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2014

     In a decision that has taken two years to reach, the World Trade Organization (WTO) ruled last week that China’s export restrictions on rare earth elements, molybdenum and tungsten are inconsistent with its obligations as a WTO member.

 

     China accounts for more than 90 percent of production of rare earth minerals—used in everything from military equipment and hybrid and electric cars, to smartphones and tablet computers—even though China has only about 30 percent of the deposits of rare earths. In 2009, China limited exports of rare earths, saying the move was to reduce pollution and preserve resources to prevent over-mining. Chinese officials had also expressed the hope that foreign companies which use rare earths would shift production to China and give technology to local partners.

 

     The U.S. complained to the WTO about the restrictions, arguing that China artificially raised the prices of rare earths for other countries and gave preferable pricing to Chinese manufacturers for competitive advantage. The European Union and Japan also joined the complaint.

 

     Finally, last week, the WTO issued a finding. After examining the various domestic measures that China claimed restricted domestic access to rare earths, tungsten, and molybdenum, the Panel concluded that the overall effect of the foreign and domestic restrictions is to encourage domestic extraction and secure preferential use of those materials by Chinese manufacturers. Under the circumstances, the Panel concluded that the “even-handedness” required by the Appellate Body under Article XX(g) had not been met, and hence the quotas could not be justified under that provision.

 

     The WTO ruling comes as good news to everyone outside of China. U.S. News ran an AP story reporting that the EU issued a statement that no one contests China’s right to impose environmental and conservation policies. However, EU officials said the panel’s ruling affirms that “the sovereign right of a country over its natural resources does not allow it to control international markets or the global distribution of raw materials.”

 

     The news was also well received in the U.S. The U.S. News article also notes that U.S. Trade Rep. Michael Froman said in a statement, “China’s decision to promote its own industry and discriminate against U.S. companies has caused U.S. manufacturers to pay as much as three times more than what their Chinese competitors pay for the exact same rare earths.”

 

     The flip side of the coin, of course, is that the WTO ruling was not well received in China. Indeed, Reuters reports that China’s Ministry of Commerce said the head of its treaty and law department welcomed the WTO’s recognition of its efforts to conserve resources and protect the environment, but regretted that the panel found China’s export duties, quotas, and quota administration breached WTO rules.

 

     “China believes that these regulatory measures are perfectly consistent with the objective of sustainable development promoted by the WTO,” China’s Ministry of Commerce said in a statement, according to Reuters.

 

     The WTO panel’s report on China’s export restraints, which include the export duties and quotas, may be adopted or appealed within 60 days. If adopted, the U.S., EU and Japan would be entitled to retaliate trade-wise if China does not comply with WTO rules.

 

     China isn’t the only source of rare earth elements. In fact, the materials are found around the world. The problem is that mines in other countries were closed when China undercut world prices in the 1990s, and ramping back up is both time consuming and costly. Nonetheless, notable work has been done by Quest Rare Minerals Ltd. in northeastern Québec, Molycorp is working to bring its Mountain Pass, CA facility back up to speed, and Australian mining company Lynas is working in Australia as well as Malaysia.

 

     Given those, and other companies’ work, and the ruling by the WTO panel, it will be interesting to see what happens next.

     As the number of intelligent devices continues to grow rapidly, it will create a network with information that allows supply chains to assemble and communicate in new ways, according to a new report from Gartner. Indeed, this “Internet of Things (IoT)”—which doesn’t include PCs, tablets and smartphones—is forecast to reach 26 billion installed units by 2020, up from 0.9 billion just five years ago. The result will impact the information available to supply chain leaders as well as how the supply chain operates, depending on industry, the research and advisory firm predicts.

 

     The Internet of Things is the network of physical objects that contain embedded technology enabling them to communicate and sense or interact with their internal states or the external environment. That means physical items such as machinery can be connected to the Internet and communicate information ranging from what it is and where it is, to environmental conditions and operational health. This consequently will lead to an enormous increase in visibility and control of devices and equipment.

 

     “It’s important to put IoT maturity into perspective, because of the fast pace at which it is emerging, so supply chain strategists need to be looking at its potential now,” says Michael Burkett, managing vice president at Gartner. “Some IoT devices are more mature, such as commercial telematics now used in trucking fleets to improve logistics efficiency. Some, such as smart fabrics that use sensors within clothing and industrial fabrics to monitor human health or manufacturing processes, are just emerging.”

 

     The flip side of the coin, however, is that as more devices connect to the Internet, they increase security risk. So due to smaller and cheaper processors, faster wireless connections and the growth of smartphones and tablets, it’s easier and more affordable to digitally connect devices ranging from sports equipment or watches to home appliances such as washing machines or refrigerators. Like a PC, these devices have operating systems and processors.

 

     Unfortunately, since manufacturers and consumers haven’t taken the same security precautions with these devices as they would with a PC, hackers are able to seize control and turn seemingly innocuous gadgets into drones that can be used to spread malicious spam or launch a massive cyber-attack capable of disrupting services or shutting down entire networks, a recent LA Times article notes.

 

     “It’s the Wild West out there again,” Tommy Stiansen, co-founder of Norse Corp., a cybersecurity firm whose threat-detection team has discovered a wide range of devices being hacked, says in that article. “The number of devices that have been compromised is staggering.”

 

     As would be expected, these attacks aren’t limited to individuals. Businesses and large organizations are now at risk because employees are connecting all sorts of devices to their companies’ networks—and the IT departments don’t recognize or know how to manage the devices, the LA Times article continues. In other cases, businesses themselves are deploying unsecured Internet-connected devices to make their operations more efficient or to launch new services, the article notes.

 

     “What’s concerning to us, is the sheer lack of basic blocking and tackling within these organizations,” Sam Glines, CEO of Norse, says in the article.

 

     At some of the companies Norse has worked with, firewalls were on default settings, Glines says. Norse also found that some companies use very simple passwords for devices. Even more surprising, in some cases, an organization even uses the same password for everything, Glines says.

 

     Security experts are calling on manufacturers to build more encryption into these devices and add safeguards that prevent them from running other programs. But that only goes so far. In the end, it will be up to IT departments to ensure the devices are secure and don’t introduce the opportunity for cyber-attacks.

    Several auto recalls have been in the news lately. For instance, Nissan Motor Co. just announced a recall of one million vehicles to fix software that could deactivate the front passenger airbag and increase the risk of an injury in a crash.

 

     The story getting more attention though, is that of GM, which has recalled more 1.6 million vehicles in the last two months. GM said that when the ignition switch was jostled, a key could turn off the car’s engine and disable airbags, sometimes while traveling at high speed. That defect has been linked to at least 34 crashes and 12 deaths since 2009. But GM has known about the defect in models such as the 2005-2007 Chevrolet Cobalt and 2003-2007 Saturn Ion, and that delay has led to government criminal and civil investigations, congressional hearings and class-action lawsuits in the U.S. and Canada.

 

     An interesting aspect is the connection between GM and Toyota’s $1.2 billion settlement of claims by the Department of Justice that Toyota suppressed what it knew about safety flaws. The announcement last week of the settlement between the Department of Justice and Toyota immediately prompted speculation about its ramifications for GM due to the similarities.

 

     In announcing the settlement last week, federal officials issued a warning to GM and the entire auto industry that the Toyota case will set the standard by which automakers are measured. Toyota never acknowledged any fault with its cars, other than sticky accelerator pedals and unlatched floor mats that weren’t directly linked to crashes, an Auto News story notes. What’s more, the company continues to deny the existence of electronic glitches that could make cars accelerate on their own.

 

     “This resolution will serve as a model for how to approach future cases involving similarly situated companies,” U.S. Attorney General Eric Holder said during a news conference announcing the Toyota settlement, Auto News reports. “Other car companies should not repeat Toyota’s mistake. A recall may damage a company’s reputation, but deceiving your customers makes that damage far more lasting.”

 

     Indeed, the DOJ took a different tactic in pursuing Toyota, and it may set the pattern for how regulators and prosecutors target wrongdoing by automakers. So, on the one hand, investigators found evidence that Toyota had purposefully withheld information from NHTSA. However, nowhere in the 12-page statement of fact signed by Toyota is there evidence that the company submitted false information.

 

     To turn what it knew into a criminal case, the DOJ charged Toyota with wire fraud. That was possible because many of the reassurances Toyota gave its customers were made electronically, including over the Internet.

 

     In another twist, U.S. prosecutors are considering using the legal theory behind the penalty imposed on Toyota to go after misconduct by companies in numerous industries, a Justice Department official told Reuters news agency.

 

     In the past, prosecutors have generally used a narrower approach in previous criminal cases against companies for misleading the public over safety issues. Pharmaceutical firms, for example, have been prosecuted under a law that makes it a crime to market drugs for uses other than those that have been approved as safe by the FDA, the Reuters article notes.

 

     Auto companies, too, are subject to a specific law that makes it a crime for them to mislead regulators about safety defects. In Toyota’s case, rather than prosecute under the TREAD Act, the Justice Department relied on a broad theory arguing that misleading statements about major safety issues constitute wire fraud, the article explains.

 

     The new twist though is that that theory could be applied across industries, including against companies that build planes, trains or automobiles, and, potentially, the mining and oil sectors, DOJ official and legal experts told Reuters.

 

     The manner in which companies respond to recalls has always had an impact on future business. Knowing that intentionally misleading customers can lead to criminal charges should change the way some companies handle recalls—and the way they treat their customers.

     U.S. businesses in China are increasingly concerned about Internet censorship, data security and air pollution, according to the results of a new a survey.

 

     Most notable to me, is that a total of 56 percent of respondents to the survey by the American Chamber of Commerce in the People’s Republic of China (AmCham China) said that Internet censorship by the Chinese government was an impediment to their business, an article on IndustryWeek reports. What’s more, two-thirds of respondents said that “the blocking of search engines negatively or somewhat negatively impacts their ability to conduct business.” Finally, and not surprisingly, 47 percent of the respondents said their greatest concern in using cloud computing in China was data security. That number is up slightly, from 46 percent of the respondents last year.

 

     “As well as finding it difficult to access credible data, companies also are concerned about protecting their own data,” the report notes.

 

     Those findings remind me of a report last February by computer security firm Mandiant Corp., which attributed attacks against 141 companies to a specific 12-story office building in the financial center of Shanghai. According to the report, the building is home to the 2nd Bureau of the People’s Liberation Army’s General Staff Department’s 3rd Department, which is known as Unit 61398. The unit has stolen “technology blueprints, proprietary manufacturing processes, test results, business plans, pricing documents, partnership agreements, and emails and contact lists,” according to the Mandiant report.

 

     The challenge for companies, whether they are doing business in China or not, is that global supply chains require collaboration including exchange of sensitive information with multiple partners—some of which are often several tiers removed from the manufacturer. However, while sharing information with suppliers is essential, it also increases the risk of that information being compromised. To mitigate such risks, companies need to evaluate their supply chain to identify which suppliers pose the greatest risk for data theft. 

 

     With that in mind, I was interested to recently learn about a project at Ford Motor Company where Ford and its partner, Achilles, are mapping its global supply chain to identify and mitigate potential risks. The goals of the project are to first, map out which supplier manufacturing sites are potentially exposed to risks—including natural disasters—to proactively mitigate any potential impact on global production, explains an article on eft. Secondly, it will address potential bottlenecks, reliance on single suppliers and identifying companies with long lead times that could impact production.

 

     The project has now been expanded to invite Tier 1 suppliers to provide information about their operations.

 

     Then again, companies also can examine possible security breaches on their manufacturing lines. Researchers in Germany, for instance, are trying to close a security breach that allows industrial intellectual property to be stolen from manufacturing data. Manufacturing data determines the production process for a product, and is just as valuable today as the design plans, according to Fraunhofer Institute researchers, who further note that whoever possesses this information simply needs the right equipment to produce a counterfeit, according to a Securing Industry article. At this year’s CeBIT exhibition in Hannover, Germany, scientists from the institute demonstrated software that can be used to automatically encrypt digital design data used in the production of industrial components if someone tries to unlawfully download it.

 

     Thomas Dexheimer of the Institute’s Secure Information Technology (SIT) test lab, says the software controls important parameters of the manufacturing assignment, such as designated use and quantity, in the article. As a result, brand manufacturers can use it to make sure contract manufacturers or licensees only produce authorized quantities, preventing so-called “after hours” runs of pirated units.

 

     What are your thoughts about the theft of IP—either in China or elsewhere? What about after-hours runs at contract manufacturers? Is that a significant concern?

 

 

     A few weeks ago, it was announced that the Digital Lab for Manufacturing will be located in Chicago. The lab is designed to significantly reduce development and deployment costs, while creating billions of dollars in value for the industrial marketplace—spurring long-term U.S. economic growth and job creation.” As time passes and details emerge, however, questions arise about whether the lab will create jobs.

 

     The Digital Lab for Manufacturing is an institute focused on digital manufacturing and design technologies. The aim of the Chicago institute is to serve as a showroom of sorts, as well as a test lab, for the latest manufacturing technologies. Companies will be able to try the equipment—and make use of the super computer at the University of Illinois—and the lab is expected to become a classroom to train the next generation of engineers, product designers and machinists, explains a recent article in the Chicago Tribune.

 

     There are more than 40 participants, including such notable Tier 1 and Tier 2 companies as Boeing, Caterpillar, Deere, ITW, Lockheed Martin, Procter & Gamble, and Rolls-Royce—along with Microsoft, Siemens PLM Software, Honeywell, 3D Systems and Cray. They note that the lab also will be part consulting firm and part incubator, the article reports. Manufacturing experts and university researchers are expected to work together to address complex issues such as making airplane engines lighter but more powerful. Furthermore, scientists working on cutting-edge technologies will be able to test their ideas to see if they have commercial potential, according to the article.

 

     The payoff for these stakeholders then is the opportunity to improve what they are doing, and also streamline the process from design to commercial availability of their products. Does that necessarily mean the institute or even companies’ results from participating will lead to job creation? The answer, it seems, is both yes and no.

 

     The Digital Lab in Chicago is part of the National Network for Manufacturing Innovation, which consists of regional hubs created to “accelerate development and adoption of cutting-edge manufacturing technologies for making new, globally competitive products.” The lab in Youngstown, OH, called America Makes, was the first of these so-called “manufacturing innovation hubs.” While it’s still in very early stages, the lab hasn’t led to obvious signs of job creation, a recent Reuters article notes. That’s because the nature of the manufacturing initiative could help create jobs for people with highly specialized skills—such as engineers—but it may do far less for people without those skills.

 

     Former White House economic adviser Gene Sperling, who conceived the administration’s manufacturing initiative, said the White House was focused on the “spillover impact” from new manufacturing projects, which also create jobs at suppliers, the Reuters article reports. He also says in the article that when considering manufacturing and the jobs it provides in the supply chain and in communities, those are middle class, high-skill jobs.

 

     It’s logical to ask then, how much “spillover” can be expected? Research by Enrico Moretti, an economist at the University of California, Berkeley, has found that each factory job on average supports 1.6 additional jobs outside manufacturing, according to the Reuters article. Those jobs can spur further economic development as well. A job in a high-tech industry, for example, can lead to high wages for engineers and programmers, who will then be likely to spend more at local restaurants, stores and other businesses.

 

     Despite the considerable talk in and around Chicago about possible jobs, it doesn’t seem that will really come to pass. On the other hand, it does seem that the Digital Lab will be a boon to innovation, and may perhaps ultimately lead to jobs as companies expand operations.

 

     What do you think? Will increasing innovation ultimately lead to more jobs?

     The growth of counterfeit goods and the theft of intellectual property are international problems that continue to grow. Unfortunately, the problem spans most—if not all industries, from aviation, space, defense and other high performance/reliability electronic equipment applications to pharmaceuticals. Indeed, international criminal police organization Interpol has gone so far as to state that no country, drug or medical product is immune from counterfeiting.

 

     Put simply, company leadership can ask: Does the company have a well-known or emerging brand? Does the product have a high profit margin? Is there an unexplained increase in returns or customer complaints? Does the brand have market share where the company doesn’t conduct business? Has the company lost market share in a particular region for a well-known product? If they answer “Yes” to one or more of these questions, then the company most likely has a counterfeit problem, wrote J. Michael Martinez de Andino recently in an article that ran on IndustryWeek. Companies then must determine what they can do to help deter the threat of counterfeits.

 

     As with anything, recognizing that there is a problem is a significant first step. I was interested to see Martinez de Andino—who is a partner at Hunton & Williams LLP, a law firm that provides legal services to corporations, financial institutions, governments and individuals—explain that the next step is to create a strategic plan with four major components: education, partnership, practical measures and enforcement.

 

     The first step, education, is fundamental because it raises awareness of the dangers of using counterfeit products and helps others to better understand the distinctive qualities of the company’s products, Martinez de Andino explains. For example, by providing information on the company’s website about how to identify and avoid counterfeit goods, the company can educate consumers. It also can offer product authentication training for border control, police and distributors to help them find and identify counterfeit products.

 

     Partnership is crucial in a similar manner. For example, companies can offer training on how to identify a fake product and provide samples of their legitimate products to assist the enforcement agencies, Martinez de Andino notes. What’s more, offering use of the company’s labs or facilities encourages the training and education of enforcement agencies, industry organizations and clients. Additionally, by working with industry organizations the company can help ensure the authenticity of the supplied raw materials and component parts.

 

     Practical measures may be the most talked about aspect of the anti-counterfeiting plan. New and evolving technology can be used to prevent counterfeiting by using smart cards, holographic images, color-shifting inks, RFID tags, UV inks, digital decoding, electronic tax verification systems, unique identification codes on packages that match the code on the packaged goods, and tracking and tracing systems, Martinez de Andino writes. For instance, holographic imaging, color-shifting inks and UV inks are increasingly used to deter counterfeit currency.

 

     The fourth component of the program is enforcement. So as Martinez de Andino explains, companies need to register intellectual property, and record the trademarks with the appropriate customs agencies, which helps others identify counterfeit goods. In addition, companies should support law enforcement and regulatory agencies with training so they can find counterfeit goods, but they also need to put counterfeiters on notice when fake products are discovered. When appropriate, they should take court action against infringers and counterfeiters to protect the company’s brand and products.

 

     To me, the biggest point is that given how lucrative counterfeiting can be, there will always be attempts to introduce counterfeit products. That means companies must be ever vigilant, and also have a strategy in place to fight counterfeiting. Secondly, while use of technology and enforcement are critical, education and partnering seem to be underutilized although they are just as important. It seems to me that’s where more work needs to be done.

 

     What do you think?

     In some respects, the recent delay on the Panama Canal expansion project is good news for major East Coast ports. While port size has been growing in recent years, the announcement in 2006 that the Panama Canal was being expanded kicked off—or gave more urgency to—expansion efforts so the ports may accommodate larger ships and process more containers.

 

     Almost every East Coast port has some active deepening projects, although they certainly differ in timeframe. Miami expects to have its 50-ft. channel completed by 2015. On the other hand, South Carolina leaders plan to deepen Charleston Harbor to at least 50 feet by the end of the decade. Then there’s the Port of Baltimore, which recently finished a project that included building a 50-foot berth and dredging the channel. Consequently, it and the Port of Virginia in Norfolk can already accommodate larger cargo ships.

 

     Due to size constrictions, 5,000 container vessels were the maximum size ship that could pass through the Panama Canal. When the expansion project is completed, however, new locks and a deeper channel will allow ships carrying 13,000 containers to pass. This is significant because it means these larger ships could carry cargo directly from Asia to the East Coast.

 

     This all comes as good news to manufacturers that move goods from Asia to the U.S. because container-shipping companies may be able to cut transport costs as much as 30 percent by sending bigger ships through Panama to move Asian cargo to Boston, New York and other East Coast ports. These shippers now unload goods onto trains and trucks on the West Coast of the U.S. to finish the journey east, or make the trip to East Coast destinations from Asia via Egypt’s Suez Canal.

 

     The flip side of the coin is this may well be bad news for West Coast ports. Indeed, as much as 75 percent of the in-bound Asian shipments to the U.S. currently goes to Los Angeles/Long Beach, Ca., and is then moved by rail and sometimes truck to the Midwest and East Coast. There would be significant rippling economic impact in port cities such as Long Beach, Los Angeles, Oakland and even Seattle if they were bypassed.

 

     Everything isn’t quite as clear cut as it seems, however. The other angle to all this is that major east-west container trades have been forming slot-sharing partnerships.

 

     There are three major players here, as Robert J. Bowman recently wrote on SupplyChainBrain. The first is the G6 Alliance, which blended two previously separate groups: the New World Alliance of APL, Hyundai Merchant Marine and Mitsui O.S.K. Lines; and the Grand Alliance of Hapag-Lloyd, NYK Line and Orient Overseas Container Line. Secondly, there is the P3 Alliance of Maersk Line, CMA CGM and Mediterranean Shipping Co. Finally there is the CKYHE Alliance, which combines the previous CKYH partnership of Cosco Container Lines, “K” Line, Yang Ming Line Marine Transport Corp. and Hanjin Shipping Co. with the ships of Evergreen Line.

 

     So the question then becomes, regardless of which ports are used, what impact will the creation of these mega-alliances have on freight rates? Will they drop because there is more capacity? Another question to wonder about are will there be more sailing choices or fewer? Bowman raised another interesting question, which is whether a mega-alliance can offer better service—or worse?

 

     Given the development in Panama and East Coast ports, and continuing alliances among shippers, it certainly seems considerable changes may be seen in shipping in the coming years.

     I’ve been following the Panama Canal expansion project, and was interested to see that work resumed last week after a stoppage. Later in the week, the Panama Canal Authority and the consortium Grupo Unidos por el Canal (GUPC) announced a final agreement in principle” that most likely ends the standoff, however, it is subject to documentation, review and final signature by the parties.

 

     Work on the expansion project, already nine months behind schedule, had stopped in early February after talks to resolve a dispute broke down. At the center of the conflict is an estimated $1.6 billion in cost overruns and extra financing for the work, and more importantly, who is responsible for those costs. The overall canal expansion, of which the GUPC consortium is building the majority, was first expected to cost around $5.25 billion. Overruns and delays have led many observers to believe the actual bill has grown to nearly $7 billion.

 

     The Panama Canal—which is 50 miles long and was completed by U.S. interests in 1914 to offer a quicker and considerably safer route between the Atlantic and Pacific—is used by 13,000 to 14,000 ships each year. The construction to add wider locks and channels capable of handling much larger container ships certainly is an ambitious civil engineering projects.

 

     Under the original schedule, the canal expansion was supposed to have been ready this year. However, Jorge Quijano, the canal administrator, says that the new plan is for the canal to begin commercial operations in January 2016, an article in IndustryWeek reports.

 

     The agreement offers co-financing of the construction, while awaiting the result of arbitration to assign final responsibility for the cost overruns, the consortium said. In their deal, both sides agreed to make an immediate payment of $100 million to the project, a cash infusion that will permit “the normal rhythm of work” to resume, the canal authority said. The accord also extends until 2018 a moratorium on payment of a $784 million loan which the canal authority had advanced to GUPC.

 

     The good news is that the deal does provide the consortium immediate cash to resume work, but there are still harsh feelings from leaders of both parties. Indeed, there has been a bitter back-and-forth between the Panama Canal authority and the consortium this year, and as Reuters reports, mistrust over the process still lingers.

 

     “I’m always very cautious because the relationship has not been very good with this contractor, I must admit,” canal chief Quijano said on a conference call with reporters.

 

     Furthermore, Quijano cautioned that if GUPC does not comply with the agreement, the canal will find other ways to complete the work.

 

     “We remain prepared for another option,” Quijano said.

 

     Nonetheless, all parties have agreed—for now—on a plan to move forward. Two points that really stand out in the conceptual agreement are that the 12 lock gates in Italy must be in Panama by December 2014, to be transported in staggered shipments; and that the construction of the third set of locks will be completed by December 2015. Both are necessary if the expanded Panama Canal is to open January 16 as currently planned.