Saturday, 29 October 2011

Supply chain shift and counterfeiting threaten Asia

In the once vibrant fishing port of Lowestoft, England, a small forklift company has changed its procurement model that reflects the start of a logistics trend that could have seismic implications for emerging Far East economies, particularly China. The driving force behind this nascent trend is supply chain fears and unprecedented intellectual property theft.

In a country where nearly all forklift production and sales is foreign owned, Britain was once a leading forklift producer. Today, a handful of niche specialist producers, mainly of articulated forklifts, is almost all that remains. But the Lowestoft company is not yet a specialist producer. Rather, it is selling main stream counterbalanced forklifts and is winning sales overseas. That company, Nexen Lift Truck Technology, took the bold decision to move the production of its X-range of forklifts and its entire R&D programme back from Taiwan to the UK.

The company, says MD, Tim Mason, "had been frustrated by progress at getting its X-range models in production at its Taiwan plant." Curiously, perhaps, it cited one reason as the shortage of a skilled workforce. "To overcome these delays and in response to several component suppliers reluctant to release specialised development items to Taiwan for fear that they may be copied in China we have taken the very big decision to move all our R&D activities to our European head quarters in the UK."

Nexen believes that the move will enable it to expand its forklift range at a significantly faster rate and also meet increased demand from the North American market. But how justified is concern over China's counterfeiting proclivities?

Counterfeiting could hammer China

There is no surprise that an emerging economy like China should avidly take to massive counterfeiting, partly as a quick-fix boost to its burgeoning economy. After all, other countries in their early development days did the same thing, like Japan in the 1950s and subsequently Hong Kong and India. That does not, of course, excuse their behaviour, but the scale of copyright infringement is breathtaking. From only about US$5.5 billion in 1982, the economic value in global counterfeiting had soared to an estimated US$500 billion in 2003. It is the fastest growing criminal enterprise worldwide and China is by far the worst offender.

The theft does not only deprive owners of intellectual property rights of huge revenues. It also means that such perpetrators have a huge advantage in bringing new products to market. Unlike their honest competitors, they can simply copy designs and so avoid huge sums invested in research and development. This subtle "pick off", as the scam is called, is a form of intellectual property theft that occurs at the high end of counterfeit sophistication and so poses a significant risk to established manufacturers. Is it any wonder, then, that copiers are able to offer cars, for example, under another brand name, at a fraction of the cost of the genuine article.

To their credit, the Chinese government has moved to remedy the situation through legislation and destruction of pirated goods but corrupt local officials fail to enforce the new laws. Aggrieved, genuine product producers, therefore, cannot expect any resolution some time soon. Only last year it was claimed that in China 78% of all software sold was pirated, according to the Business Software Alliance's 2011 Global Piracy Report. The global average rate is only 42%.

The extent of counterfeiting is far from confined to the end products, like autos and consumer electronics. There are now hundreds of foreign auto parts suppliers in China, for example, and this movement of the auto supply chain to China means intellectual property piracy is not only a risk facing other OEMs but also the supply base. Nexen's component suppliers to Taiwan, therefore, have every reason to be fearful.

Mini renaissance for UK manufacturers?

The concerns over copyright infringement, however, are now being augmented by bigger concerns over stretched supply chains becoming ever-more costly and unreliable. Labour rates in those Far East countries are rising fast, along with commodity prices. In Britain, a weak pound is adding to cost pressures. Consequently, UK retailers are sourcing more locally in Britain. One of Britain's biggest home shopping companies, N Brown, has more than doubled its base of UK suppliers, which boosted a handful of small textile manufacturers in Leicester and Manchester, though the company still sources less than 5% of its textiles from the UK. But according to a recent survey by the Economist Intelligence Unit, more than half of UK manufacturers expect to increase domestic sourcing over the next few years.

The attraction of overseas sourcing has always been low cost, which outweighed irritants like unreliable delivery, long supply chains and often unpredictable quality. But the recession has highlighted the risks of a complex global supplier network and long lead times. One UK company, for example, had a warehouse full of aluminium castings from an emerging markets supplier, for which the group had no orders. Renegotiating the contract proved impossible.

Businesses are now becoming more aware of the risks and volatility involved in a geographically large supply chain. There are signs that mid-ranged parts supply from the east are now shifting back to the UK supply sources, especially for products where labour accounts for a relatively low proportion of the total costs.

There is one risk, however, that took an earthquake and tsunami to bring home to the world the folly of JIT supply chains originating in natural calamity-prone regions. As a principle, there is nothing wrong with JIT supply and production provided certain ground rules are rigorously obeyed. One of those rules is to avoid putting all one's supply chain eggs in one basket. Japan was and remains a choke point for around 100 products essential the the electronics and auto industries. The destruction wrought by the earthquake and tsunami last March cost the global economy billions of pounds in lost production, and still continues, as JIT components quickly dried up and could not be supplied from elsewhere. Guangdong province in China is another serious choke point for many electronic products, in particular, and rare earths elsewhere. Thailand is yet another example of a hostage to nature. The continuing flooding there, the worst in 50 years, is the latest example of how nature's fury can disrupt a too tightly stretched global supply chain. Computer prices are set to rise because Thailand is home to about a quarter of the global hard drive assembly facilities. But other industries, like cars and cameras, are also seriously disrupted.

These regions will continue to be exposed to the inevitable natural calamities to come so western manufacturers must secure several other supply sources, preferably insulated from natural calamities, even if, initially, that raises procurement costs.

Monday, 3 October 2011

ITF launches humanitarian response to piracy

With piracy at sea hitting an all-time high in the first three months of 2011, the ITF Seafarers' Trust charity* and the TK Foundation launched a new initiative on September 29, the Maritime Piracy Humanitarian Response Programme (MPHRH) to help all those seafarers and their families cope with the traumas of piracy. "Until now, there has been little coordinated help for those who are suffering," said Roy Paul of the Seafarers' Trust. All that will now change as the comprehensive programme attempts to build up a network of first responders and get psychological help for affected crews and their loved ones. The programme will be a continuum of care functioning before, during and after piratical attacks.

Given the shameful attitudes of some ship owners towards their traumatised crews, the ITF initiative is desperately needed and the task ahead dauntingly huge and complex. Dr Peter Swift, MPHRP Chair, praised those shipping companies for implementing the industry's best management practices and sound practices to address the humanitarian needs of their crews and their family members but "regrettably many have not," he said. It is reminiscent of those dark early days of World War 2 when captured British merchant seamen were not compensated for their loss of personal possessions or even paid while in captivity, leaving them stressed over how their families would cope at home.

Laudable though this imitative is, it deals only with the symptoms of piracy, growing steadily stronger over the last seven years. Nearly 4,000 seafarers have been taken hostage in the past five years and detained for months in appalling conditions. Tens of thousands of others have been the victims of attacks. Today, nearly 300 seafarers are being held hostage on ships off the Somali coast -- all of them under increasingly violent conditions. Having "crossed the line from savagery into torture," said Dr Swift, often drug-crazed pirates leave crews stripped naked in cold stores for hours, tie crew's genitals with cable ties and subject them to mock executions and even keel hauling.

The annual cost of piracy is now put at $12 billion, but that probably does not include the cost of holding higher stocks as ships take longer to reach their destinations via the Cape of Good Hope. In terms of human costs, Dr Marion Gibson, psychosocial consultant to MPHRH, told this writer that the families of returned hostages felt aggrieved that in many cases pirates were not being punished for their crimes. This is one of the most abject, shameful aspects of the pirate scourge. Some hundreds of Somali pirates were released this year, many of whom were on their third arrest. Some countries are reluctant to try pirates, partly on cost grounds, and countries like Kenya and the Seychelles are already overloaded by pirates.

Anti piracy barriers must be eased

Pirates are doubtless grateful for many other obstacles put in the way of their capture and condign punishment. Some countries have laws against merchant ships entering their countries with arms on board and there are insurance obstacles. ITF itself is opposed to arming seafarers and advocates offering no resistance when attacked. The various navies on station in the Indian Ocean are doing their best with limited resources but as one NATO admiral said: "You could put a World War 2 navy out there and it still would not be enough."

Given the inability of the navies to eradicate the scourge, I asked Rear Admiral Ort, Chief of Staff of NATO's HQ in London, if the international community should not go one step further, once all hijacked crews and their ships had been released, by preventing further hijackings and attacks through the arming of crews or placing armed private contractors and trained, seconded naval personnel on board. After all, one American NATO admiral admitted that merchantmen should be armed.

"First of all," replied Admiral Ort, "I would say it is more complicated because whatever we do at sea is actually only fighting symptoms. The real cause of the problem lies ashore. It is directly related to the fact that Somalia is a failed state without the necessary institutions. So the longer term structural solution involves building Somalia as a nation state to deal with this. Obviously this is longer term but shorter term we are stuck with fighting the symptoms." The admiral also voiced concerns over armed private contractors on board. "Some are really very good but obviously some of them are less so," but he did confirm that trained, armed naval personnel are now being supplied to merchantmen but the problem here was one of capacity owing to the thousands of ships transiting the Gulf of Aden every year.

Logic, therefore, inescapably points to the need to offer some seafarers training in weapons handling and anti-boarding tactics in return for financial inducements. The multitude of barriers to this would have to be eased while the emergency lasts. "We as an international community need to get our act together," said Rear Admiral Ort. Failing that, the piracy scourge will worsen unless, perhaps, a final solution is adopted reminiscent of the bombardment of Algiers in 1816 and 1824. That option, however, would tragically involve many innocents and would outrage international opinion. But it should be remembered that even the restoration of national good governance in Somalia may not be the solution. Other countries, after all, which are not failed states, have been emboldened by the Somali pirates' runaway success and are making life particularly difficult off the west coast of Africa.
*ITF's ability to offer badly needed help is circumscribed by its limited funds. Donations would be welcomed at: