

Industry Insights / / , , ,

3-d printing as the future of manufacturing

 

When 3-D Printing is brought up, I generally tend to think back to the tiny plastic wrench I received during my father’s “bring your kid to work” day. Almost too short to see into the machine, I watched with amazement as the engineer effortlessly programmed it to produce a small bolt. I believe part of me expected the machine to pop out the object in a matter of seconds, but the huge contraption whirred for a while, only to slowly get to work printing the small plastic component. The tour guide then handed us all a small plastic wrench which he claimed came from the machine and we continued onward.

That “bring your kid to work” day was most likely around 2004 or 2005, and while it was amazing to me then, 3-D Printing has come a long way since. Before examining the present, the fact that 3-D Printing is not a new technology is rather noteworthy. The first 3-D printing attempts were made in 1980 by Japan’s Dr. Hideo Kodama, whose rapid prototyping machine pioneered the field of Fused Deposition Modeling (FDM). The technology continued throughout the eighties, with the following decade seeing the first use of 3-D printing in the medical field and the gradual adoption of 3-D printing by other industries.

However, progress for 3-D Printing really picked up in the last decade due to FDM patents becoming public domain. This allowed many companies to pick up the technology which increased the visibility of 3-D printing. Soon 3-D printing was brought up in almost every headline, from Cornell University’s 3-D food printer, the technology being mentioned in Barack Obama’s 2013 State of the Union Address, and the ability to 3-d print bone.

Even so, the hype has begun to die down a bit. Concerns over health and expenses, in addition to bigger trepidations grabbing our attention away from the technology, have caused the tech to shy away from the spotlight of news media. However, the technology itself has not gone away. 3-D printing is still being utilized on a massive scale by numerous companies for a multitude of uses.

3-d printing
In recent years, 3D Printers have made their way from big corporations to personal use. But is large scale production using this innovative tool viable?

3-D Printing in 2018

While 3-D printing may not be making headlines as much as it used to, many companies are still utilizing the technology as an innovative and effective tool. Here’s how some of the top companies of 2018 are utilizing 3-D Printing in their processes.

Hershey’s

As a Pennsylvanian, there is a special place in my heart (and my stomach) reserved for Hershey’s chocolate. Even though Hershey’s candy products have been a staple dessert food for generations, the company has set their eyes on the future. The company 3-D Systems has partnered with the famed candy producer to create a 3-D printer that can be used for chocolate and other edible products.
At the same time, the technology Hershey’s hopes to incorporate into their production process is nothing new. 3-D System’s “SugarLab” projects have produced other sugary treats using 3-D printing methods, including icing and hard candy products. Still, it remains to be seen whether or not Hershey’s will use this technology in mass production or, as most companies do, a prototyping tool (Gilpin, 2014).

3-d printing to expand product offering
Hershey’s is now utilizing 3-D Printing technology in order to expand their product offering

Nike

In the tremendously competitive footwear industry, shoe manufacturers must hunt for any comparative edge they can find. When American football players began to demand a faster shoe, Nike jumped into action and developed 3-D printing techniques to assemble a custom-made plate for the cleats that enhanced the players’ form and speed. Nike quickly realized the potential of 3-D printing since this breakthrough and has customized shoes through 3-D printing for Olympic runner Allyson Felix and for a specific drill used in American football called “shuttling” (Hannon, 2018).
Nike has displayed the immense arena of customization for the world to see, encouraging other companies to gain visibility either by customizing shoes for their customers or for professional athletes. However, Nike has continued to show off their own customized shoes’ power as well, with one recent flex of power being the Breaking2 event. This event saw marathon runner Euclid Kipchoge just miss the barrier two-hour marathon barrier by twenty-six seconds while wearing a specially-designed shoe made using 3-D printing. While Kipchoge couldn’t accomplish the feat, he still ran two and a half minutes faster than the previous record, exhibiting the amazing power of 3-D printed customization. Notably, Adidas has also 3D printed a trainer as well as well although the commercialization piece has yet to be fully resolved.
While 3-D printing has helped these companies develop new products and enhance their offerings , there are still some widespread concerns revolving around the adoption of 3-D printing in the production process.

 

The Hazards of 3-D Printing

When any new technology becomes adopted in manufacturing, it is almost immediately thrown under the scrutiny of both producers and consumers. 3-D Printing is no exception, for the new technology has caused many to be concerned over the high cost of the products, as well as some health concerns that come along with the input materials used by the printers.

Health Concerns of 3-D Printing

In spite of some safety regulations, long-term exposure to the materials used by 3-D printers and the printers’ byproducts has been suggested to be dangerous for one’s health. Recent studies have shown that hazardous vapors and gases are released during the printing process. Specifically, two of the most dangerous byproducts of 3-D printers are UFPs and VOCs, which are acronyms for ultrafine particles and volatile organic compounds.

Cost Concerns of 3-D Printing

Another factor driving hesitation among manufacturers are the costs of 3-D printing. While many are familiar with the high mark-ups surrounding 2-D printer ink, the mark-ups for 3-D printer ink are generally quite high. Standard 3-D printer “ink” will range from $25 to $45, even while the plastic pellets used in the filament only cost around $2/kilogram. Such high mark-ups drive many companies to not even give a second glance to 3-D printers once seeing the price tag of their materials, opting for cheaper methods of production instead.
However, it should be mentioned that the cost of this printer “ink” is decreasing as more companies enter into the 3-D printing market. Competition has lowered the price of this ink in some instances, with companies like BeeCreative, 3D Systems, and MakerBot all attempting to gain customers through lower “ink” prices. Printer “ink” may be able to lower its price in the future as more companies enter the market, but as it stands now, the materials used in 3-D printing need to see a price drop before being considered for large-scale production (Covert, 2014).

 

The Benefits of 3-D Printing

While some of the concerns over 3-D printing may portray the product as having a lot of rough edges that need to be smoothed out, there still are many benefits 3-D printing can bring to a company. From effective prototyping to increased offering potential, 3-D printers have become a valuable asset in the world of manufacturing.

3-d printing to save time and money
Many companies are choosing 3-D printing due to its ability to save both time and money

A Time and Money Saver
“Time is money” is a familiar saying to any businessperson or media consumer. Likewise, spending lots of time on the development process could be seen as a waste of valuable resources. Fortunately, 3-D printing can address some of these concerns. Instead of undertaking a process like mold making, which can cost thousands of dollars, take up to a week, and is generally a sunk cost; 3-D printing can print directly onto a surface without any need for a mold. This allows companies to save money, be more receptive to customer responses to new products, and allocate the saved time to more important tasks.

Easily Customizable
Like stated above, the process of 3-D printing lets companies to more easily respond to customer demands. Yet, 3-D printing could even eliminate the need for a company to guess the desires of a customer all together. Now, 3-D printing can allow consumers to customize their products however they would like them. This could easily be done through a web-platform interface or application where the user could input their choices and a 3-D printer develops a product customized to their exact parameters.
Furthermore, 3-D printing can also make it easier for companies to develop a limited-edition or one-off products easily. With reduced upfront costs in addition to minimal reliance on factory labor, 3-D printing is a decent answer for small batches of customized products.

 

Concluding Remarks

3-D Printing is by no means new. Nearly a decade after the technology became public domain, the market has exploded with start-ups offering a variety of products related to the new technology. Even so, like any new invention, 3-D printing still has some way to go to be truly mainstream and part of the actual bulk production line. Nevertheless, the tech has been able to find its way into some companies like Nike and Hershey’s due to its ability to save resources and speedy customization capabilities. Certainly, 3-D printing will need to address the concerns over health and costs in order to scale up its use in production, but the tool is still great for companies looking to produce small batches of customizable products or quickly design prototypes.

At ET2C we have utilized 3D printing for prototypes and sampling where our clients we may need moulding to be opened for bulk production. This has enabled approval of fit, function and form prior to any CAPEX being incurred and has streamlined the development process. Although this is not a mainstream manufacturing process (too expensive) at this time, it’s current use in the prototyping phase of product development has been invaluable as a proof of concept.
However, with more technological advances, there is no doubt that in the future 3D Printing will have a broader application enabling customization and personalization to be possible on a large scale.

For all enquiries, please contact us via our website.

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Running into First: Ethiopia!

Industry Insights / / , , ,

running into first: ethiopia

 

Does the name Abebe Bikila mean anything to you? Unless you’re a running fanatic or Olympics expert, probably not. Abebe was the first African to win the Olympic marathon, which he completed in Rome in 1960. That’s pretty impressive, especially considering that the US and Russia were vigorously training their athletes as a propaganda move, but it gets better. Not only did Abebe win the marathon by running at a 5:10 minute per mile pace (roughly 18.4kph), but he also did it barefoot.

ethiopia marathon
Abebe Bikila Winning the 1960 Olympic Marathon displays the Ethiopian spirit to quickly adapt and overcome.

It’s no surprise that his home country of Ethiopia is the oldest independent state in Africa while also boasting the title of the second fastest growing economy in Africa and the world. This fast growth and political stability have flagged the developing nation as a potential site for international businesses to cultivate their business in this possibly-bountiful economic environment.

The global outsource manufacturing sector is increasingly fluid, particularly with soft goods (the lowest value add manufacturing process) and businesses are always keen to identify the latest low cost manufacturing base. Asia’s demographic, even with India included, is aging.

Labor is still an important component of manufacturing even in an era of automation and technological advances. The only other continent that can compete with Asia on labor is Africa.

One of the countries being looked into includes Ethiopia. While all sub-Saharan nations in Africa seem to be experiencing economic growth at an average rate of 3.2%, with its 10% growth as of 2018, Ethiopia stands out as one of the fastest. Can this fast growth be sustained, however? Or is Ethiopia just booming before its bust? A look into the profile of this ancient and resilient nation displays hope for prospective businesses but is not without its red flags.

 

Ethiopia

One of the characteristics that has caused the most publicity for Ethiopia is the country’s economy. Ethiopia’s exports have all the characteristics of an emerging economy, complete with a dominant agriculture sector with a rapidly growing manufacturing sector. At the time this article was written, Ethiopia exports a total of 3.13 Billion US dollars of products every year, with its main exports being vegetable products like coffee, which constitutes 24% of the total $1.81 billion made from vegetable exports. Manufactured products are still small in comparison, with only 232 million US dollars being coming from this emerging industry. The economy over the past decade has grown at 10% a year making it one of the fastest growing economies in Africa.

Although Ethiopia still ranks as one of the continents poorest countries, it has resource and labor to make it an attractive destination of export manufacturing. With a population of some 100 million people, 70% of whom are under 30, it has a demographic that props up the manufacturing sector, particularly given the unemployment rate is around the 17% mark.

ethiopia manufacturing agriculture
Ethiopia, while developing its manufacturing industries, still relies primarily on agriculture as its main source of exports.

In addition, it has a developing infrastructure, in part thanks to Chinese FDI. Some of the successes in this space include the development of Ethiopia Airlines, upgrading its network of trunk roads, and expanding access to water and sanitation services, all signaling progress for a more connected Ethiopia – the Addis Ababa-Djibouti rail line cut the journey time for taking goods from land locked Ethiopia to the sea from days along roads to 12 hours. However, one of Ethiopia’s largest problems lays in its power access, where, according to a World Bank journal article, a further 8,700 megawatts of power are needed in the next decade, which requires the doubling of the current power capacity (Morella & Foster, 2011).

Nonetheless, Ethiopia is also improving the conditions and sprawl of its road networks, with a US $43m road designing and construction agreement dedicated to infrastructure. Yet, this large investment along with the need to upgrade its power capacity combined with the large trade deficit could see large amounts of debt in Ethiopia’s near future.

 

Industrial Parks

Similar to the special economic zones that transformed Shenzhen into a manufacturing powerhouse decades ago, Ethiopia now has close to 30 industrial parks demarcated as ‘Special Economic Zones’. There are also incentives for foreign companies to open up manufacturing plants within these zones such as duty free exports, 10 year company tax breaks and no tax for foreign workers and duty free exports.

The majority of these companies are Chinese built and managed but are in the main focused on utilizing the local labor pool contrary to many reports of widespread Chinese labor being imported. Their scale is significant; the Huajin International Light Industrial City is a 1.5 million square-meter park that will eventually have a capacity of 100,000 workers and provide the amenities (such as housing, healthcare etc) – a larger population than the average UK town.

It is not only the Chinese that are investing in ‘Made in Ethiopia’. In Hawassa, some 270km south of Addis Ababa, built at a cost of $250 million by the Chinese Civil Engineering Construction Corporation, there are 140 hectares (part of the first phase) with 52 factory sites which house 20 different apparel firms from 11 different countries. Notably, American clothing giant PVH, whose brands include the likes of Tommy Hilfiger and Calvin Klein, and H&M take up some of the available space.

 

A Marathon, not a Sprint

That’s not to say that there are not challenges that Ethiopia needs to address. It will take time and it will not happen overnight. Unlike 90% of International Labor Organization member states, Ethiopia has no minimum wage. Even though $57 per month is the international poverty line, there are workers being paid less than $50 per month even with overtime. This is something that needs to be addressed and foreign firms will be giving particular focus to this as part of their ethical code of conducts, and there has also been a ground swell of discontent among workers on pay with an increasing number of strikes being held.

The productivity is currently estimated to be a third of that in China. This will develop over time and is a sign of the immature nature of the manufacturing sector (whereas China has to continue squeezing out any productivity gains to remain competitive) and the development and continued investment that will be required going forward.

 

Summary

There is a vast demographic dividend on the African continent, and with the Asian average age increasing, the labor pool of the East is beginning to diminish. That is even including countries like India, Bangladesh and Indonesia. Low value add manufacturing is already present within Ethiopian industrial parks, namely footwear and apparel/textiles, and with continued development and investment ‘Made in Ethiopia’ is likely a label that will become increasingly common in Western retail stores. There are challenges, but these are not dissimilar from the Asian manufacturing base some 20 years ago and arguably Western retailers/brands are now better equipped to deal with the management and implementation of ethical standards at overseas manufacturing plants with the visibility now required across their supply chains. It will take time, but Ethiopia is well positioned to be crowned the ‘Winner’ when it comes to mass manufacturing compared with its African neighbors.

Internally, at ET2C, we are making it our business to understand how the Ethiopian manufacturing sector is developing and its current relevance to our clients. We are constantly looking for new opportunities across Asia and beyond to help our clients source from the most suitable suppliers.
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