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  First Thoughts

    Dan Gilmore


    Supply Chain Digest

Oct. 26, 2017

The Four Scariest Supply Chain Worries this Halloween Season

From Trouble in the South China Sea to Digtial Disruption, Here are the Top Four Supply Chain Goblins

After several weeks of various conference "trip reports," I am back to a more standard First Thoughts column this week.

I have several topics "in the hopper," if you will, but none was quite jelling yet, when long-time SCDigest editorial assistant Joan Nystrom wondered if there was a way to connect a column in some way to the current Halloween season.

I pondered, and thought this might be good: "What are some scary things in our supply chain universe right now?" Here are my top four:

Gilmore Says....

Earlier this year, McKinsey researchers calculated that 49% of time spent on work activities could be automated with "currently demonstrated technology.

What do you say?

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Eventual Conflict in the South China Sea: I am have been writing about this for a number of years, and even conducted a video interview with former UN ambassador John Bolton on the topic.

As probably most are at least generally aware, China continues to lay claim to what were really a series of rocks and outcroppings in the South China Sea, upon which it has built a series of artificial islands far from the Chinese mainland – and then started arming them and building landing strips.

The US and several other nations in the region vigorously reject these Chinese claims and island building, and indeed last year there was ruling by the Permanent Court of Arbitration in The Hague which said there was no legal basis for China's maritime claims. China says that ruling is invalid.

And the tensions are getting worse, not better. For example, earlier this year the Global Times, a Chinese tabloid controlled by the Communist Party's People's Daily newspaper, reported that the Legislative Affairs Office of the State Council is considering amendments to the 1984 Maritime Traffic Safety Law.

The amendments are slated to take effect in 2020, and if enacted, would violate Beijing's obligations as a signatory to the UN Convention on the Law of the Sea. Specifically, the changes would require foreign ships to obtain permission to pass through these "Chinese waters."

China's rules are inconsistent with the internationally accepted concept of "innocent passage," which is incorporated in a UN convention, and recognized by customary international law.

The effect, however, of China's proposed rules will depend on how expansively Beijing interprets
" Chinese waters." China's official maps show nine or ten dashes that enclose about 85% of the South China Sea. Beijing takes the position it has sovereignty to every island, shoal, atoll, rock, and other feature inside that infamous line, so far beyond normal ocean boundaries as to be absorbed.

The US and others will not allow such Chinese control of these waters, through which trillions of dollars of ocean trade move every year.

Meanwhile, just last week Chinese President Xi Jinping very forcefully outlined plans to become the world's biggest superpower within the next 30 years. That as the US continues to occasionally sail Navy ships right past thefake islands in what it calls "freedom of navigation" operations - while China warns the US to stay clear of the islands in strident language.

This simply is not going to end well. It may be next year, it may be 10-20 years from now, but there will be a flash point, and who knows happens from there. The impact on the supply chain are hard to overestimate – and truly frightening.

The Impact of Robots on Jobs and Society: Robotic technology is advancing at a breathtaking pace. And here I am referring just to physical robots, not the software robots driven by artificial intelligence and other software advances. But make no mistake about it, it is software progress much more so than the mechanical gains that is driving robotic advances, as the rate of improvement follows a more digital (Moore's Law) path.

There are definitely two camps here: one that acknowledges that of course robots will take some jobs, but argues that even more jobs will be created, at higher wages, as robots take over repetitive physical tasks in factories and distribution centers (and fast food restaurants and many other types of businesses.)

Others, including me, are less optimistic. I've noted many times the "robots for humans" campaign driven by the Chinese provincial government in Guangdong, where even in low wage China a company called Changying Precision Technology Company invested heavily in robots and saw factory employment drop from 650 to 60, with the company saying that might fall to 20 later on.

Earlier this year, McKinsey researchers calculated that 49% of time spent on work activities could be automated with "currently demonstrated technology."

I think the robots are taking over – the question is really just the pace, which is uncertain. The impact on supply chain costs may be good, but the potential impact on society is truly scary – none of us know what is on the other side of this revolution. I am worried.

Digital Disruption: Virtually every business is or can be threatened by some type of technology-driven disruption. Which brings my mind one of my favorite quotes, from former GE CEO Jack Welch in 2000: "If the rate of change on the outside exceeds the rate of change on the inside, the end is near."

So this is something scary not in a more macro sense but rather in the futures of individual companies and sectors, with the demise of corporate icon Kodak in the face of a digital assault perhaps the leading example.

Ecommerce is of course roiling the retail sector and by extension consumer goods. One research firm just predicted that Amazon's US share of ecommerce sales will be 53% by the mid-2020s, sales that overall will have at least doubled by then (I think that last estimate is low). What does consumer goods to retail supply chain look like then?

Companies making any physical product that deals with handling information or media are under major threat to have that product go completely digital. Who needs a Garmin GPS when it's on my phone, or a police scanner radio when its functionality can be delivered via software/Cloud? And ng have you hard Uber is being Ubered by a peer-to-peer platform that takes out Uber's cut?

These are scary times for many companies, and others probably should be more scared then they are. The "innovator's dilemma" (how hard it is for most existing companies to innovate due to impact on current business model) is clearly in full force. What does the business landscape look like in 20 years?

The Potential Collapse of NAFTA: President Donald Trump ran hard against the North American Free Trade agreement, and won the election with the strong support of rust belt states.

Talks between the US, Canada and Mexico are underway – and not going well. Canadian prime minister Justin Trudeau recently said he remains optimistic about the potential for a NAFTA deal but noted that Canadians must be "ready for anything." The outcome here is far from clear.

I think the idea of NAFTA – generally free trading between the three main North American countries – makes a lot of sense. But the negative impact of the deal on US manufacturing with regards to Mexico is very real and growing. The US trade deficit in goods with Mexico will be over $60 billion this year and rising.

So I think some tweaking is in order – but a total NAFTA collapse would be very bad, roiling supply chains and the economy. "The collapse of the 1994 trade deal would reverberate throughout the global economy, inflicting damage far beyond Mexico, Canada and the United States and affecting industries as varied as manufacturing, agriculture and energy," the New York Time says, adding it would create "chaos in the auto industry."

The stock market would also get hammered, perhaps crashing hard from current lofty levels.

All this we want to avoid by some sensible adjustments that make NAFTA a win-win for all three countries, as the textbooks say is possible. But a sudden collapse would be a real trick and no treat – something to be worried about indeed.

So there you have my top four scary things in the supply chain to be worried about this Halloween. Let's hope the worst we get is a few smashed pumpkins instead.

Any reaction to these supply chain Halloween scares? What is frightening to you in the supply chain right now? Let us know your thoughts at the Feedback section below.

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