Manufacturing Supply Chain Industry Analysis

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01
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Part
01

Operating Effects Due to Digital Transformation

In the area of digital transformation, the industrial Internet of Things (IIoT), business analytics, and 3D printing are all impacting manufacturing operations. From a customer expectation standpoint, direct-to-consumer sales are changing how manufacturers need to operate.

Digital Transformation

Internet of Things

  • In manufacturing, the Internet of Things (IoT) is often referred to as the Industrial Internet of Things (IIoT). IIoT focuses on machine learning, big data, and machine-to-machine communication, which allows for more efficient and reliable operations.
  • In the industrial age, operational success in manufacturing was often measured by how stable the production line was. Any changes to the process typically resulted in delays and defects. With the adoption of IIoT, change is expected and welcomed, as the sensors that are placed on the manufacturing equipment are constantly providing data that provides insights into how the process can be tweaked for greater efficiency and production.
  • In addition to providing data on how production can be improved, IIoT also provides data on equipment health. This has a major impact on manufacturing operations because it is no longer necessary to wait until a piece of equipment breaks down in order to fix it. Rather than having extensive downtime when a breakdown occurs, IIoT allows for potential problems to be identified and dealt with before they have a detrimental effect on manufacturing operations.

Business Analytics

  • As described above, due to IIoT, manufacturers can collect tremendous amounts of data on their operations, and one way that can be used is to identify potential problems with equipment. However, the data can also impact many other aspects of operations.
  • There are many tools that can be used to automate the quality testing process. While traditionally this has been done manually, now x-ray scan, photographs, and high-tech testing software customized for each product component can be utilized to automate the process each step of the way. This helps eliminate variations in objective judgments made by inspectors.
  • Big data can also be used for product optimization. The data that is collected can be analyzed to determine any parameters that may be responsible for varying levels of quality in a product component. Once identified, these parameters can be changed to make improvements.
  • Data analytics can also help optimize the supply chain processes by analyzing how long processes take and determining the best time to place orders. Data on transportation time, potential disruptions, and how quickly supplies are used in the production process are all pieces of information that can help improve the supply chain.

3D Printing

  • 3D printing is considered additive manufacturing, while most production methods are subtractive. The difference is that there is significantly more waste with subtractive manufacturing.
  • Because 3D printing is portable, as compared to traditional assembly line manufacturing methods, it will impact the operations of companies as they are able to produce both components and products closer to where the customers are. Not only does this have the potential to decrease the use of traditional assembly lines, even those utilizing new technologies, but can also impact the supply chain.
  • 3D printing is a form of "on demand" production that has the potential to reduce the need for goods to be transported both locally and globally. With fewer individual components potentially needed to manufacture products, logistics and warehouse operations will likely be impacted by the change.
  • Some industries where 3D technology is being used, or is expected to be used in the near future, are oil & gas, chemicals, automotive, aerospace, medical, food, and construction.

Customer Expectations

Direct-to-Consumer Sales

  • Direct-to-consumer sales are happening for both B2B and B2C companies. Customers are becoming happy to cut out the middleman and buy directly from the manufacturers.
  • Since many manufacturers are only set up to accommodate sales to distributors, this change will require operational changes to be able to ship directly to consumers. This could include packaging changes, establishing new shipping partnerships, or working with third-party fulfillment partners.
  • Additionally, marketing and communication processes will have to change to focus directly on the end user rather than distributors.
Part
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Part
02

Life Cycle Changes

Manufacturing Sector Overview

  • Industry 4.0, also known as "the fourth industrial revolution" is a remodeled approach based on new advancements to achieve results that were not possible in the past, with manufacturers becoming increasingly automated and self-monitoring.
  • The emerging approach, or the "fourth industrial revolution," is the move towards digitization. "Industry 4.0 uses the Internet of Things and cyber-physical systems, such as sensors to collect large amounts of data that can be used by manufacturers and producers to analyze and improve their work."
  • At the heart of Industry 4.0 are smart factories, which will advance the supply chain and production line and create better automation and digitization. Machines which "self-configure, self-optimize, or use artificial intelligence" can create better quality goods or services or more cost efficiencies.
  • McKinsey and WEF have found that "early adopters experience a 112% cash flow advantage from their Industry 4.0 ventures over those who wait for the price of new technology to drop. Accenture estimates the first wave of IIoT adopters could see 30% improvements in productivity, and Symantec found that early adoption can lead to 26% reductions in annual inventory."
  • Industry 4.0 encompasses the "entire product life cycle and supply chain, from design, scheduling, sales, inventory, engineering, quality, and customer, and field service." Industry 4.0 systems "form the backbone of a new paradigm in product life cycles, one that’s typically faster, smarter, and more connected."

Geographic Insights

United States

  • The Smart Manufacturing Leadership Coalition (SMLC), in the United States, "is a non-profit organization made up of manufacturers, suppliers, technology firms, government agencies, universities and laboratories that have the common goal of advancing the way of thinking behind Industry 4.0." It aims to "create an open, smart manufacturing platform for industrial-networked information applications, in the hope that different manufacturing firms will gain easy and affordable access to modeling and analytical technologies that can be customized to meet their needs."
  • The U.S. is already using digitalization to help its manufacturing sector. "The Manufacturing USA program has introduced technology institutes that are cultivating the research and commercialization of technologies such as clean energy, materials and composites, semiconductors, and flexible hybrid electronics."

Europe and Global

  • The German government is investing roughly €200 million (around $216 million) to encourage research related to Industry 4.0.
  • In terms of research and development, the European Union is falling behind "in many enabling technologies of Industry 4.0. For example, in artificial intelligence (AI), the European Union ranks 4th after Japan, South Korea, and the USA."
  • A 2018 survey from McKinsey found that "64% of global manufacturers have connectivity programs in the pilot phase, while another 23% are beginning to experiment with connectivity. 70% are piloting intelligence programs, and 61% are already piloting flexible automation. Of those that responded, only 30% have achieved Industry 4.0 impact at scale."
  • A Deloitte global survey found that "94 % of executives in industrial companies see digital transformation as a top strategic priority, but only 14 % are highly confident that their organizations are ready to fully harness the changes associated with IIoT/Industry 4.0."
  • The findings indicate that a majority of manufacturers are moving towards integrating "digital technologies into their operations. They’re making their factories more connected, smarter, and increasingly automated."

Specific Insights on Product Life Cycles

1. Rapid Prototyping

  • Industry 4.0 concepts are changing product life cycles. One example of this is the use of 3D printing workflows, which are becoming increasingly prevalent in Industry 4.0 systems. These follow a highly digital process by using analytical parameters that provide feedback throughout production to manufacture objects in the physical space.
  • Traditional vs. Emergent: Traditionally, the process was slow and resource-intensive, which limited businesses from moving new products through the prototyping stages in a fast and cost-effective way. However, Industry 4.0 manufacturers can now do this much faster and easily create small, 3D printed prototype batches of products for development.
  • Implications/Effects: This process can dramatically "shorten product lead times by enabling product designers to test new ideas and make adjustments on a rapidly accelerated timetable, meaning that businesses can put out new products more quickly and with a higher degree of certainty (due to the digital feedback endemic to the 3D printing process)."

2. Product Customization

  • Industry 4.0 also facilitates product customization. Digitized manufacturing processes are making production planning more visible and adaptable. It is becoming easier to make small adjustments to "production processes on a per order basis while placing customized products into existing production workflows."
  • Traditional vs. Emergent: In the past, planners had to reimagine their entire production workflows when an order for customized products came in, which could cause "production slowdowns, premium freight, or other disruptions from complex orders." Planners can now, "adapt existing schedules and processes to create custom products, thus keeping production capacity at optimal levels and maintaining value."
  • Implications/Effects: The product design process will become more collaborative and more individualized due to easier product customization. Manufacturers and their customers can synergize by connecting and communicating more easily and businesses can position themselves as more "agile, dynamic, and adaptable" to customers.

3. Predictive Analytics

  • Predictive analytics workflows in manufacturing "offer both agility and added security to new and changing production processes."
  • Traditional vs. Emergent: Many supply chain managers typically have difficulties with meeting short delivery windows on some customized orders. Predictive analytics "could model the effects of customized products on a value chain, and also predict the demand for repeat custom orders in advance, based on customer purchasing habits."
  • Implications/Effects: With predictive analytics, production planners "could potentially adapt their plans to include some custom orders before the orders are placed, helping to minimize disruptions and unexpected supply chain events, while still ensuring on-time delivery."
Part
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Part
03

Implications and Impact of Digital Transformation

Thee key impacts of digital transformation in the manufacturing sector are that (1) manufacturers are becoming technology companies, (2) competitors are increasingly new and changing and (3) cybersecurity risks are rising.

Manufacturers are Technology Companies

  • According to industry experts (e.g., Forbes, IndustryWeek, RSA, Hexaware), one of the most significant overarching impacts of the current digital transformation in the manufacturing sector is that industry players are increasingly becoming technology companies.
  • Amid what Hexaware and others are terming The Fourth Industrial Revolution, manufacturing companies are integrating so much technology into their production processes (e.g., artificial intelligence, 3D printing, robotics, self-driving trucks, IoT) that the distinction between manufacturers and technology companies have "begun to blur."
  • As evidence of this shift, RSA notes that manufacturers such as Ford are currently filing more technology patents than technology companies such as Google and Amazon.
  • Taking this example a step further, the average high-end car has many millions of lines of code, compared with the approximately 1.7 million lines in the Windows kernel.
  • Notably, this transformation has bolstered both profitability and productivity in the industry, with Forbes and MPI Group reporting that 70% of manufacturers believe IoT has increased their profitability.
  • Similarly, Capgemini found that manufacturers who have implemented smart factories have realized 20% improvements in both product quality and productivity.
  • Going forward, according to Hexaware, 86% of manufacturers worldwide anticipate further cost and revenue improvements due to digitization over the next five years.
  • Additionally, Forbes also expects that manufacturing companies will invest an additional $267 billion by 2020 in their digital transformations.

New & Changing Competition

  • In parallel, this shift to manufacturers as technology companies is changing the industry's competitive landscape, with the evolution of existing industry leaders as well as the entrance of "new, digitally enabled" players.
  • According to RSA, the risk of not innovating is now one of the greatest threats to manufacturers worldwide, given that historic competitors are "upping their digital technology game," while new, digital entrants in adjacent markets are increasingly encroaching on market share.
  • Specifically, over half of the global 2000 companies plan to incorporate modern technology into their manufacturing processes by 2020, while "innovative startups" are pushing existing players to reconsider and redesign their historic business models.
  • As a result, the large majority (86%) of manufacturers agree that adopting digital technologies is now "necessary for survival," according to IndustryWeek and Mint Jutras.
  • However, many manufacturers are currently struggling to adapt and compete, given that digital transformation comes with many risks and hurdles itself.
  • According to the 2018 book Network, Smart and Open, many manufacturing companies have failed to make more rapid technology advances given the fact that doing so often requires that they "completely redesign" their operating models.
  • Additionally, ResearchAndMarkets notes that manufacturers in less developed or lower-cost countries are challenged in finding sufficiently skilled labor to support the latest technologies, with only 2% of the laborers in countries like India possessing the requisite skills.
  • Similarly, Forbes highlights that companies with fewer employees may also lack the capacity and ability to invest in sufficiently skilled employees, adding that approximately 90% of US manufacturers have fewer than 500 employees.
  • However, despite the cohort of manufacturers that may be falling behind, IndustryWeek notes that almost two-thirds of manufacturers believe that they are or will be fully prepared to compete in the increasingly digital manufacturing industry in the near future, thereby forecasting only heightened technology-related competition moving forward.

Increasing Cybersecurity Risks

  • Finally, The Wall Street Journal, Willis Towers Watson and RSA are among the industry experts pointing to increasing cybersecurity risks as another major implication of the digital transformation in manufacturing.
  • RSA notes that manufacturers were already "prime targets" for cyber-attacks that look to steal intellectual property or disrupt operations, citing the NotPetya ransomware as a "tough lesson" for global manufacturers.
  • However, according to The Wall Street Journal, the increasing prevalence of digital supply networks, data sharing, smart factories and connected objects, among other digital transformations, has heightened this cyber-threat.
  • RSA corroborates this assessment, stating that cybersecurity risks for manufacturers are "widely expected to increase" as sensors and other connected devices are further integrated into daily operations.
  • Such cyber-attacks often lead to a number of other risks for manufacturers, such as business disruption, privacy breaches and third-party supply chain complexities.
  • However, manufacturers are increasingly realizing the importance of readying internal business continuity, incident management and response plans, as well as making decisions that better consider product pedigree and supplier trust.
  • Meanwhile, experts including The Wall Street Journal discuss a variety of cybersecurity strategies that global manufacturers are currently and expected to adopt to better mitigate such risks going forward.
Part
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Part
04

Implications from Coronavirus Outbreak

The coronavirus outbreak has caused significant disruptions in several manufacturing industries, including the tech and electronics, automobile, transportation, fashion and textile, and transportation equipment and machinery industry. Some potential implications/disruptions of the outbreak on these industries are supply chain disruptions, low consumer spending, discovery of new markets by manufacturers, a drop in the global GDP, and travel disruptions/transportation ban.

Supply Chain Disruptions

Low Consumer Spending

Global Discovery of New Markets

  • Due to the disease outbreak in China, several companies will opt to shift their manufacturing operations to other, safer regions. According to the Economic Times, a few days after the outbreak, Indian manufacturers and exporters received an increased number of inquiries, particularly from the US and the EU, with the aim of replacing China as their supplier.
  • According to Rakesh Kumar, the director-general of India’s Export Promotion Council for Handicraft, the country received over 50 new accounts seeking to source several goods, including fashion goods, textiles, and furniture. The US and the EU have also set their eyes on India for products like garments.
  • Tech companies have also not been left in shifting their supplies to other countries. Tim Cook, Apple’s CEO, reported that the company is working on a mitigation plan to tap alternative supplies.
  • However, some companies in the electronics manufacturing industry noted that they are unable to move their supply chains since the process is either too expensive or because China is the primary supplier of the raw materials.

The Global GDP to Drop

Travel Disruptions/Transportation Ban

  • Since the coronavirus outbreak, the movement of people has been restricted within and outside of China. According to Vogue Business, the China Outbound Travel Research Institute expected that outbound tourists would surpass 7 million during the Spring Festivals of 2020. However, with the disease outbreak, both the US and China have discouraged traveling, and the Lunar New Year holiday travel dropped by 28.8% compared to 2018.
  • According to Odyssey Logistics, manufacturers who are planning to transport products from mainland China will witness a reduction in airfreight capacity, since the major cargo and passenger airline for the area, Cathay Pacific, minimized its capacity to 50%. The hardest hit industries would include electrical equipment and machinery.
  • Other regions like the US and the EU have also administered stringent travel restrictions to contain the disease outbreak. In February of 2020, the US banned the entry of foreign nationals that visited the nation 14 days before arriving in the United States.
  • The coronavirus outbreak has also disrupted air cargo movement. For instance, AIG Cargo canceled all its services in the first week of February to and from China, citing a travel advisory by the UK government. Also, the German logistics group DHL reported several disruptions to air cargo shipments, rail cargo services, and trucking.
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Part
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Sectors Which Could See Disruption from Coronavirus Outbreak

Coronavirus has been a global topic of concern. Not only pertaining to the healthcare segment but the overall global economy, Coronavirus has been a cause of disruption for several manufacturing and services sectors across the globe and their respective supply chains.

Tech & Electronics Industry

  • Apple is one of the most affected companies in the tech sector, both in terms of retail and supply chain segments. The company has several supply sources in the Wuhan region and that it had closed a few retail locations.
  • The tech and electronics sector disruption also includes companies like Pegatron and Electrolux. One of the core reasons for these disruptions is due to the fact that China is responsible for the most part of the supply chain of tech and electronic goods components, which includes everything from LED chips to TV panels to capacitors to motors to everything needed in the assembling of electronic and tech goods.
  • According to a recent Euromonitor International, the high tech good industries, particularly the manufacturing segment is projected to be highly affected because the global production for this particular industry is centrally located in china and amounts to nearly 46% of global production. The industry's export share for this particular segment is also very high, almost close to 27%.
  • US manufacturers are mostly dependent on components for the production of most electronic goods, such as computers. People from National Public Radio recently talked about the issue and pointed out that the computer manufacturing segment will be one of the most affected sectors in the US, due to its high dependency on China for most critical components.

Automobile Industry

  • "Automotive is another industrial segment that is likely to be adversely affected; BMW, Tesla, and Jaguar Land Rover also announced that the virus outbreak might hinder their everyday operations in China; as an indirect effect, car companies would also suffer from reduced production output in hi-tech goods, plastics, and chemical goods industries, which are among the industry's core suppliers."
  • Analysts have projected that the impact of the Coronavirus on the global automotive industry is mainly dependent upon the number of days these factories or manufacturing units will remain closed, and the impact will be directly proportional to the number of more closure days.
  • "According to industry analyst IHS Markit, the closed provinces are normally responsible for over two-thirds of vehicle production in China. First-quarter production losses because of the crisis are expected to hit around 350,000 units (-7%) if the plants remain closed until February 10."
  • Hubei, a province in China, which is one of the most affected and one of the provinces which is mainly responsible for manufacturing automotive components, is being highlighted as one of the main provinces responsible for the supply chain disturbance caused by a shortage of components and automotive parts.
  • Companies like General Motors and Hyundai have faced supplier problems due to the Coronavirus outbreak. Mitsui, one of the Japanese trading house giants, expects that manufacturing activities are most likely to slow down in the automobile and other sectors, and possibly reduce steel product demand. Tesla is also assessing whether the supply chain for cars built in its California plant will be affected.

Transportation Bans have Fueled Supply Chain Interruptions

  • One of the core causes of global supply chain disruption is transportation issues, air travel bans. Air transportation alone has had a significant impact, with global customers across the world in industries like transport equipment, machinery, chemical products, metal products, pharma, and medical equipment. So air travel bans in China have also affected manufacturing industries like metal and machinery industries since the components required for manufacturing in these industries are still in transit.
  • The final impact is currently difficult to quantify as the crisis is only beginning to unfold.

Fashion & Textile Industry

  • Companies like H&M have reported limited supply chain disruptions due to the virus outbreak in China. Delay in shipment deliveries has caused problems for businesses in Europe, as the region is heavily dependent upon China for most of its fashion production. "Even though most factories are still closed due to the Chinese New Year break, many factories are now delaying the start of production because of the fear of inappropriate health procedures for their workers, which will have a ripple effect throughout the global fashion production cycle."
  • "Due to the ongoing crisis, the production cycle of the fashion industry for the Autumn and Winter collections is also most likely to be delayed, and if the situation gets worst, this will be directly affecting the businesses of most European companies that rely heavily on Chinese manufacturers."
  • "VF Corp. in a recent interview stated that although it cannot yet gauge the impact that the Coronavirus outbreak will have on its supply chain, some 16% of the group’s total cost of goods is sourced directly from mainland China, with 7% of this going to the U.S. market."

Electrical, Transportation Equipment and Machinery Manufacturing Industry

  • China is an eminent part of the modern global industrial machine segment; since it "alone accounts for more than one-sixth of the global economic output and is considered as the world's largest manufacturer."
  • The number of facilities located in the affected regions of China of publicly-traded companies, who are engaged in prominent supply-chain production of electrical equipment, transportation equipment, and machinery is 47, 28, and 28, respectively. "The computer and electrical equipment industry and the machinery industry could take the biggest hits due to the Coronavirus outbreaks. Since these production units are closed, the supply chain of these industries is most likely to be affected.

Research Strategy

In order to provide a thorough outlook on the manufacturing sectors expected to be vulnerable to supply chain interruptions due to the Coronavirus outbreak, we employed a variety of resources, including news and media sources, market research publications, expert interviews, and podcasts, and several others. Our background research unveiled that the impact of the Coronavirus has not yet been calculated since it is still unfolding and its early stage. Disruptions in the supply chain have been limited for all the above mentioned industries. We have not ranked any of these industries, in order of vulnerability as the statistics to confirm the likelihood of these industries being vulnerable to supply chain interruptions are unavailable in the public domain and studies have also not been conducted yet for detailing the expected impacts of the supply chain disruptions.
Part
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Part
06

Brexit - Chemicals Sector

Some insights relating to England completing Brexit include loss of marketplace, multiple registration and change in trade deals, and the UK's REACH registration becoming invalid. Below is explicit information on the request.

Loss of Marketplace

  • With Brexit, the British chemical sector would suffer the most if a new Free Trade Agreement (FTA) would not be implemented. This sector is projected to lose about £7 billion in exports if a new FTA is not created with the EU.
  • The British chemical sector exports goods worth £55 billion abroad each year, where more than half of these products are exported to the EU nations. Currently, UK's chemical companies are facing stiff competition from the US and Asian chemical industries; therefore, breaking away from their continental trading partners, EU nations, could immensely affect their supply chain.
  • According to economic analysts, for the UK to minimize disruption to trade, it must remain within the EU. However, with Brexit, the British companies will fall under two scenarios: 1) Implement a new FTA, and 2) No FTA.
  • Even if a new FTA is implemented, chemical companies could still lose about £2.5 billion in exports. If there would be no FTA, the British companies could contract by -1% per year on average, compared to a current projected growth rate of +4% per year if the UK does not leave the EU.
  • Also, the UK's chemical industries are projected to lose about 20% of the gross value if the UK leaves the EU. Additionally, EU27 countries are likely to look for alternative suppliers of chemicals leading to a loss of market for the UK's chemicals.

Multiple Registration and Change in Trade Deals

  • After Brexit, Britain will be an open nation/country because it would have left the customs union and the single market, and this would be a catastrophe for Britain's chemical sector. This is because the UK's chemical industry majorly relies on the EU supply chains; this is, chemicals usually cross many borders multiple times during processing and assembling.
  • Therefore, if the UK exits the EU, its chemical companies could end up transferring over 9,000 registrations to the EU countries to keep selling them their chemical products. Also, new chemicals could be registered twice, in the UK and EU, with substantial additional costs ranging between £1,500 and £30,300.
  • Additionally, according to labor MP, Mary Creagh, tariffs would be a burden; however, non-tariff barriers could cause a lot of damage.
  • Since chemical products have the strictest import/export regulations, this will disrupt the free movement of products and services between the UK and EU, and it will cause huge consequences, especially in terms of money. According to Richard Carter, managing director of BASF UK, chemical industries will incur additional costs of between €40 to €60 million per year due to changes in the customs duties and delays.
  • The only good news about the UK leaving the EU single market is that British chemical industries could make separate trade deals with other countries worldwide without being concerned with EU regulations. However, according to Dominic Raab, cabinet minister, the UK's 'hands will be tied' while practicing international trade.

UK's REACH Registration Could Become Invalid

  • If the UK has left the EU without a deal with ECHA (Europeans Chemical Agency), its REACH (Registration, Evaluation, Authorization, and Restriction of Chemicals) registrations can become invalid.
  • According to a White Paper published in July 2018, UK regulators will continue to participate in ECHA (chemicals) committees and offer financial contributions; however, they will not vote. Also, the UK companies would be allowed to continue registering their chemicals directly with the ECHA.
  • If after Brexit and the UK had not reached a deal agreement with ECHA, the following will take place:
  • The UK companies registered with REACH will need to transfer their registrations to an EEA-based organization so that they can be able to sell their products into the European Economic Area (EEA) market.
  • The UK downstream users would face new registration requirements for them to continue importing chemicals from an EEA nation.


Part
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Part
07

Brexit - Industrial Products

While Brexit officially occurred on January 31, 2020, the details of the UK's trade relationship with the EU has yet to be confirmed. This means that industry analysts are still uncertain about how exactly the industrial products industry will be affected by Brexit, but they offer many scenarios and insights about possible outcomes of the process.

Tariffs and Tax

  • If a more favorable trade deal is not reached between Britain and the EU, import and export tariffs will default to the WTO's rate of 10%.
  • This will understandably affect all businesses within the supply chain, as goods crossing borders several times in the supply chain will drive the price of production up.
  • Some countries have shown a willingness to negotiate separate free-trade deals. There is the potential for the UK to strike favorable deals with new countries it did not have access to as part of the EU, but this will take a significant amount of time to trickle down to the industry.
  • Furthermore, it is unclear whether the UK will be excluded from the EU VAT (value-added-tax) network.

Conformity

  • A new framework for conformity will be introduced for products sold in the UK. While no one knows exactly what this will look like, it means that manufacturers may have additional or different standards to adhere to achieve the ability to sell their products in the UK marketplace.
  • Goods placed on the market after Brexit will need to be relabeled.
  • Brexit will also alter the structure of authorised representatives, potentially creating confusion or extra measures for products. Goods coming onto market after Brexit will need a representative in both the UK and the EU since now the same representative cannot stand for both entities.
  • Additionally, EU goods that may have used a UK accredition service now will need to find a new conformity assessor, as the UK body will no longer be valid or recognized.

Intellectual Property Rights

  • EU laws on intellectual property rights will no longer stand in the UK after Brexit. Therefore, those in the UK who had previously only registered with the European office will now need to register with the Office of Protection Rights in the United Kingdom.
  • EU trademark opposition will now no longer apply in the UK.
  • The EU and the UK will have to determine, via their future trade deal, how to approach intellectual property rights. The uncertainty so far means EU right holders in the UK may need to assess whether registering their trademark in the UK is pragmatic.

UK Industry Will Suffer

  • As with many other verticals, this industry has already seen reduced profit margins since the Brexit vote.
  • Over half of British manufacturers have report a decline in interest with their EU suppliers and buyers, and 64% have reported lower profit margins.
  • At least half of manufactured goods in the UK go EU countries and only 18% go overseas.
  • Therefore, the continued level of uncertainty will continue to impact the industrial products industry.
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Part
08

Brexit - Consumer Packaged Goods

Three detailed insights discussing England completing Brexit as it relates specifically to the manufacturing sector in the consumer package goods market have been provided below. These insights focus on company headquarters, supply chains, and product labeling.

Company Headquarters

  • Brexit’s impact on CPG companies will depend on their involvement and exposure in the United Kingdom. Companies that have their headquarters in the UK will be affected more than global companies that are not based in the region.
  • The companies will be affected in terms of market access, sourcing raw materials, nontariff barriers, and ultimately financial performance.
  • For CPG companies that trade from outside the EU or UK, there could be reduced tariffs and improved trading terms.
  • In addition, Brexit will result in some companies moving their headquarters or offices. Examples of companies that are leading this trend include Panasonic and Sony, which moved to continental Europe.
  • According to the Food & Drink Federation, 17% of FMCG companies intend to shift from their UK headquarters. A case in point is Unilever. Other manufacturing companies are not implementing their expansion plans while some are focusing on expanding in the EU.

Supply Chains

  • Brexit could complicate the movement of goods via current supply chains and make the process slow, expensive, and hard to execute. Companies that are based in the UK and have a multicountry supply chain will be more affected than those that only have a UK-specific supply chain.
  • To address this issue, companies will have to make investments in warehouses and storage spaces at different locations to cater for any delays in shipping. Companies that focus on perishable food products will be adversely affected due to the limited shelf life of the items.
  • As it stands, manufacturing companies that are based in the UK and rely on EU suppliers are expanding their networks by searching for alternative suppliers in non-EU countries and the UK.
  • In addition, complex changes in information technology systems will have to be made to cope with the increased administration functions due to company import and export declarations of goods being shipped between the EU and UK.

Product Labeling

  • CPG companies that are based in the UK will have to evaluate the advantages of continuing to follow EU safety and product labeling standards. Since these standards are strict, companies in the UK might want to continue following them as a way of ensuring guaranteed access to EU markets.
  • After Brexit, the standards could be changed for various reasons such as reducing production costs. A cost-benefit analysis would be useful to CPG companies since it will help them evaluate the costs of making such changes and the financial impact.



Part
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Part
09

Brexit - Building Products

While Brexit officially occurred on January 31, 2020, the details of the UK's trade relationship with the EU have yet to be confirmed. This means that industry analysts are still uncertain about how exactly the building products industry will be affected by Brexit, but they offer many scenarios and insights about possible outcomes of the process.

Materials

  • The UK construction industry imports around 64% of its materials from the EU. If new tariffs are imposed, it could increase the overall price of construction.
  • Additionally, 63% of building products made in the UK are subsequently exported to the EU. Any possible new tariffs would greatly affect the ability of the building products industry to remain competitive and robust.
  • Extra border controls could result in delays to projects both in the UK and EU.
  • With many small operators in this industry, there is a reduced capacity to cope with delays and/or stockpile key materials.
  • The industry has already suffered a dramatic contraction since the British vote for Brexit. Faced with uncertainty, the European Construction and Materials Index fell 2.1% after the initial vote.
  • If the UK government enacts protective policies, it will affect overseas imports from other countries like China.

Skills Shortage

  • The construction industry is already facing a skilled worker shortage, relying heavily on EU workers to fill gaps. Even without Brexit, experts estimate a 250,000 person shortage.
  • If free labor movement is removed or curtailed, as the Home Secretary wants to do, it would affect the British ability to keep up in the construction industry.
  • Around 8-10% of workers in the industry currently are EU migrants. Without sufficient workers, labor costs will rise.

Infrastructure Funding

  • The European Investment Bank and the European Investment Fund give billions to infrastructure improvement projects across the EU. When Britain leaves the EU, it will no longer have access to this funding and the amount of money it will receive from the UK government for projects is uncertain.
  • If consumption of building products drops due to reduced infrastructure investment, this affect the industry's profitability.
Part
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Part
10

Brexit - Medical Equipment

While Brexit officially occurred on January 31, 2020, the details of the UK's trade relationship with the EU have yet to be confirmed. This means that industry analysts are still uncertain about how exactly the manufacturing sector in the medical equipment market will be affected by Brexit, but they offer many scenarios and insights about possible outcomes of the process.

MANUFACTURERS AND AUTHORIZED REPRESENTATIVES

  • The identification of manufacturers by an authorized representative in the EU may be more complicated than in the past. There shall be the adoption of new medical device regulations, which are expected to impact medical device manufacturers substantially.

NOTIFIED BODIES

  • In contrast, the MHRA intends to give an ongoing legal status to current British notified bodies in the UK market, to recognize the validity of the certificates issued before January 31, 2020. Certificates provided by approved British notified bodies for products sold in the UK market will, therefore, continue to be valid following Britain's withdrawal from the EU.

REGISTRATION OF MEDICAL DEVICES


Part
11
of twenty-three
Part
11

Brexit - Automotive

While Brexit officially occurred on January 31, 2020, the details of the UK's trade relationship with the EU has yet to be confirmed. This means that industry analysts are still uncertain about how exactly the automotive industry will be affected by Brexit, but they offer many scenarios and insights about possible outcomes of the process.

Even With A Free Trade Deal, The Industry Will Still Suffer

  • Even if the UK obtains the best possible trade deal with Brussels, a version of the free trade it enjoyed as a EU member state, experts warn the automotive industry will still take a hit.
  • Sales and investments in the industry dropped over the past couple years due to uncertainty. Therefore, output and exports are now lower than expected.
  • Lower costs of producing automobiles abroad is predicted to have a negative effect the export market, and manufacturers will likely return to a greater focus on the domestic market.
  • For example, Nissan has stated that if a "hard Brexit" occurs, it will actually pull EU production and focus on local production, aiming to increase its domestic market share to 20%.
  • While the effect of Nissan's plan could actually be positive for the UK, the overall industry prediction is one of reduced production/profit.

Tariffs Will Play a Large Part in Determining the Fate of the Industry

  • The fate of the industry is largely going to be determined by the tariff rates that the UK can negotiate in its EU trade agreements. If no deal happens, tariffs will default to the WTO's 10%, which could cost the industry £1.8 billion in exports.
  • 53% of assembled cars and 69% of car parts made in Britain are exported to the EU, so a 10% tariff would hugely affect automaker's ability to do robust export business.
  • Furthermore, supply of cars and car parts within Britain would also take a huge tumble and/or significantly increase in cost. 68% of registered cars and 80% of components in Britain come from the EU, so this could cost upwards of £2.7 billion if a 10% tariff were imposed.

Delivery Schedules/Timing

  • In addition to increased costs with importing/exporting assembled cars and components between the UK and the EU, a huge portion of components cross borders daily between manufacturers.
  • Deloitte estimates that £35 million in automotive components cross the border every day for "just-in-time" deliveries.
  • New border controls, in the absence of free trade/movement, could delay these critical deliveries and have a knock-on effect the automotive supply chain.
  • Manufacturers and suppliers have reportedly already started stockpiling parts, which is not practical nor sustainable long-term.

Skills Gaps

  • Even before Brexit, there was already a 5,000 person skills gap shortage in the automotive sector in the UK.
  • Reduced hiring flexibility adds to the industry's challenges, dramatically cutting workforce agility.
  • SMMT estimates at least 10% of current automotive employees are from the EU. The ratio for some companies within the supply chain is as high as 30% EU employees.
  • A recent survey reported that 80% of British manufacturers reported difficulties with hiring qualified staff. This was before Brexit officially occurred, so experts warn it could get even worse, as the Home Secretary wants to cut EU-immigrations and introduced stricter wage requirements for immigrants.
  • Skills shortages could significantly impact company operations and production rates, leading to fewer cars and components being produced in Britain.

Part
12
of twenty-three
Part
12

China Trade - Chemicals

The regulatory changes around China trade that specifically affect the manufacturing sector in the chemical market include a reduction in chemical trade, insecurity about chemical investment, loss of jobs, and impact on the supply chain.

Reduction in Chemical Trade

  • In 2019, the U.S. increased 10% tariffs to 25% on Chinese goods which included chemicals like vinyl chloride, vanillin, and sucralose.
  • In retaliation, China increased tariffs on billion worth of US goods, which included chemicals like methylene diphenyl diisocyanate and polyethylene terephthalate chip, among others.
  • Due to the China trade war, chemical trade between the United States and China will be reduced drastically, as both countries will search for alternative suppliers in countries that are not affected by the trade conflict.
  • With an increase in tariff rates, the manufacturers of the specialty chemical makers, firms that rely on exotic molecules from abroad, will be severely affected.
  • Because of the tariffs, the US chemical trade deficit with China increased to $4.0 billion in 2018.

Insecurity about Chemical Investment

  • The retaliatory tariffs imposed by China could lower the return on investment for recently built chemical projects or under construction projects as the chemicals produced in the U.S. are already suffering from both higher cost of materials imported from China and the shrinking Chinese export market.
  • Due to the nature of chemical manufacturing, chemical producers do not have many options to modify their manufacturing process to change how their products are classified and avoid tariffs.
  • Chinese chemical manufacturers will reduce production as well as their purchases of chemicals and plastic resins since they will have less access to U.S. consumers.
  • Because of the China trade war, chemical manufacturers may have lower profits and chemical production in China.
  • The United States will be in danger due to higher tariffs and manufacturers will have insecurity about investment in the Chinese chemical industry.
  • Global chemical manufacturers, including Chinese chemical companies, may consider shifting investment from China to other countries that offer advantages like low production costs, proximity to markets, and regions that are not under trade conflict.

Loss of Jobs

  • Due to the rising demand for chemicals in China, chemical manufacturers had made huge investments decisions. However, due to retaliatory tariffs imposed by China, chemical manufacturers are suddenly facing the possibility that the Chinese demand they thought they could count on could fade away.
  • U.S. based chemical manufacturers are facing a plunge in profits because of the trade war as companies in the U.S. were forced to send products to markets with less advantage outside of China.
  • The American Chemistry Council has stated that the Chinese retaliatory tariffs on U.S. exports could put 8,000 chemical workers' jobs at risk if the China trade war is not resolved.
  • The trade war can also affect the jobs and wages of about 46,000 people who work in the companies that provide goods and services to the chemical organizations.

Supply Chain

  • An increase in tariffs by 10% on chemicals products has scrambled and complicated the supply chain process of chemical manufacturers, and the producers who had avoided duties will be included under the new tariffs.
  • Some chemicals listed for tariffs are used in the production of food products, beverages, pharmaceuticals, and personal care items, among others.
  • Companies based in the United States will be more affected due to the rush in transit times as it can create chaos on carriers and freight forwarders trying to coordinate customer shipments from China to the U.S.
  • A rise in tariffs due to China trade will likely promote more freight to ship ahead of the deadlines.
Part
13
of twenty-three
Part
13

China Trade - Industrial Products

China is known to possess the ability to produce industrial goods at a lower cost compared to most countries due to the availability of labor and cheaper raw materials. Consequently, many manufacturing companies in the United States and the European Union are unable to compete, with several jobs lost within the industrial sector. The proposed changes around China Trade that specifically affect the industrial product manufacturing market include imposed tariffs and quotas on industrial machinery and equipment, imposed duty on steel and aluminum, and increased tariffs on chemicals and plastics.

Imposed Tariffs of Industrial Machinery and Equipment

  • In February 2018, the United States administration imposed tariffs and quotas on major industrial product categories imported from China. Based on the proposal, tariff rates were to be raised on Chinese products worth $250 billion, from the previous 25% to 30%.
  • According to Business Insider, the Chinese industrial machinery and equipment that will be affected by this proposal include industrial heating equipment, scales used to weigh large industrial equipment, industrial ovens and furnaces, industrial batteries, and escalators.
  • The imposed tariffs on industrial products are most likely to affect business-to-business (B2B) industries. According to Euromonitor International, the new trade tariffs target electrical equipment, machinery, basic chemicals, metals, engines, industrial control equipment, electronics, and pharmaceutical industries. The US imports almost a third of the aforementioned products from China; the tariffs will inflate product prices, which would affect the buyer industries.
  • The IBIS World also noted that domestic industrial manufacturing companies would greatly benefit from the imposed tariffs. In particular, the Circuit Board and Electronic Component Manufacturing industry would gain a lot from duties imposed on industrial process controls and communications devices assemblies, which comprise over 40% of the total industry revenue.

Imposed Tariffs on Metals (Steel and Aluminum)

  • In 2017, the U.S. Department of Commerce considered reviewing Section 232 of the Trade Expansion Act of 1962 based on the threats imports by steel and aluminum imports, which were driven by overproduction and excess capacity in China. The phenomenon caused collapsing prices in the U.S. aluminum production, employment, and capacity. It was found that the market price of aluminum had fallen by 39% from 2007 to 2016.
  • Because of the witnessed steady price collapse, the U.S. administration imposed tariffs on steel and aluminum, major Chinese exports, in March 2018. The U.S. administration placed a 25% duty on steel imports and 10% duty on aluminum imports.
  • A positive impact of the tariffs is expected in the domestic aluminum manufacturing industries. The Economic Policy Institute projected that the production of primary aluminum would increase by 67% between 2017 and 2018. The restart of new smelters in the industry would also create over 1,000 new jobs and generate new investments of up to $100 million.
  • Another report published by South China Morning Post revealed that Chinese steel producers would not be affected by the new steel and aluminum tariffs since they would be enjoying more exemptions than U.S. allies, including South Korea, Canada, the U.K., and Spain. Although Chinese steel exports fell to 9.34 million, the country was able to increase its total production to 928.3 million metric tonnes from the previous year’s 831.7 million metric tonnes.
  • Critics of the steel and aluminum tariffs forecast an increase in volatility of the global trade with a slower growth rate of job creation. Overall, five jobs may be lost for every one gained. Additionally, there would be over 36,000 job losses for every job gained in the U.S. aluminum and steel manufacturing sector.

Trade Changes on Chemicals and Plastics

  • The U.S. chemical manufacturing sector relies on China for several chemical products that are critical to their processes. Every year, the U.S. imports over 1,500 chemicals and plastics from China, which are valued at $26.5 billion.
  • According to Independent Company Intelligence Services (ICIS), the U.S. imposed 25% tariffs on industrial chemicals such as acetyls, olefins, alcohols, aromatics, anhydrides, acrylics, and glycols.
  • On the other hand, retaliatory tariffs by China affected over 1,000 chemicals and plastics exports from the U.S. worth $11 billion. The critical chemical products affected included linear low-density polyethylene (LLDPE), Ethyl vinyl acetate (EVA), polypropylene (P.P.), and high-density P.E. (HDPE).
  • The chemical tariffs imposed by both countries have created opportunities for industrial product manufacturers in the U.S. According to CNBC, the U.S. oil majors and chemical companies are planning major investments to produce polyethylene. Also, the U.S. will continue to generate profit from the tariffs since China relies on the U.S. propane, which is demanded by Chinese plants to create propylene.
  • The Chemical and Engineering News reported that the U.S. would be the most affected with the chemical tariffs. According to the report, the U.S. requires dodecanedioic acid, a chemical that is used to make nylon 6-12 for automotive parts manufacturing. However, apart from a single manufacturer in Europe, the compound is only supplied by China.
  • A 2018 Petrochemicals Special Report projected that European countries are to experience more polymer export offers by the U.S. In fact, E.U. statistics revealed that there were 27,178 metric tonnes of imports in 2018, compared to only 11,446 metric tonnes in the previous year.
Part
14
of twenty-three
Part
14

China Trade - Consumer Packaged Goods

China is one of the leading countries having trade links with many other countries in the world. Changes in the manufacturing landscape in China has the potential to impact businesses, and even economies, in other countries. A few detailed insights surrounding the impact of the changes in trade with China are given below.

The Impact of US-China Trade War

  • Both the US and China have increased import tariffs for each other amid the rising tension when it comes to trade between the two countries.
  • The US raised tariffs by 10-25% and China quickly responded with their own tariff raise.
  • The impact of this situation is imminent and will significantly impact retail, food & beverage, and beauty & personal care products.
  • The cost of plastics, as well as other packaging materials, will go up as a result of the new tariffs.
  • Similarly, production equipment will become even more expensive to buy and repair due to the increased cost of some metals.
  • Soy, dairy, pork, seafood, and beef are among other sectors that will be impacted.
  • The impact of the changes in trade situation with China will create more problems for the US as Mexico and the EU have their own tariffs on products like dairy, whiskey, and bourbon.

Cross-Border E-Commerce

  • The online retail market in China is the world's largest and is also the fastest-growing. The market is valued at $830 billion.
  • Chinese consumers are now becoming more demanding and they want more value for their money. In line with this, they are looking for cross-border e-commerce solutions in search of higher quality products at lower prices.
  • Chinese consumers value imported goods because of "quality, health and safety and even package design."
  • E-tailers (aka e-retailers) are creating more and more shopping festivals to attract consumers. Shopping festivals like Double 11 are an opportunity for local as well as foreign brands to leverage consumer enthusiasm for their advantage.
  • Online platforms like Kaola.com, Tmall Global and JD Global are helping Chinese consumers to acquire imported goods easily.
  • Even US retailers Kroger and Walgreens are now selling directly to Chinese consumers via Alibaba.

Chinese Manufacturers

  • While typical Western product categories — like chocolate and cheese — are still dominated by global CPG brands, Chinese brands are gradually emerging as shareholders in other subcategories, e.g. "packaged food, soft drinks, beauty products, and home-care products."
  • Retailers are now more widely accepting smaller brands as compared to big brands in terms of physical as well as virtual shelf space. Local manufacturers from China can take advantage of this situation if larger CPG brands do not take note of this situation and strengthen their relations with key retailers.
  • According to Accenture, "the top three big consumer goods brands have lost more than 5% of their share" in three of the four markets, namely China, India, Brazil, and Indonesia.
  • An example is of China Mengniu Dairy Co., which was ranked 61 among the top 100 consumer goods companies in 2018.
  • With the changing tariffs courtesy trade wars between the US and China, and the emergence of local Chinese manufacturers, large global CPG brands are facing a huge challenge of maintaining their market share in these markets.

Research Strategy

We have provided detailed insights that shed light on China's trade relations with other countries around the globe and its impact on the manufacturing sector in the consumer packaged goods (CPG) industry. In doing so, we have focused on the US specifically, wherever possible, or provided global insights that are relevant to the US as well. Each insight has been supplemented with additional helpful information, e.g. examples and statistics, as available.
Part
15
of twenty-three
Part
15

China Trade - Building Products

According to Freedonia market research, the building products market "encompasses virtually the entire building envelope and includes such topics as asphalt, roofing, siding, insulation, lighting fixtures and many other materials and equipment used in residential, nonresidential and nonbuilding construction." The China — US trade war has led to many changes in how manufacturing companies in the US approach their manufacturing process within the building products market, with some moving parts of the manufacturing process to other South Asian countries, and some rethinking the way of investing global hubs for manufacturing and moving into a more fragmented manufacturing process.

China trade regulation changes

  • In January 2020, the US finalized Phase 1 of its trade deal with China which preserves the majority of the tariffs that President Trump has placed on $360 billion worth of Chinese goods previously, and guarantees China buying an additional $200 billion worth of American goods and services by 2021.
  • Scott Paul, president of the Alliance for American Manufacturing, which includes manufacturers and the United Steelworkers union, said in a tweet: "The deal does absolutely nothing to curtail China’s subsidies to its manufacturers. All those ‘forgotten men and women’ in U.S. factories have, once again, been forgotten."
  • Additionally, the Wall Street Journal reported that manufacturing firms have already moved their manufacturing process outside China in order for the U.S. Customs and Border Protection officials not to be able to determine the official origin of a product as China.
  • One example of a company going around the tariff regulations is Formlabs Inc., a 3-D-printer maker in Somerville, Mass. The company shifted its production for parts of its circuit boards from China to Vietnam while the motherboard still gets assembled in Shenzhen, China. The move should save tens of thousands of dollars in tariffs for the company.
  • Similar to this technology company, building products companies which are expected to assembly products (such as insulation, lighting fixtures, and other construction fixtures) are expected to move their manufacturing plants for certain parts outside of China while the overall assembly is expected to stay in China.
  • According to Bain, one of the leading global consulting agencies, research shows that "due to automation, technological improvements. We move away from this consolidated global manufacturing hubs that we used to have into a more fragmented manufacturing footprint."
  • In construction specifically, some companies are already looking for new suppliers as well as new sources of innovation paired with new areas of manufacturing in order to emerge victorious after these turbulent times.
Part
16
of twenty-three
Part
16

China Trade - Medical Equipment

Insights surrounding trade between China and the US include the impact on industry costs, impact on hospitals, effect on imaging R&D, the supply chain impacts and the location.

Industry Costs

  • When the new tariff regulations were first imposed by the US government, in July 2018 the U.S. medical device industry initially faced nearly $1 billion in extra costs. In July 2019, a few medical devices were exempted from the 25% tariffs, including "microwave ablation antennas, tube suspensions used to hold and position X-ray equipment and food allergen analysers." However, the majority are still on the list.
  • Some examples of the impact include a small medical device company in Ohio that incurred $250,000 in tariffs. He has a partner in China. His appeals for relief took over a year and when he finally got a response, they reversed only $8,000 of the total.
  • Another small company based in Redwood City, Ca. makes “wearable” patient monitoring equipment. It found itself with a $100,000 tariff bill because it failed to apply for an exclusion before the appeal process closed.

Increased Hospital Costs

  • The America Hospital Association wrote to the Secretary of Commerce that the recent tariffs were estimated to raise the cost of "medical equipment and supplies typically purchased by hospitals and health systems by at least $160 million per year."
  • The association further stated that there would be a detrimental impact on all communities, but especially vulnerable communities that can least afford higher costs.
  • Hip and knee replacements have become more common in older patients and their prices are increasing. Also, hospitals are paying more for sophisticated medical equipment like pacemakers and defibrillators which also become more urgent.

Medical Imaging Impacts

  • The Medical Imaging & Technology Alliance (MITA) conducted a survey of its membership, including such major players as GE Healthcare, Cardinal Health, Bayer, Hitachi, Lilly, Phillips, Medtronic, and Samsung, whose sales comprise more than 90% of the global market for advanced medical imaging technology.
  • Their reported stated that "Of those that responded and that are affected by the tariffs, 100% of medical imaging manufacturers said they would invest fewer resources in research and development and 100% said they would reduce workforce if the tariffs were put into effect,"
  • Implications for the makers of high-value medical devices such as MRI machines that have been swallowing the cost of the U.S.-China trade war are looking at cutting R&D and other costs.

Multiple Tax Points in the Supply Chain

Change in factory location

  • With none signs of the tariffs being removed, medical device companies are changing their supply chains to other low-labor-cost locations such as Thailand, Malaysia, Vietnam, Mexico or Costa Rica.
  • Companies are looking at India and Malaysia, both FDA-registered locations.
  • The impact is that it is likely other locations will see moderate increase in manufacturing activity with some companies expected to shift operations to these destinations.
Part
17
of twenty-three
Part
17

China Trade - Automotive

Several recent changes related to China trade in the automotive sector are the removal of shareholding caps, the simultaneous increase and decrease of auto tariffs, the termination of local tax rebates and the coronavirus outbreak.

Removal of Shareholding Cap

  • According to local and industry experts (e.g., ING, Nikkei Asian Review, China Daily), one of the "most far-reaching moves in decades" to impact China's trade relations in the auto industry is the removal of the country's shareholder cap on automotive joint ventures.
  • Specifically, on April 17, 2018, National Development and Reform Commission announced that China would be "phasing out" the 50% equity cap on automotive joint ventures that had been in place since 1994.
  • This phased approach included the removal of the shareholding cap for manufacturers of new energy and special purpose vehicles by 2018, the elimination of the cap for manufacturers of commercial vehicles by 2020 and the dissolution of the cap for passenger vehicles and the 2+2 restriction by 2022.
  • According to ING, it is "well-known" that trade in China's auto manufacturing industry is largely defined by the many joint ventures between domestic and foreign brands.
  • As such, this regulatory change is expected to revolutionize the composition and trade decisions of global auto manufacturers in China.
  • Most "immediately," the changes implemented in 2018 are increasing foreign-brand production of new energy vehicles in the country, with Tesla's new production factory in China serving as a key example.
  • Going forward, the complete removal of the shareholding cap is forecast to attract more global brands to manufacture additional vehicles in China, not only to serve the local market but also for export to other nations.
  • Additionally, this regulatory shift may also incentivize American brands to expand their current 11% share of total production in China to circumvent China's auto tariffs on vehicles from the US.

Simultaneous Increase and Decrease of Auto Tariffs

  • Recent changes in automobile tariffs also represent a significant impact on China trade as it relates to the vehicle market, as per business and industry experts (e.g., CNBC, CNN, Automotive News, PWC, ING).
  • Most notably, on August 23, 3028, China enacted a new tariff policy that simultaneously raised tariffs on US car imports to 40% and relaxed tariffs on vehicles of all other countries to 15%.
  • Since then, China has further decreased and subsequently increased relevant automotive tariffs on US vehicle imports, while American has also taken a threatening posture related to new and expanded tariffs on auto-related products from China.
  • According to ING, the "net effect" of these various tariff policy shifts is a "price cut" for cars imported to China by vehicles manufactured worldwide, apart from those produced in the US.
  • Additionally, this trade war is expected to expand the current dominance of car imports from Europe and Asia in China at the expense of North America, which currently hold 48%, 33% and 18%, respectively, of the automotive import market in the country.
  • On a longer-term basis, experts including ING suggest that this tariff dichotomy could also have "substitution effects" in the Chinese auto manufacturing market, whereby European and Asian brands are less incentivized to form joint ventures to manufacture auto goods within the country, and are more likely to import vehicles produced outside of China into the country.
  • Meanwhile, the potential for further tariff shifts remains high, with China's Finance Ministry and the Trump Administration agreeing to a first phase of a new trade deal in 2020, and announcing as recently as Thursday, February 7, 2020 that they hope to further "alleviate economic and trade frictions" between the two nations.

Termination of Local Tax Rebates

  • Meanwhile, top-tier business publications (e.g., The Wall Street Journal, CNN, Reuters) also highlight that trade within the Chinese auto sector has been significantly impacted by the expiration of related tax rebates in the country.
  • Despite it's "30-year boom," The Wall Street Journal reported in January of 2020 the Chinese vehicle market had entered a "prolonged and unprecedented sales slump" due to recent policy changes.
  • First and foremost, the Chinese government withdrew a tax rebate for small-engine vehicles in 2018, which had made new car purchases more affordable for the country's lower-income consumers.
  • Subsequently, China also reversed its subsidies for new energy vehicles, which "further upended the market."
  • As a result of these changes, auto sales in China from local brands, domestic/foreign joint ventures and imports fell by 8.2% between 2018 and 2019, representing the second straight year of market contraction.
  • Going forward, auto industry executives generally expect the impact of these policy changes to continue to weigh on the marketplace and its global sellers in 2020, despite some suggestions of a potential rebound in vehicle sales and trade later this year.

Coronavirus Outbreak

  • Meanwhile, any summary of impacts to global automotive trade due to changes in China would be incomplete without discussion of the most recent and still developing consequences of the coronavirus outbreak, whose epicenter is in the Wuhan province of mainland China.
  • CNBC, Barron's, CNN, NPR and NBC News are among the preponderance of industry experts currently highlighting how this "unprecedented" outbreak in China and its business consequences pose a major threat to global automotive trade.
  • Notably, the World Health Organization has declared the virus a "global health emergency" in January, and since it's inception, the coronavirus has killed 636 people and infected 31,161 individuals in mainland China alone.
  • In order to manage the spread of the virus, China has mandated that over 24 provinces, municipalities and regions in the country stop work until February 10, 2020 at the earliest.
  • According to IHS Markit, the resulting shutdown of vehicle manufacturing plants in China through mid-February is expected to reduce annual production by over 350,000 units, or by as much as 1.7 million units if factories remain shuttered until mid-March.
  • This manufacturing interruption will not only directly prolong China's larger slump in vehicle sales, but will undermine the more than $70 billion worth of car parts and accessories that China exports worldwide, per insight from CNN and NBC News.
  • Specifically due to this new "snarl" in the global auto supply chain, automotive manufacturers including Hyundai have already suspended production in manufacturing plants outside of China, while European car manufacturers such as Volkswagen and BMW are forecast to see a 5% hit to earnings for the first half of 2020, per research firm Bernstein.
  • However, NPR reported on February 6, 2020 that the US auto industry is less likely to be disrupted in the near-term, given that there is a "little more slack" in its vehicle parts pipeline.
  • Overall, while the exact extent of the damage from coronavirus to global auto trade remains uncertain, CNBC, Barron's, CNN, NPR and NBC News agree that the consequences will be severe worldwide as well as particularly for China.
Part
18
of twenty-three
Part
18

USMCA - Chemicals

The United States–Mexico–Canada Agreement is significant for the development of the chemical manufacturing market. The effects of the USMCA agreement include duty- free trade, foreign direct investments, risk-based approach in the regulation of chemical substances, and also promotion of digital trade across North America.

Duty- Free Trade

Foreign Direct Investments

  • The USMCA Agreement is also vital to chemical manufacturers in the United States because their major export markets are Mexico and Canada and over 46,000 jobs in the chemical industry in the US are export-dependent.
  • By investing in Mexico and Canada, the US chemical manufacturers have prospered in both foreign and domestic markets. The US FDI (Foreign Direct Investment) has promoted job creation and investment in the country because the competitiveness of American chemical manufacturers has been strengthened through supply chains being extended to Mexico and Canada.
  • However, the ACC has raised concerns about the impact of ISDS (Investor-State Dispute Settlement) provision may have on the industry. ACC highlighted several issues in the ISDS provision, including the requirement that investors are to make claims on possible violations by Mexico by first obtaining an ultimate decision from a court or wait for thirty months after commencing a proceeding in a court.
  • According to ACC, this provision will offer a minimum economic advantage to the chemical industry in North America as a result of the reduction in investment protection offered to chemical manufacturers in the United States.

Regulations

  • USMCA Agreement has provided a risk-based approach for the regulation of chemical substances, and, therefore, members are expected to realign their chemical policies accordingly.
  • The joint proposal between ACC, CIAC and ANIQ include clarity, simplicity, and transparency of chemical rules. The USMCA has moved in this direction by providing a list of options for chemicals rules of origin, which include chemical reaction option and limited exception to the rules. Consequently, chemical manufacturers will not be required to determine regional value content to have origin bestowed.
  • In the Agreement, there are specific outlined areas of cooperation like data sharing, risk assessment, chemical inventory development, protection of confidential business information and GHC alignment. "Regulators are, therefore, able to create efficiency gains in their regulatory work and avoid duplication of efforts and resources."

Promotion of Digital Trade

  • In the Agreement, ACC has championed digital trade across North America. This means that chemical manufacturers will freely generate data across borders in the region. Most of these manufacturers generate data for employee development, regulatory compliance, global customer management, and also for technical innovation.
  • "The USMCA also has important practical innovations for chemical manufacturers like electronic filling options and e signatures, which will further promote digital trade."



Part
19
of twenty-three
Part
19

USMCA - Industrial Products

The changes in the USMCA Agreement seem to be affecting the auto industry more than any other. Textiles, apparel, and agriculture have changes, but they reflect greater protectionism.

USMCA Overview

  • The changes in the USMCA Agreement seem to be affecting the auto industry more than any. Textiles, apparel, and agriculture have changes, but they reflect greater protectionism.
  • Those against the new agreement believe that it is contrary to the principles of a free trade agreement, except for small gains by dairy farmers. They state the USMCA does not actually promote free trade.
  • Ultimately it seems that Mexico and Canada are willing to accept the negative impact on their economies and agree to the USMCA because they feared that Trump would cancel NAFTA. To them, this is an insurance policy.
  • The U.S. International Trade Commission (Commission or USITC), assessed the likely impact of the U.S.-Mexico-Canada Agreement (USMCA or the agreement) on the U.S. economy as a whole and on specific industry sectors. The Commission’s model estimates that USMCA would raise U.S. real GDP by "$68.2 billion (0.35 percent) and U.S. employment by 176,000 jobs (0.12 percent). The model estimates that USMCA would likely have a positive impact on U.S. trade, both with USMCA partners and with the rest of the world. U.S. exports to Canada and Mexico would increase by $19.1 billion (5.9 percent) and $14.2 billion (6.7 percent), respectively. U.S. imports from Canada and Mexico would increase by $19.1 billion (4.8 percent) and $12.4 billion (3.8 percent), respectively." This has been hailed as a marginal impact on the economy.
  • The USITC also predicts that US exports and imports for agriculture, manufacturing, and services will increase.

Labor Force

  • The Mexican government is mandated to allow their workers to form collective bargaining units, making it a more union friendly environment.
  • The US and Mexico have agreed to a binational panel to review claims that either country is violating freedom of association and collective bargaining rights in facilities in their countries and to issue recommendations to remediate the violations. "Neither the pact nor the protocol cover bans on forced or compulsory labor, and in another skewed result, only federal statutes in the United States are covered by the USMCA obligations. Accordingly, Mexican labor regulations are subject to the dispute mechanism, but US state right-to-work laws banning compulsory union membership cannot be challenged by Mexico."
  • The USITC predicts that the agreement will increase US employment, especially workers with between 10-15 years of education and wage increases of 0.27% on average. Highly educated workers will receive the highest wage increases. They further predict that wages in Mexico will raise by 17.2%.

Automobile Industry

Mandates

  • NAFTA originally required automakers to use 62.5% of North American parts in their cars to be imported duty-free. The new agreement will raise the bar to 75% by 2023. This will incentivize automakers to increase the amount of North American parts in their cars and trucks. Furthermore, not only must the steel purchased by vehicle assemblers originate in the region, but virtually all the steel must be processed entirely within North America.
  • The USMCA also mandates that automakers manufacture 40% of their motor vehicles in plants where workers are earning a minimum of $16 per hours. Average wages are higher than that in the US and Canada, but in Mexico they are lower. Manufacturers have shifted their production to Mexico in recent years due to the lower costs. The Mexican government is mandated to allow their workers to form collective bargaining units, making it a more union friendly environment.
  • "The agreement includes side letters from the U.S. to the Mexican and Canadian governments promising exemptions from potential future tariffs imposed by the U.S. on some motor vehicles and auto parts, specifically 2.6 million Mexican-made passenger vehicles, all Mexican light trucks, and US$108 billion and US$32.4 billion dollars worth of auto parts from Mexico and Canada, respectively."

Effects

  • The provisions of the new trade deal are expected to ultimately raise production costs for North American automakers. With Mexico having less power to negotiate pay and unionization becoming more friendly, the cost of manufacturing auto parts will raise.
  • This agreement incentivizes automakers to manufacture more car parts in North America. This will also drive up production costs. This could also affect Canada, as it will make more sense in the supply chain to have the part sources as near to the assembly plants as possible to minimize delays.
  • Manufacturers will have to decide whether they will absorb the higher costs, change the product mix to make it less expensive, renegotiate supply deals, or raised the price of the finished goods to pass the cost onto consumers.
  • Some argue that these changes will raise production costs, resulting in higher auto prices, reduced US demand, lower auto exports, and more rapid substitution of machines for workers.
  • The projected impact of the agreement over the next five years is $34 billion in new investments, $23 billion annually in new purchases of US auto parts, and 76,000 new automotive jobs created.
  • This agreement, along with the "melted and poured" loophole, could also be a help to the steel industry, if it works as planned. The words "melted and poured" were a last minute addition. This means the steal must not only be purchased from North American producers, but melted and poured within these countries to qualify for the tariff exemption.

Supporters

  • Ford has come out in support of the new agreement. In a press release, the company applauded the agreement, stating that Ford was “very encouraged” and expected USMCA to “support an integrated, globally competitive automotive business in North America.” It is believed that Ford has given their support because this agreement remove's Trump's ability to disrupt the industry with tariffs. The burden of the higher overall costs are most likely offset by the reassurance the tariffs are off the table. Ford also pledged in 2017 to construct new facilities in Michigan and renovate old ones. The agreement will increase the value of those investments.

LevaData Survey- Automobile Executives

  • A survey was conducted of automobile executives in 2019. The results are as follows:
  • 78% believe that the changes will have a positive impact on their company in the long run. 89% believe vehicle manufacturing in North America will increase.
  • 53% say that USMCA will increase North American vehicle manufacturing and provide a net improvement for workers and consumers. They also agree that the consumer will pay higher prices.
  • 41% believe production costs will increase by 10% over the next three years and 25% believe that increase could be 25% or more.
  • 58% agree these increases will result in higher costs for consumers
  • 73% state their payroll costs will increase or either their workforce will be cut.

Textile/Apparel Industry

  • Apparel production in the US is only about 3% of the apparel market. With the new agreement, protections have increased.
  • Reliance on low cost fabric from Asia is discouraged.
  • Duties on non-originating yarn and fabric are limited to 10% by volume of North American garments to qualify as duty-free.
  • The record keeping requirements and additional documentation could further increase the costs of apparel manufacturing in North America.
  • The increased costs are likely to discourage North American producers to take advantage of this agreement and outsource even more apparel.

Pharmaceutical Industry

  • The agreement deleted several pharmaceutical patent provisions including one that would have made it harder for Mexico and Canada to market generic drugs. In the US, a generic drug must wait for 12 years to be introduced. In Mexico and Canada this waiting period is much shorter.
  • Now, pharmaceutical companies can maintain patents on biologics for 10 years, up from 8 years. This was a compromise between the 12 years in the US and 8 years in Canada. The result will be that the creation of generic biologics as a cheaper alternative to the original brand-name products will be delayed coming to market by two years in Canada.

Intellectual Property

  • New provisions have increased protection for US firms that rely on intellectual property. The agreement will require "full national treatment for copyright and related rights so United States creators are not deprived of the same protections that domestic creators receive in a foreign market. "
  • There will be a minimum copyright term of the life of the author plus 70 years, or 75 years after the first publication.
  • The agreement will enhance provisions for protecting trademarks, including well-known marks, to help companies that have invested effort and resources into establishing goodwill for their brands. There is also broad protection against trade secret theft.
  • Overall, the agreement promises stronger rules to protect manufacturing inventions.

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Part
20

USMCA - Consumer Packaged Goods

The US-Mexico-Canada Agreement (USMCA) is a significant development that could present both opportunities and challenges to the manufacturing sector in the Consumer Packaged Goods market. The effects of the agreement include reassessment of supply chain, positive effects on trade, and goods access market.

USMCA — Consumer Packaged Goods

Reassessment of Supply Chains

  • The USMCA Agreement will likely impact the US consumer goods manufacturers as they will likely begin an accelerated period of reconsideration and will potentially recalibrate their supply chains.
  • CPG manufacturers may also need to reconsider where they manufacture and sell their goods and, in some cases, figure out whether business will even be feasible under some scenarios.
  • It is predicted that by 2023, CPG manufacturers should consider developing mechanisms and strategies for ensuring agility and flexibility for long-term supply chain.
  • By 2023, CPG manufacturers should consider and prepare for potential strategic mergers and acquisitions that align with USMCA.

Trade

  • USMCA is expected to have a positive effect on trade, between the consumer goods manufacturers of US, Mexico and Canada as it will help in building strong relationships with key trading partners that are essential to provide consumers with the safe, affordable, high-quality products.
  • The USMCA will help in delivering increased certainty for CPG manufacturers and for the employees in manufacturing sector whose employment is depended on the North American trade.
  • President and CEO Geoff Freeman of Grocery Manufacturers Association has predicted that the CPG industry will grow and succeed under USMCA.

Goods market access:

  • US and Canada have agreed to look into new provisions that will promote manufacturing sectors, and the distribution of cosmetic products.
  • Through the new Market Access, manufactured consumer goods like cosmetic products will no longer have to be subjected to irrelevant and restrictive provision and they instead manufactured goods between the US, Mexico, and Canada will be updated through key references.
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Part
21

USMCA - Building Products

The US-Mexico-Canada Agreement is a significant development that could present both opportunities and challenges to the manufacturing sector in the building products market. The effects of the USMCA agreement include free trade, goods market access, and economic growth.

Free Trade

  • Building product manufacturers like plumbing products have supported the passage of the USMCA and advocated for its quick implementation as their industry largely depends on cross-border trade.
  • Within the North American region, the United States is one of the most important markets for manufacturers of building products, as Canada and Mexico are critical export markets for plumbing manufacturers.
  • USMCA agreement is predicted to preserve and strengthens the United States' strong trade ties with Canada and Mexico and also includes provisions on digital trade and improves transparency.
  • USMCA will provide a fair and balanced environment for building product manufacturers by providing equal binding enforcement for all obligations, from commercial issues to labor and the environment.

Goods Market Access

  • The USMC Agreement provides new commitments that will ensure market access for building products, such as steel as the non-tariff barriers will affect trade positively and promote goods distribution.
  • USMCA will allow a panel with representatives from each country to challenge tariffs that may be imposed on the building products.
  • The USMCA implementation is predicted to strengthen the steel industry’s competitiveness in the face of the continued challenges from global excess capacity.
  • The Association of Equipment Manufacturers also predicts the USMCA implementation as positive news for building product manufacturers as it will preserve duty-free market access to their trade partners.

Economic growth

  • The USMCA will aid building product manufacturers such as window and door manufacturers to continue to grow in the United States and compete globally for jobs in the building products segment across the U.S.
  • Implementation of the USMCA will provide stability in the North American trading relationship among building product manufacturers such as window and door manufacturers and will help spur economic growth in the coming years.
  • USMCA will also help to build continuous growth in the United States, compete globally, and also support manufacturing jobs in the country.
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Part
22

USMCA - Medical Equipment

The United States, Mexico, and Canada Agreement (USMCA) supports manufacturing trade in the North America region, to bring various benefits to not only these three countries but the whole world as well.

Trade

Medical Device Manufacturing Industry

  • The USMC Agreement has promoted manufacturing in the United States. As a result, the economic growth is expected to shoot up because 75% of the auto and medical equipment content will be manufactured in North America.
  • Redefining medical device per the three countries within the USCMA has encouraged and promoted competitiveness that expands the definition of the term, medical device.
  • The manufacturing of medical equipment, however, is keen on countering duplicative medical devices. This has made it possible to allot medical devices personal annex, which has, in turn, made it possible and eligible for medical devices to be assigned to a committee that thoroughly reviews the medical equipment for each party. This ensures that there are no violations, as grievances are timely addressed.
  • The medical device manufacturing industry will thrive under regulatory compliance. While the devices for each of the three countries are not uniform in the design and manufacturing process, they are all required to meet regulatory compliance in standard and guidance.

Goods Market Access

  • The USMC Agreement provides new commitments that will ensure market access for various goods, such as medical equipment. The non-tariff barriers will affect trade positively and promote goods distribution, import and export licensing.
  • Both the US and Canada have agreed to look into new provisions that will promote manufacturing sectors, and the distribution of medical devices, pharmaceuticals, and chemical substances.
  • Through the new Market Access, manufactured goods such as medical equipment will no longer have to be subjected to irrelevant and restrictive provisions. Instead, manufactured goods between the US, Mexico, and Canada will be updated through key references.
  • On marketing authorization, the involved parties will be required to grant authorizations to supply medical devices that have been approved to be safe, effective and up to quality. The design and usage will also be considered as part of marketing authorization to discourage duplication and promote the protection of intellectual property.
Part
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Part
23

USMCA - Automotive

The new US-Mexico-Canada Agreement (USMCA) is a significant development that could present both opportunities and challenges to the global automotive manufacturing supply chain and the North American car making industry. The effects of the agreement, as explicitly related to the manufacturing sector in the automotive market, include increased regional value content rule, enhanced labor value content rule, and the establishment of requirements for automotive manufacturers' use of steel and aluminum.

An Increase in the Regional Value Content Rule

Creation of New Labor Value Content Rule

New Steel and Aluminum Use Requirements

Sources
Sources

From Part 05
From Part 17