BASF prepares its UK supply chain for Brexit

BASF has been working with Ready for Brexit (the online platform I co-founded last year) as part of its programme to prepare its UK supply chain for Brexit.  Here, Ready for Brexit’s editor, Anna Tobin,  reports on the workshops that BASF has been running this month for SMEs.

The world’s largest chemical business, BASF, has a large network of companies in the UK. Over the last few weeks, it has run a series of workshops for those working in its supply chain to ensure that its UK infrastructure is as ready as possible for Brexit.

Of all the UK’s industrial sectors, the chemical industry is likely to be one of the worst hit by a no-deal Brexit. It contributes £15bn annually to the UK economy and it is the UK’s largest manufacturing exporter, with 60% of its exports going to the EU. As the lynchpin of this industry, BASF is doing everything it can to prepare the UK’s chemical industry for Brexit. Working with the Government and in collaboration with every link in its supply chain has been the focus of BASF’s Brexit preparations.

BASF has worked closely with Ready for Brexit to highlight key areas for attention to its SME partners. Over the last month, it has run a series of workshops for SMEs in its supply chain involving presentations and question and answer sessions with Government advisors, senior figures at BASF, logistics and customs experts.

Logistics
Bill Bowker, director of transport and warehousing company Bowker Group, which has been working with BASF since 1986, headed one workshop. He explained to his audience that as part of his Brexit contingency planning he has increased his storage space and staffing, obtained ECMT permits and ensured that his drivers have international driving licences and green cards; while he is advising his customers to increase their stock levels and ensure that all shipping information is correct to minimise delays.

Abram Op de Beeck, BASF’s customs and foreign trade manager, advised attendees to get an EORI number as soon as possible, to sign up for Transitional Simplified Procedures for customs and to consider appointing a customs agent to simplify the management of their customs declarations.

DEFRA
Alun Williams, who is working on EU exit for chemicals and pesticides at the Department for Environment Food and Rural Affairs (DEFRA), explained that the Government is working to ensure that any new UK regulatory systems will mirror the existing EU systems as far as possible to minimise costs to industry. He also said that they were endeavoring to minimise disruption to integrated supply chains for chemicals, will continue to monitor and evaluate chemicals in the UK to reduce the risk posed to human health and the environment; and that they would be maintaining existing standards of protection for human health and the environment.

He conceded that businesses looking to operate in the UK and EU markets will have to work with two regulatory systems. To maintain access to the EEA market, UK REACH registration holders will need to transfer their registrations to an EEA-based organisation. And to maintain UK market access to existing UK-based REACH, registrants must sign up to the new UK IT system in the first 120 days of the UK leaving the EU. The other alternative is to ask your EU/EEA supplier to appoint a UK-based Only Representative to ensure UK REACH compliance.

Williams explained that to register a new chemical for the EEA market, UK companies must register with ECHA via an EEA-based customer or Only Representative. To register a new chemical for the UK market, UK companies must set up an account on UK REACH IT and register the new chemical.

BEIS
Fiona Hitchiner, senior policy advisor chemicals at the Department for Business Energy and Industrial Strategy (BEIS), pointed people towards the Government’s tariff checker and advised them to review their contracts and International Terms and Conditions of Service to show that they are now an importer/exporter and to establish responsibilities with their suppliers and customers. She also reminded attendees to check whether they could save money and help cash flow by using a duty relief or deferment scheme and reiterated the need to obtain an EORI number and to register for Transitional Simplified Procedures.

The day-long workshops were full on, but that is why BASF has put on these events. It wants to get the message across that there is a lot to do to prepare for a no-deal Brexit, and that preparation is vital to minimise the expected ill-effects.

Supply chains to shift from global to local

YouTube Jun17

We are living in an ever more uncertain world, where “business as usual” is becoming the least likely option for the future. Companies and investors need to adapt quickly to this new normal environment, if they want to maintain revenue and profit growth. One example comes from the American company 3M, which has become legendary for its ability to identify new trends. Their latest insight continues this tradition, as CEO Inge Thulin has explained:

Our strategy has changed. If you go back several years, there was a strategy of producing at huge facilities at certain places around the world, and shipping it to other countries. But now we have a strategy of localisation and regionalisation.”

As Thulin suggests, there is plenty of evidence that global supply chains have reached their sell-by date. Political pressures are just one example of the challenges they now face, with America’s President Trump leading the way in starting to redraw the global trade map:

  He has already withdrawn from the Trans-Pacific Partnership, aimed at linking the US and 11 Pacific nations
  He is also intending to renegotiate the North American Free Trade Agreement with Mexico and Canada
  This month, he announced his intention to withdraw from COP-21, the Paris Climate Change Agreement

Similar disruption to previous trade patterns is also underway in Europe, where the UK’s Brexit vote to leave the European Union (EU) means that at least 759 treaties will have to be renegotiated – covering not only trade, but also key areas for business such as air traffic rights and financial services. This process will not be easy in the UK’s febrile political atmosphere, given the Conservative Party’s failure to win an outright majority in this month’s election.

The move away from globalisation towards more local supply chains also highlights the growing importance of sustainability as a key driver for the future. Globalisation was a critically important dynamic during the Baby Boomer–led economic SuperCycle, when demand was rising on a constant basis. But this demographic dividend is now being replaced by a demographic and demand deficit.

Today’s globally ageing population means that economic growth is set to decline in many countries:

  Older people already own most of what they need, and their incomes decline as they move into retirement
  The younger generation are also owning less “stuff”, as streaming services such as Netflix and Spotify confirm

Digitalisation is playing a key role in enabling this aspect of the paradigm shift, and it seems likely that major markets such as autos will now be prime candidate for disruption. We cannot yet know whether car-sharing, or autonomous vehicles, or another yet-to-be-invented business model will eventually dominate the mobility market of the future. But we can be reasonably sure that major disruption lies ahead.

I discuss these issues in more detail in the above video interview with Will Beacham, deputy editor of ICIS Chemical Business, and in a new article for the magazine.  Please click here to download a free copy.

 

Trump policies to impact global supply chains, US stock markets

Shiller Jan17

Wall Street’s post-election rally suggests that many investors currently have the wrong idea about Donald Trump. They have decided he is a new Ronald Reagan, with policies that will deliver a major bull market.

But those promoting this narrative have forgotten their history. Both men certainly share a link with the entertainment industry. But Reagan took office towards the end of one of the worst recessions in the 20th century. By contrast, Trump takes office at the end of an 8-year bull market.

Prof Robert Shiller’s CAPE Index (based on average inflation-adjusted earnings for the past 10 years), provides the best long-term view of the US stock market, going back over a century to 1881.  As the chart shows:

   Ronald Reagan took office in January 1980, when the CAPE Index was 9.4
   It fell to 6.6 in July/August 1981 at the bottom of the recession, when the S&P 500 was just 109
   At the end of Reagan’s Presidency it was still only at 14.7, and the S&P 500 was at just 277
   Today, Donald Trump takes office with the CAPE ratio at 28.5 and the S&P at 2271, after an 8-year rally

Is it really credible as a Base Case that the rally could continue for another 8 years?  After all, Trump himself claimed back in September that the US Federal Reserve was being “highly political” in refusing to raise interest rates:

They’re keeping the rates down so that everything else doesn’t go down. We have a very false economy. At some point the rates are going to have to change. The only thing that is strong is the artificial stock market.”

Common sense would also tell us that Trump is about to make sweeping changes in economic and trade policy.  He made his position very clear in October with his Gettysburg speech.  And his Inauguration Speech on Friday explicitly broke with the key thrust of post-War American foreign policy:

We assembled here today are issuing a new decree to be heard in every city in every foreign capital and in every hall of power. From this day forward, a new vision will govern our land. From this day forward, it’s going to be only America first, America first. Every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families.

Change on this scale is never easy to achieve, and usually starts by creating major disruption.  The expected benefits take much longer to appear.  This, of course, is why “business as usual” is such a popular strategy.  But it is clear that Trump is perfectly prepared to take this risk.  As he said at the start of the speech:

“We will face challenges. We will confront hardships. But we will get the job done.

Many companies and investors are still hoping nothing will change.  But CEOs such as Andrew Liveris at Dow Chemical and Mark Fields at Ford have already realised we are entering a New Normal world:

   Liveris told a Trump rally last month that jobs would be “repatriated” from outside the USA when Dow’s new R&D centre opened, adding as the Wall Street Journal reported “This decision is because of this man and these policies,” Mr. Liveris said from the stage of the 6,000-seat Deltaplex Arena here, adding, “I tingle with pride listening to you.”
  Fields personally told Trump of their decision to cancel the Mexican plant and invest in Michigan, sayingOur view is that we see a more positive U.S. manufacturing business environment under President-elect Trump and the pro-growth policies and proposals that he’s talking about”.

The reversal of US trade policies will impact companies all around the world.  The White House website has already confirmed the planned withdrawal from the TransPacific Partnership – and from NAFTA, if Mexico and Canada refuse to negotiate a new deal.  China is certain to be targeted as well. Protectionism will start to replace globalisation.

This means that today’s global supply chains are set for major disruption.  This will directly impact anyone currently selling to the US, and US companies currently selling overseas.  It will also impact every supply chain that involves a final sale either to or from the US.  The Great Reckoning for the policy failures since 2009 is now well underway:

   The Dow Jones Industrial Average’s repeated failure to break the 20,000 level may well be a warning sign
   Japan’s Nikkei Index was also poised to hit 40,000 when closing at 38,916 on 29 December 1989 – but never did

Sometimes, as US writer Mark Twain noted, “History doesn’t repeat itself, but it often rhymes”.

Consensus wisdom defies reality around the world

Wealth“Consensus wisdom” is a handy way of keeping up with events.  Nobody likes to be the person who says “I don’t know” when the boss asks a question about something important.  But unfortunately, “consensus wisdom” is often wrong, as Ipsos MORI confirm in their new ’Perils of Perception‘ survey,  As the authors note:

“It highlights how wrong the public across 40 countries are about key global issues and features of the population in their country.”

The chart above highlights one of the key results, which has major implications for companies and investors:

  It shows the actual percentage of wealth owned by the poorest 70% of the population in each country
  It also shows people’s perception of the percentage owned by this poorest 70%
  Only 3 countries have an accurate perception – the UK, Australia and Belgium
  India is the most inaccurate, with a 29 point gap between perception and actual
  Other major countries are nearly as bad – the US has a 21 point gap, Russia and China have a 17 point gap, Brazil and Germany have a 15 point gap

As Ipsos MORI note, the problem is that middle class people usually think:

The rest of the population is more like them, than they really are….On average, just 15% of total wealth is owned by the bottom 70% across these countries – but the average guess is almost twice that at 29%. (My emphasis)

“Some countries are incredibly inaccurate: Indians think this group owns 39% of the country’s wealth when actually only 10% do. The US is also significantly out: Americans think the bottom 70% own 28% of the country’s wealth, when it’s actually a quarter of that at 7%.

The Ipsos data helps to explain why companies and investors are often wildly over-optimistic when planning new investments.  This has become a major problem in the Emerging Markets (EMs), where many senior executives have assumed after visiting the chosen country that vast numbers of people are becoming “middle class”:

 They stay in good hotels, company-chosen for safety and service, with other guests from similar backgrounds
 Their local colleagues and partners are usually middle class and suffer from the over-optimism recorded by the polls
 They rarely visit areas where most people live, as colleagues and the hotel often tell them these are “too dangerous”

The past few years of high profile stimulus policies has only added to the confusion.

Most visitors were immediately impressed to find an expensive new airport when they landed.  They were similarly upbeat to find shopping malls filled with western luxury goods.  Naturally, they assumed this meant the economy was booming. And, of course, the major international banks were happy to supply them with imaginative and glossy reports on the country’s potential, in the hope of winning lucrative project work.

In reality, however, they have been fooled.  This appearance of “middle class living” was financed by debt, not wages:

 Average GDP/capita in the world is just $10k according to the IMF
 Wealthy G7 countries such as the US are at $56k, with the UK at $44k, Germany at $41k and France at $38k
 The EMs are very much poorer, and will take decades to catch up, even if they continue to do well
 Russia is the richest BRIC country at $9.2k, followed by Brazil at $8.7k, China at $8.1k and India at just $1600

The end result, unfortunately, is that many companies have effectively been wearing rose-tinted spectacles when making investment decisions.  They now face a very difficult time as these plants all start to come online.

President-elect Donald Trump has made it clear he will impose tariff barriers to force US manufacturers to reshore production back to the US.  In turn, many EMs will no doubt put up trade barriers to protect their own industry.  Supply chains will be hit from two angles at once.  Not only will imports from the EMs reduce, but exports to the EMs will also decline:

  Ford’s decision this week to abandon its planned $1.6bn Mexican investment is a clear sign of what is to come
  They were at least able to cancel. If it had already been built, it would probably now become a “white elephant”.

Unfortunately, this creates a further problem for “consensus wisdom”.  Much of what appeared to be true during the SuperCycle is no longer correct.  As I noted on Monday, economic criteria are no longer the key to future profitability.

The next 12 months are therefore likely to see more change than we have seen in the past 20 years.  Companies and investors that fail to quickly realign their perceptions with reality will risk finding life very difficult indeed.

Water wars, food shortages create urgent need for new, demand-led approach

Demand Apr16Companies and investors need to refocus on demand as the key driver for revenue and profit growth.  Supply-driven business models are no longer sufficient.

‘How do we do this?”  is the key question, as I discuss in this short video interview with ICIS deputy news editor, Tom Brown:

  • The key is to focus on critical issues where change is urgently required
  • As the World Economic Forum has warned, water and food are critical issues for the world over the next 10 years
  • It suggests they are 2 of the top 5 major global risks – wars are already being fought over water supplies

Newly released diplomatic cables show that the problems have been growing for years.  As Newsweek magazine reported this week:

“In 2009, U.S. Embassy officers visited  Nestle’s headquarters in Switzerland, where company executives, who run the world’s largest food company and are dependent on freshwater to grow ingredients, provided a grim outlook of the coming years. An embassy official cabled Washington with the subject line, “Tour D’Horizon with Nestle: Forget the Global Financial Crisis, the World Is Running Out of Fresh Water.”

“Nestle thinks one-third of the world’s population will be affected by fresh water scarcity by 2025, with the situation only becoming more dire thereafter and potentially catastrophic by 2050,” according to a March 24, 2009, cable. “Problems will be severest in the Middle East, northern India, northern China, and the western United States.”

Today, we can clearly see that Nestle’s warning was right.  But very little has yet been done to solve the problems of water or food shortage, and time is starting to run out.

As we discuss in our major new Study, ‘Demand – the New Direction for Profit’, the chemical and plastics industries are vital to solving the problems.  The reason is that 40% of more of all the water and food produced in the world is currently either lost on the way to the consumer, or wasted.  So it makes no sense to simply focus on supply-driven models that aim to produce more water or food.

Instead, we need to understand how to reduce the loss and waste that currently takes place:

  • Plastics can potentially add days, sometimes weeks, to shelf life – helping to avoid food decay
  • Indicators could be added to packaging to tell the consumer when food is still safe to eat
  • Plastic pipes can be installed to stop water leaking away on its way to the user
  • We could radically improve water supply by abandoning outdated civil engineering techniques.  It is ridiculous that we are still focused on digging big holes and pouring concrete.  Modern, cheaper process engineering technologies could dramatically change the way water is provided

But there is little time to lose.  Nestle’s fears from 2009 are already coming true.  California is in its 5th year of drought, which experts say is probably the worst for 1200 years.  War is raging in Yemen due to drought, and 10 states in India are also suffering from drought.  As one expert told the Financial Times, a change of mindset is long overdue:

We’ve always looked at the problem from the supply side, not from the demand side.  This sector has always been in the hands of technocrats, particularly structural engineers. They only know how to construct . . . The general feeling is, ‘We have plenty of water, it’s available free of cost, it’s the government’s duty to provide me water’.”

Companies and investors now need to move very quickly to the demand-led approach.  Time is not on our side.