The Global Financial Meltdown and its Impact on the Global Supply Chain

Posted on November 11, 2008 by fenwickconsulting Ads by Google

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The transportation sector has been feeling the effects of the global downturn for the greater part of this year due to the high price of fuel compounded by cargo shipments falling short of expectations. For those companies already in a weak financial position, the effects of the fuel crisis are crippling. These companies will be further damaged as a result of the decline in the U.S. housing market, coupled with a tight credit market. Those companies, who are financially strong, diversified, and not excessively leveraged, are most likely taking a proactive approach to mitigate the effects of a looming recession. Still, the logistics industry, along with every other industry is in a state of uncertainty wondering just how badly this global meltdown is going to affect their business. The shipping industry has seen indications during the first part of 2008 that an economic downturn was looming; high fuel prices increased both the price of commodities and the cost of shipping goods. Demand for goods declined and cargo volume subsequently decreased. Many trucking companies went out of business when fuel prices skyrocketed. Airlines have been struggling to cover the cost of fuel and when air cargo prices increase, companies may shift to other modes of transport for their cargo. An IATA report indicated that global cargo traffic dropped by 7.7% compared to 2007. In ocean transportation, major trade lanes have seen an unexpected decrease in forecasted volume. Trade from the Far East to Europe has been weakening; ocean carriers originally expected 10 to 15% growth in 2008 over last year. According to the former Far Eastern Freight Conference, in the first six months of 2008, the volume of containers carried to Northern Europe only increased 6.3% and to the Mediterranean only 11.7%. Regarding trade in the Far East-U.S. trade, the Transpacific Stabilization Agreement reported a 6.9% year-to-date drop in cargo volumes over January-June, compared to the same period a year earlier from 3.30 million to 3.07 million 40-foot containers (FEU). Through July, the year-to-date gap widened to 7.5%. The silver lining for carriers servicing the U.S. is that exports have been increasing over the past year due to the declining value of the U.S. dollar. For ocean carriers, exports from the U.S. have helped address problems with the imbalance of containers, since increased exports means that the carriers would actually get paid to reposition boxes back to areas like the Far East. In the U.S., key economic indicators such as unemployment, housing starts and retail sales paint a gloomy picture of the current state of the U.S. economy and the spill over effect to the global economy is unavoidable. All of these factors do not bode well for the logistics industry. There are several areas that are most likely to have the largest impact on the logistics industry:

Supply and Demand in the Market

The logistics industry follows the waves of supply and demand worldwide. The key for logistics providers is to follow the forecasts for worldwide supply and demand trends. Keeping up with key trends can help the provider to accurately determine demand for cargo capacity as it pertains to ships, planes, trucks, railcars, ports and warehousing, Demand for raw materials and finished goods are declining. Companies typically source raw materials from the cheapest source. Raw materials are sourced from countries that have the natural resources available to them, technological advantages, low labor costs, and logistical advantages. If all things are equal, a weak currency can also give a country an advantage; a product costs less when bought from a country with a weaker currency relative to the country that is purchasing it. When demand falls for finished goods, naturally the demand for raw materials will also decrease. So for example, the U.S. export market is thriving due to the weak dollar; meanwhile demand in the U.S. is continuing to decrease for finished goods. The decreased demand for finished goods hurts the global economy since global buyers will need less raw materials and equipment; consequently, demand for U.S. and world exports will decrease. According to the Associated Press, a purchasing managers index produced by the China Federation of Logistics and Purchasing fell to 44.6 in October, the lowest level since the survey began in 2005. The decline is attributed to a decrease in new orders and a decrease in demand for construction materials. Analysts speculate that the overall reason for the decline is because of the spillover of the U.S. crisis, Chinas increased interest rates, and Chinas temporary shut down during the Olympics. Credit Credit has tightened, affecting business ability to finance the purchase of goods, make further investments in assets and infrastructure and to finance capital to stay in business or expand through acquisition. According to a report by Moodys investors service, credit standards will likely tighten for corporate borrowers, severely limiting access to new financing that could stave off bankruptcy for troubled companies. Capital-constrained financial institutions will be more reluctant to make loans, especially at a time when the number of defaulting companies is rising, said Moodys Senior Vice President Bart Oosterveld, one of the reports authors. While no region is immune from the global slowdown, he said, concerns are greatest for businesses that rely heavily on developed countries, where the pace of economic activity is visibly slowing. The maritime industry is exposed to the credit crunch. According to Ocean Intelligence, a maritime credit risk assessment group, [The credit crisis] could be the catalyst to propel the maritime industry into a new era where transparency and great dialogue with financiers and suppliers will be as essential for securing credit for vital purchases such as fuel, as it already is for borrowing for fleet improvements. In the Airline industry, many carriers could face difficulty finding financing for planes, due to banks scaling back from extending credit facilities to the airline industry. Mergers and acquisitions in the 3PL market are affected by the drying up of private equity available to the sector. Investors are staying on the sidelines amid the current turmoil in the financial markets, according to the Journal of Commerce (JOC), in an article reported this week on the Slowdown in private equity deals. The JOC further reports that the slowdown in private equity gives way for strong 3PLs, those who do not need to utilize private equity, to make strategic acquisitions of smaller firms.

Over Capacity & Cost in the Ocean Market

Growth in vessel space is exceeding demand and nominal capacity is forecasted to grow from 14.3 % to 15.9% in 2009 according to AXSLiner. This is due in part to decreasing demand and the new 8,000 TEU and larger ships that are being delivered in record numbers. The Far East to Europe trade is taking the largest hit as a result of the increase in capacity, as this trade is one of the few trades that can accommodate the large ships that are being built. As a result of the increase in capacity and shrinking cargo volume, carriers are seeking ways to cut back capacity. A number of methods have been discussed throughout the industry in the past few weeks and in fact some ocean carriers have already put some of the following plans into place: Cancel new ship orders Consolidate and/or cancel routes and sailings Enter into vessel sharing alliances Redirect ships into more prosperous trades Lay up ships for maintenance and repairs Return chartered ships Add ships to existing service rotations in order to slow down the consumption of fuel (Slow Steaming) Lay up ships until capacity is needed An increase in cargo capacity puts downward pressure on the rates, which benefits shippers in the short run. The long run effect is that carriers operating costs are increasing and with each loss-giving box they accept, they lose more money. The most leveraged carriers can in fact go out of business, which in turn reduces overall capacity and rates can potentially increase. Those carriers who are diversified and offer global services will fare better and can actually benefit in the long run when there is less overall capacity in competitive trades. Other sectors of the market are impacted as a result of the volume decreases: the shipbuilding industry, the charter services, railways, truckers, and port terminals. Ocean carriers need to remain focused on addressing costs. They need to reduce their cost and mitigate risk by controlling capacity and they need to charge customers rates and surcharges that actually cover their fixed operating cost. Carriers cannot afford to lose money on both imports and exports-as some in the industry say; it is circles of poverty. Over Capacity & Cost in the Air Market According to IATA, airlines reduced capacity but were unable to keep pace with the fall in demand. The deterioration in traffic is alarmingly fast-paced and widespread, said Giovanni Bisignani, IATAs director general. Even the good news that the oil price has fallen to half its July peak is not enough to offset the impact of the drop in demand. Cargo traffic dropped 7.7 % from last years figure. IATA is forecasting a loss of $5.2 billion for this year, Bisignani said. According to Bisignani, urgent measures are needed. All areas impacting the business must be examined for ways to reduce costs and drive efficiencies. Its a matter of survival, said Bisignani. Reverse Globalization 2008 3PL Provider CEO Perspective is a report that was produced by Northeastern University and Penske Logistics in the U.S. According to the report, third party logistics (3PL) revenue is projected to drop because business is expected to decrease dramatically. However, a trend towards reverse globalization is gaining traction. Heres what the survey found this year in regard to Reverse Globalization: Due to rising costs of labor, the impact of high fuel prices on shipping costs, and continued concern around government regulations in Asia, 16 of the 39 CEOs involved in the surveys indicate that some of their customers (the shippers that put the freight in motion) are changing their sourcing and manufacturing strategies and are moving operations away from Asia and closer to home. Hand-in-hand with reverse globalization, 3PLs and customers are gravitating toward expanding into nearby emerging markets where the cost of labor, shipping and land is less expensive.

11 of 20 North American executives reported seeing a shift in customers pulling manufacturing back from Asia to North or Central America. In Europe, 20% of CEOs reported that some customers have moved operations from Asia to Eastern Europe. Similarly, in Asia-Pacific, one-third of CEOs indicated that a number of customers have shifted manufacturing out of the region. North American logistics providers are increasingly turning to Mexico and Latin America.

By relocating to origins closer to customers, transportation costs go down and transit time is drastically decreased, which can have an effect on warehousing and distribution strategies. This trend has a positive effect for truckers, inland water carriers, rail carriers and region ocean carriers and airlines. The global meltdown is likely to have a deep effect on the logistics sector, as it is closely tied to the global economy. Both consumer spending and business growth is down for the foreseeable future. Analysts can speculate, but nobody can predict just how far the influx of funds into U.S. and foreign banks will go to restoring the economy to its pre-housing market crash. The U.S. market will feel the effects of this crisis for many years to come as they continue to pay down the massive national debt incurred. The logistics industry cannot control the future of the economy, so it must continue to react quickly to the hurdles that are presented and it must continue to innovate and make the supply chain more effective, increasing productivity no matter the state of the economy ..

Meltdown and the spiral effect

Thu, Dec 4 03:22 AM Until now, the banking, financial services and insurance (BFSI) vertical was seen as the prover-bial pot of gold for the Indian IT industry. With 30-40% of Indian IT services revenues emanating from the lucrative vertical, bellwethers in the tech industry ruled the roost. That was then. As the magnitude of the global economic meltdown becomes clearer with each passing day, it is becoming evident that the BFSI vertical could well become the biggest casualty. And the likes of Tata Consultancy Services (TCS) or Infosys stand most exposed to uncertainties in the market. TCS gets around 43% of its revenues from BFSI, while the percentage for Infosys is at 33%. Spillover of the negative sentiment does not stop at the BFSI vertical alone. Impact of the slowdown could percolate to other verticals as well. While so far, these managed to remain insulated from the economic turmoil, the cracks in the wall have started becoming clearer now. S Gopalakrishnan, chief executive officer of Infosys says that this slowdown will have an impact on all the verticals, except for the government sector. "We are into retail, manufacturing, hi-tech etc. The impact in all these sectors is major," he says.

"The problem is not really peculiar to the BFSI sector; it is radiating to everything else. But the centre of attention is really the BFSI," agrees Hari T, global marketing officer, Satyam Computer Services. For the record, manufacturing, telecom and retail are the biggest verticals (in revenue terms after BFSI) for the Indian IT industry. Alarm bells are ringing in industry circles as these verticals have started showing worrisome signs. The BFSI sector is the largest revenue contributor of the Indian IT industry with roughly 40% share. The top five Indian IT companiesTCS, Infosys, Wipro, Satyam and HCL Technologies (in that order) get around 30% of their revenues from BFSI. Manufacturing and telecom are the next big verticals for the top five companies with around 20.5% and 17%, respectively coming from these verticals. Though it is difficult to quantify the impact, the next year is expected to bring some clarity. "The signs have just started coming in the October-December quarter. The January-March quarter is being said to be the toughest as the crisis will go up by a few notches. That is when the real picture will come into being," says Navin Agrawal, executive director, KPMG. According to analysts, there is an overall slump in the manufacturing industry, which largely comprises the auto, pharma, chemical and aerospace sectors. While many auto companies in the US have asked for a bailout package from the government, the aerospace industry also continues to be in the red. Pharmaceutical industry seems to be the saving grace as people are expected to continue spending on that front. "Whatever happens as a natural outcome will continue to see spending. However, incremental spend may not happen," says Harshad Deshpande, IT research analyst with Ambit Capital. This vertical also sees a lot of ERP spending, which is considered to be largely discretionary and may witness a decline in new SAP or Oracle licences being purchased. Moving on to the telecom vertical, the general consensus is that software spending on telecom will witness a gradual slowdown. However, while equipment manufacturers will bear impact of the slowdown the most, telecom service providers are expected to be lesser hit. However, there is widespread belief that telecom service providers tool will not come out unscathed. Let us not forget that the likes of BT, ATandT, Alcatel Lucent and Deutsche Telecom are some of the biggest telecom outsourcers to Indian IT companies. "The telecom vertical has been under pressure due to the client consolidation for the past 2-3 years. However, the nature of the business there is more real and won't come to a halt because of the slowdown. At the same time, new investment and spend on value added services along with average revenue per user (ARPU) could see a drop," says an analyst

who didn't wish to be named. On the other hand, services like maintenance and customer support are likely to remain unaffected. Likewise, the outlook for retail is also not very good as the financial crunch is expected to have a direct impact on customer spending. Retail is the largest vertical for Indian IT companies after BFSI, manufacturing and telecom. Among the top-5 companies, Infosys and Wipro have the largest presence in the retail vertical, which is a large consumer of supply chain management, inventory management and logistics management solutions. "The industry functions on legacy systems, and the current times could see companies deferring the switch to newer technologies," says an IT analyst with a brokerage firm. All is however not lost. There remain some verticals that have the capability to not only defy, but buck the trend. "Irrespective of what is happening to the oil price, energy and utilities will be a significant growth market. This sector has very disjointed automation processes today. And I think efficiencies of scale can be dramatically improved," says Hari of Satyam Computer Services. He adds that Satyam will continue to look at transportation and logistics as major growth areas, especially in the areas of supply chain management and integration. To summarise, these are interesting times and hence throw up lots of challenges and opportunities. It is up to the courageous to go beyond the known and explore new horizons. And if the past track record of our IT firms is an indication, all is not lost despite the gloomy outlook. .. India Different services show different response to global meltdown New Delhi | Sunday, Dec 28 2008 IST A FICCI Survey on the services sector today brought out a mixed response to the global meltdown, with some gaining and others losing in the worldwide slump. Out of 31 segment surveyed, 12 have showed some resilience by recording a 'high' to 'excellent' growth rate ranging between 10 per cent to over 20 per cent during AprilNovember 2008. In 2007-08, 26 segments of the services sector recorded this order of growth. Although the slowdown is expected to make a further dent in the growth of some segments of the services sector, given its overall contribution of 63 per cent to GDP, the services sector growth is expected to help maintain a healthy GDP growth this fiscal, according to the FICCI Services Sector Survey. Wireless subscribers grew by 50 per cent

in April-November 2008 as compared to 58 per cent in the corresponding period of the previous year. Internet subscribers grew by 26 per cent against 20 per cent and Broadband subscribers by 87.7 per cent against 23.6 per cent. While the segments whose growth have been negative during April-November this year are: Air Passenger Traffic 4.7 per cent (20 per cent); Domestic Air Passenger traffic 8.5 per cent (22.5 per cent); Assets mobilised by mutual funds 50 per cent (64 per cent) and Assets under Management 26 per cent (50 per cent) and Insurance premium 2.7 per cent (23 per cent). Railways Revenue earning passenger traffic has recorded a 12.2 growth during AprilNovember this year against 14 per cent, Revenue Earning Railway Freight Traffic 15.7 per cent (14 per cent), Franchising 10 per cent (25 per cent), Exchange Earnings from Foreign Tourists 16.5 per cent (14 per cent), Housing Finance 12 per cent (12 per cent), Entertainment and Media Industry 10 per cent (16 per cent), IT, Software, Software Services 15 per cent (33 per cent), Organised Retail Trade 15 per cent (30 per cent), Education and Training Services 10 per cent (16 per cent). Services contribute about 63 per cent to GDP which is well above the share of industry, including manufacturing (19.5 per cent), and agriculture (17.8 per cent). During 2007-08, the services sector grew by 10.7 per cent over the previous year, which is higher than 8.8 per cent growth in manufacturing and 4.5 per cent growth in agriculture. The services which have achieved a moderate growth of up to 10 per cent are -- goods transported by roads 9 per cent (11 per cent), Railway Freight Traffic 6.5 per cent (9 per cent), Railway Passenger Traffic 6.5 per cent (6 per cent), International Air Passenger Traffic 7.2 per cent (12.4 per cent), Air cargo 5.3 per cent (14 per cent), Export Cargo 7.7 per cent (7.5 per cent), Import Cargo 6.3 per cent (20 per cent), Cargo handled at major Ports 3.9 per cent (12 per cent), Courier Industry 8.5 per cent (15 per cent), Logistics Industry 8 per cent (15 per cent), Retail Trade 9 per cent (12 per cent), Foreign Tourists Arrivals 8.2 per cent (12.2 per cent), and Construction 8 per cent (9 per cent). -- (UNI) -- 28DC4.xml