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Navigating the Future in an Uncertain Political and Regulatory Environment

The Supply Chain Resource Cooperative held its bi-annual Industry Partner Meeting in the Talley Student Center at North Carolina State University this past week.   The theme, Navigating the Future in an Uncertain Political and Regulatory Environment”, included a keynote I gave, followed by presentations from Jason Schenker (Prestige Economics), Tim Barnes (AsiaPacific Consulting), and an industry panel of experts, representing a variety of different public and private sector companies.  Participants also attended the Innovation Showcase in Nelson Hall,, featuring two winning supply chain teams in the undergraduate and graduate divisions!

I began the discussion with an overview of the many uncertainties that confront supply chain executives, as well as some preliminary forecasts based on my recent discussions with executives in a variety of industries.  In general, some of the key takeaways that I presented were the following:

  • Given Trump’s strong personality, there is no doubt that the political environment will continue to waiver.
  • The general consensus today is that there will be an  increase in spending (especially in infrastructure) and a decrease in taxes, but also a decrease in regulation. However, when you cut taxes and spend more and don’t have money – it will cost more to finance debt.
  • The risks to the economy haven’t changed at all and the Fed will likely continue to drive higher interest rates despite extra spending – so this may present a situation of stimulating fiscal policy against tightening monetary policy.
  • The dollar will remain strong, and this will hurt exports.  The likelihood of a reduced corporate tax is good, but a reduced personal tax will hit a lot of challenges.  The barriers to global trade may or may not occur, as there is a lot of political influence on behalf of many industrial interests.
  • The Economists predicts GDP growth will range between three scenarios:  4% (15% probability), 2-3% (60% probability), and recession (25%), the latter scenario involving a global trade war and a crippled presidency.

Jason Schenker provided an interesting backdrop to these discussions also, noticing that optimism is very high for corporate and personal tax reductions, regulation reductions, and more government spending.  But as he noted, “Expectations – Reality = Disappointment!”  In February, the GDP forecast for 2017 was 3.4% – and in April, it is 0.5%.  So there continues to be a lot of shifts in the perceptions of what will happen in the economy.

Jason also shared a number of interesting and compelling graphs that suggested other things going on in the global economy.  For instance, he showed a major drop in auto sales in Q1, a strong dollar impacting Q1 trade data, a European Central Bank heavily focused on inflation, and the fact that we are near full employment.  As such, tougher immigration laws are likely to drive increased wage rates and even tougher employment conditions for companies.  He also looked at commodity prices and especially aluminum, noting that they pointed to the fact that the Chinese recession is effectively over, and that we are likely to see growth in industrial metals, higher global demand, upside risks on oil prices, and gold prices going up.  Finally, Jason commented on insights from his latest book “Jobs for Robots“, that suggest that higher level human jobs will never be fully replaced by robots, but that mundane and low cost jobs very well could be.  Education is the best medicine against having your job “robofied!”

Tim Barnes, who has written in this blog in the past, was our next speaker.  He shared insights from his book on “A Naked View of the Trans Pacific Partnership“, but rather than focusing on the TPP, discussed a number of important trends stemming from the US’s withdrawal from the TPP.  He began by discussing how Free Trade Agreements, along with labor costs and transportation rates, are among the three most critical elements to factor in when analyzing global supply chain decisions.

He also noted that many companies have a strong focus on globalization, as countries like Yemen, Mynamar, Cote D’Ivoire, and Mongolia have 7-8% growth rates. India and China are both growing at rates of 6-7% as well. Textiles in India is going up – but geopolitical risks are still very high in all of these regions. There are some talks going on between North Korea and China, and as China buys a lot of coal from North Korea, so this may take a while in terms of pressure, but the two at least are in talks following Trump’s visit with the Chinese leader.

After the US dropped out of the TPP, the other 11 countries met in March 2017 to look for a 12-1 scenario. Australia and Japan are pushing to continue, however Malaysia and others are moving on, as they are not going to join now that the US is gone.

What US industrial leaders must now worry about is the Regional Comprehensive Economic Partnership (RCEP) which includes China, Japan, Korea, Vietnam, Brunei, Australia, New Zealand, Thailand, Cambodia, Indonesia and others. It excludes Canada, USA, Mexico, Chile, and Peru. It is expected to be concluded this year – and it represents about 30% of global GDP and almost half o the world’s population.   The RCEP doesn’t cover labor laws, data, information services – just products. This is what China wants – and so it is the focal point. The US is on the sidelines, and may be invited at some point in the future, but since it has not been part of this from the beginning, the rules have been already established.

Tim also discussed the “One Belt One Road” project in China.  Surprisingly, almost no one in the audience (including me) had heard of this. This project is a 100 year trade strategy that China has undertaken. It is $4T-8T undertaking, that will include Free Trade Agreements, involving a modern version of the Chinese “Silk Road”, going from China through Western Asia, the Middle East, and linking their their maritime network, SE Asia, Africa, the Middle East, and Europe. China will form Free Trade Agreements with every country along this entire network. It is a modern version of the old Silk Road, which sought to maximize trade with Europe and the countries between them. The One Belt One Road project covers 65% of global population and 34% of global GDP – and this will connect the future of low cost locations with value added locations, and will exclude South Korea, Japan, the Americas, but the RCEP will link this countries in.  This is a development that we all need to be more aware of.

Next, our industry panel spoke on a variety of perspectives that were fascinating to hear.  The panel included both public sector experts (Dianne Lancaster, Chief Procurement Officer, State of Oregon; Jon Johnson, CPO IT, General Services Administration) as well as private sector experts (Joseph Martinez, CPO, MUFG; Ian McCullogh, Managing Director Supply Chain Strategy & Operations, Duke Energy; Mike Cockrill, VP Supply Chain Management, Bayer Crop Science NA; and Ash Patel, Vice President, Kymanox).  These individuals provided a number of compelling and articulate insights into how they view many of the perceived risks around the current economic and political environment.  The general consensus was that the press is often focused on selling ad placements, and is always going to create a lot of noise around the president and his administration.  It becomes important to separate the noise from the real impact, and in most cases, these issues are not going to have a material effect on current strategies and policies in the supply chain.  As for the public sector, there are risks associated with the downsizing of government, as our speakers reminded us that most new innovations have to go through approval and permitting through the government, and that “cuts” in government are likely to slow down these processes.  Interestingly, a member of the audience pointed out that the ratio of government employees to the number of people in the US is at its lowest point in the history of the country!  There was also a number of interesting points of view related to the importance of talent and investment in innovation, as corporate balance sheets are in a bloated state, and companies are still often loathe to invest.

Following this session, we all proceeded to Nelson Hall, to participate in the Innovation Showcase.  I had the opportunity to meet with a number of student teams, and was impressed by many of these, especially as many focused on predictive analytics and cost modeling approaches that were highly unique.  An example of one of our teams working with Aramark, one of our partners on a predictive modeling study, is shown below.

Two of our teams won prizes!  An undergraduate team working with Bayer Crop Science took first place, and an MBA team working with John Deere took second in the graduate competition.  Details on these projects can be found at this link.

Congratulations to all of our students who completed great projects this semester!!