Great topic, Kylie! I think when we think about isolationism, we tend to think about the impact on the raw goods supply chain and don’t think about the labor bottleneck. But, as we’ve learned in TOM, sometimes the human is the actual bottleneck, rather than the machine or the supply chain.
As I thought about the options you suggested, I took a look at GE’s US sales to see whether door #3 (exiting US manufacturing) was feasible. Per this presentation (https://www.ge.com/docs/works/brochure.pdf), it looks like US sales represent 40% of their business. Assuming the tariffs the Trump administration is posing go into place, I don’t think they’d be willing to give up 40% of their business (either by choice or by being forced out by being noncompetitive).
I think that option #2 is the best option because of how tied GE is to the overall economy. Increasing the amount of workers that are educated in STEM will not only help fuel GE’s growth, but it will also help fuel the growth of other local manufacturing firms. For GE, this creates an opportunity to sell more to both the more highly educated end consumer and the growing businesses (like in the case of selling more engines to airlines which service the end customer who is traveling more because they have more money). This article (http://www.theceomagazine.com/business/importance-stem-education-economy/) looks at Australia, but I would expect the impact on the US economy to be similar. In it, it mentions that a 1% increase in the labor market working in STEM would create a 5% increase in GDP. Because GE is so highly tied to the performance of the overall economy (very high beta, if you will), GE is highly incentivized to help educate the workforce both to tackle their own labor shortages, but also to fuel the demand side of their business too. Plus, it won’t be too hard to convince the US market – who wouldn’t want to be an engineer?
I hope that your city can survive! If Delphi adopts smart strategies, I’m sure that they can. From reading your response and hearing about the issue, it sounds like there are a few major tactics – 1) Invest in your largest customer base and try to localize manufacturing as much as possible, 2) Stand with the rest of your industry to try and combat isolationist approaches and 3) look at other markets which value either lower cost products or higher technology products. In some ways, I think the extent of globalization existing in the supply chain will help Delphi ride this wave, particularly in the short term, and they should push heavily on tactic 2. There are few companies that have a supply chain and manufacturing base that is entirely within one country. Therefore, as you point out, the auto industry needs to really push on this leverage to prevent isolationist tariffs from going into place in the first place. If the resulting tariff does nothing to differentiate among auto companies, but just passes higher prices to customer across the board, Delphi may not have as much to worry about. In the long term, I think they need to start looking at diversifying their customer base and prioritizing countries that value a globalized supply chain. There are several countries looking to capture economic power that the US and UK are turning away and would be happy to incent Delphi to sell into their markets with more favorable tax structures. They might find more value and economic success in looking at trying to serve the emerging markets rather than fight the trends in developed markets.
Great summary and analysis of this issue. It’s an exciting area for manufacturing. I think it’s interesting that Adidas is developing this Speedfactory as not only a way to increase ROCE, as you described, but also a way to increase speed to market. As I look at some more articles on their rationale for the factory (I liked the Wired article: https://www.wired.com/story/inside-speedfactory-adidas-robot-powered-sneaker-factory/), it appears that customization and speed to local market is a very big driver and the business strategy appears to rely on having many of these factories in several markets. This requires a much higher capital investment, though the capital invested is utilized much more efficiently. If the ROCE is meaningfully higher, perhaps it does make sense to deploy many factories in local areas, where previous manufacturing economics have demanded the economies of scale that a centralized factory provides. I worry however, about the amount of capital that will be required to deploy this model at scale. If they are not capable of getting the efficiency gains promised by the technology or if a local market changes substantially and no longer demands product from this factory, this could be a major operational risk. I would push Adidas to crystallize their business strategy around automation and understand whether they can just update existing factories with Internet 4.0 technology to gain the operational improvements without the added capital risk.
Interesting topic, Nirav! It really showcases how digitization is transforming every industry, from the glamorous to the more discrete industries like hoist and cranes.
Digitization like this really makes sense from the supply chain optimization side and you point out the ROIs that need to be measured for companies to put these systems in place. The one portion of this chain that I would push back on is the customer side. With the RFIDs and GPS tracking, it will add extra cost to the systems. When I think about how purchasing worked at my previous manufacturing company (I actually bought a hoist for one project!), it was almost completely driven by the lowest price. While you’re absolutely right in that having the equipment there is time critical for the project, price was the main driver. For this to really take on in the market (and thus incentivize companies to take on the investment of installing these systems), the customer must be educated on how much this could save them by increasing their ability to plan and track shipping or maintenance issues early. A problem caught early is almost always cheaper than a problem caught later and this part of the story will be key to it’s success in the marketplace. This article does a good job of showcasing how a potential economic argument could work: https://www.anodot.com/blog/predictive-maintenance-whats-the-economic-value/. Further, to your last question, the predictive analytics that you’ve integrated into the system could lead to power machine learning capabilities that continue to get better with supply chain optimization and maintenance predictions.
Your explanation and analysis of the dynamics made me reflect on many of our leadership and marketing cases because to really pivot and survive in this new industry, Cummins will have to fundamentally change as an organization. As I think about the critical tasks that Cummins needs to do as a Diesel Engine manufacturer, they are dramatically different from those that they need to do as an Electric Engine manufacturer. The technology is fundamentally different and requires a different supply chain, engineering base and even customer relationships, as you pointed out. Because some of their customers have electric engine technology themselves, there’s a chance that Cummins will move from a supplier to a competitor which might fundamentally change their business model. If I was part of Cummins’ management, I would have to think seriously about how much change is required for a transformation of this kind and whether we have the capability to actually make that transformation. I wonder if it’s possible that they’ll be able to manage being competitive in both industry or whether they would be better off investing in start-ups that can focus on the electric vehicle side and then be managed as a JV once they get large enough. I would worry that they would really be able to get over their perceived sunk costs in the diesel engine industry to really focus on a business that could destroy the diesel engine business, particularly when the time is right to actually sell off the diesel business. Sounds like the need a CEO eager to make broad strokes!
You raise an interesting question about the role of banks in promoting sustainable development. As the growth engine for the economy, they are the key enablers for the success or failure of a lot of businesses. To your point, should they be using that power to drive change? While I think the fact that they should be investing in renewable projects is clear, for me, the question about whether they should be powering traditional CO2 emitting companies comes down to whether the bank is financing responsible energy projects. In the short term, we will need a mix of energy resources and we will need to finance projects to produce cleaner (though not carbon neutral) energy sources like natural gas. As an investor, Wells Fargo should be doing due diligence to understand if this project is being managed responsibly and in the most environmentally and culturally friendly way possible. If there are glaring red flags (like there were with the Dakota Access Pipeline), they should not invest. On the flip side, if a company is looking to build a new natural gas pipeline to change a power plant from coal power to natural gas power, and the company has worked through an environmental assessment of the pipeline, I think that’s a responsible project for Wells Fargo to finance.
Looking at Wells Fargo’s track record in Energy finance, however, I would argue that they in particular need to take a careful look at how their evaluating their energy deals. Rather than take the careful, disciplined approach I outlined above, it appears that they were actually very bullish on energy over the last few years (https://www.reuters.com/article/us-wells-fargo-energy/wells-fargo-energy-investment-unit-sought-risky-deals-faces-losses-idUSKCN0XA09K). This, combined with their financing of the Dakota Access Pipeline despite red flags, suggests to me that they don’t have careful vetting systems in place and did not properly understand the industry. If they really are serious about impacting climate change with their investing choices, they will need to put in more controls that not only price the risk of the energy market correctly, but also take into account factors like environmental impact, cultural impact and net carbon impact. They might also reallocate some of the 400 petroleum engineers they hired to sustainable investing.