Thanks for your essay, Jordan. Below are some thoughts I’d like to add to this robust discussion:
You cite above that 1 in 6 American men are looking for jobs – do you have any visibility into what types of jobs these men are seeking? I wonder whether this unemployment statistic is reflective of a gap in the demand/supply for skilled labor (e.g., professional services that require some sort of advanced education) or for relatively unskilled labor (e.g., the type of work that Walmart would often be supplying). An important assumption you are making is that this supply/demand gap in jobs that you cite could be meaningfully mitigated by Walmart’s re-shoring of manufacturing capacity (meaningful enough, say, for its customers not to care that Walmart’s “everyday low prices” are no longer that low).
Leaving job creation out of the equation for now, as you pick up on above, the Walmart case is particularly interesting because American people (and many Trump supporters) shop at Walmart and are reliant upon its low prices, yet they also have subscribed to a political belief that re-shoring manufacturing capacity will “make America great again.” I wonder what these customers value most: the loyalty of Walmart to Trump’s calls for re-shoring (e.g., principle), or their pocketbooks (e.g., low everyday prices). I don’t think we know yet, but if Walmart were to re-shore, I suspect that customers would “vote with their dollars” and would be more willing to forgive Walmart for its outsourcing if it meant they would have more money in their pockets at the end of the shopping day.
One solution to this, of course, would be for Walmart to eat these higher labor and manufacturing costs, decreasing their gross margin while keeping costs low for American families. However, I don’t think this is realistic (and I know you don’t, either, based on your essay). There is a fundamental and problematic misalignment here among Walmart shareholders and management and the Americans that they serve. Is the government’s protectionist policy protecting the right stakeholder in this case?
Thanks for your essay, Kylie. Though I also see isolationism as a major threat to GE, I also see a great opportunity here. Though labor costs would be higher than they would otherwise be for offshore manufacturing, the United Interconnect, Fasten and Marriott cases we discussed this week shed light on the importance of a company’s ability to operate in a cost effective way. For example, Asahi, Fasten and AirBnB have all been forced, due to varying contextual constraints or market drivers, to become profitable/successful under a lower-cost model. When these companies end up entering or disrupting new markets, higher-cost incumbents (e.g., United Interconnect, Uber, and Marriott) are at a disadvantage, even despite providing a better or more innovative product – in this case, the new, lower-cost entrants can work their way up the “innovation curve” and pose the threat that they could end up providing a better or more relevant product at a lower cost. This dynamic could be applied to the situation that GE finds itself in: if it becomes the first-mover to re-shore to the U.S., I would suggest that it find other ways to enhance cost efficiency (therefore allowing it to swallow inevitably higher labor costs) so that it becomes a low-cost operator relative to its competitors. If U.S. isolationism takes full form (I realize this is a major assumption), GE’s competitors will also have to re-shore one day. However, they will do so late and will be at a severe disadvantage to GE. Said another way, if GE could successfully manage costs in other ways, it could build a meaningful moat around its competitive advantage relative to its peers when they are all forced to produce on-shore.
Thanks, Elle, for an interesting essay. A couple of thoughts below:
– Supply-side: To address your last question first, my bet would be that Citi and its competitors are actively seeking JV or partnership opportunities – if not outright offers to buy – fintech platforms, which offer platforms, IP and expertise in the SCF space. On the other end of the table, I would imagine that fintech platforms are incentivized to partner with large banks because of the superior logistics and systems capacity to handle the vast amounts of supply chain data that you discuss above. At the end of the day, I think the banks like Citi have the upper hand over the fintech platforms because they most likely boast superior (i) scale, (ii) relationships/networks, (iii) financial resources, and (iv) systems capabilities.
– Demand-side: My major concerns about the demand-side of the SCF system (e.g., whether a Toys R Us would have welcomed this service) are:
(1) What may be the cybersecurity threat posed to a business like Toys R Us if it were to work with Citi and “open its kimono” to all of its supply chain information? How might Citi account for this and mitigate this risk?;
(2) Per the United Interconnect case today, we saw a copycat threat scenario arise when United allowed its external equipment consultants to enter its manufacturing facilities. Do you think Toys R Us would have been concerned about the downside of Citi having access to all of its proprietary supply chain information? I can imagine some significant negative applications of this data if Citi were to unintentionally share it with a competitor, for example.
Thank you for your essay – you bring up key questions that I also ask myself as well when reading about Industry 4.0’s impact upon manufacturing employees and systems. A couple of thoughts:
– You specify that these smart factories will be rolled out in emerging markets first before being brought to the U.S. (Atlanta). I think this is an apt specification because the labor implications will be different in the developing vs. developed parts of the world. In the U.S., for example, I’ve often thought about how the government will become involved: for example, might it introduce a subsidy for worker salaries (e.g., some kind of tax credit) in traditional manufacturing facilities like those of Adidas to persuade companies to retain these (potentially obsolete) employees? While this would counter the theory of efficient markets that politicians may be reticent to disrupt to such a degree (e.g., subsidizing a clearly unproductive economic activity), the alternative (allowing millions of employees to lose their livelihoods) seems equally as unlikely. I have major concerns about how this might play out in emerging markets whose governments may not have the funds or the power/will to introduce protections for these workers. In both cases, people will lose jobs (it’s just a matter of when), and the key role that the corporations and governments will need to play is introducing training or transitions programs to support manufacturing employees in re-inventing their economic relevance in a digital world. I suspect that this next phase for “commoditized” workers (much like manufacturing line-workers in the 20th century) could be coding.
– Your point about cybersecurity is a good one. I would be curious to understand the economics of investing in buffing up a company’s internal systems and controls to thwart this threat, relative to the enhanced efficiency of smart factories. Do the benefits outweigh the costs, on average (remember, just one attack could be disastrous and immensely costly for a company).
– Per the case today on United Interconnect, I think Adidas also needs to remind themselves of who their customers are, what the customer promise is, and whether this operational enhancement will be the right choice for customers. It may be, but I think companies should be wary of jumping to change decisions just for change’s sake.
Thanks for sharing your research on this interesting dichotomy – one of the world’s largest polluters now facing a threat to its own business model viability as a result. Please see below for my thoughts:
– One point on your verbiage on holding all the productive assets in the Gulf Coast region and the risk associated with this capital allocation: as Exxon is a vertically integrated oil major, it maintains operations across the oil and gas value chain (upstream acreage development, midstream transportation/storage of hydrocarbons, and downstream refining and sales/marketing of those hydrocarbons) and across the world. It is inherently one of the most diversified energy companies that exists, so I would not be immediately concerned that it is seeking to concentrate investment in the Gulf Coast. Furthermore, while $20bn is a large figure to invest in the Gulf Coast region in isolation, in the context of its total spend, I would imagine that this figure is not as significant contextually (for example, this is roughly equal to one year of XOM spending at current levels (which are depressed because of the oil market environment), and this $20bn initiative is likely to last several years. Assuming a 10 year program, this would be $2bn per year, or 10% of total annual spend at current levels (which are likely to increase when the market recovers – a large piece, but not concerning to me).
– One fun element of energy is that it tends to be a zero-sum game along the energy chain (unless oil prices are depressed, when everyone hurts). So, if we think about XOM (which owns all pieces of the value chain as I note above), a supply disruption in one area of the world (Gulf Coast) for one element of the supply chain (downstream refining) could actually prove to be a net-positive for XOM. For example, if a hurricane rocks the Gulf Coast, most likely oil and refined product supply will both be dampened, providing price support for oil. So, although XOM’s downstream operations may be hit by downtime and/or higher feedstock costs, its upstream and midstream operations in the U.S. may be able to sell at a higher price, therefore increasing revenue and margins for XOM and netting out the downstream losses. Though this is all speculation, I would be interested in knowing to what extent some of these supply disruptions caused by storms are helping XOM and therefore providing incentives for XOM management to continue to turn a blind eye.
This was an interesting look at how climate change is impacting the operations of the financial services industry and market makers more generally – thank you for sharing. Please see below for my responses and observations:
– Interestingly, in this context the motivating factor in addressing global climate change is not, in fact, avoiding the negative consequences of global warming, but instead avoiding negative PR (or, in this case, seeking positive PR – potentially to counter-balance the negative PR surrounding WF’s retail banking operations). Consequences of global climate change have been publicized for years by the scientific community and by the media, yet the public (including private citizens and corporations) still largely ignores them. If we view the threat of reputational risk as a more imminent and tangible threat to corporations such as WF, this could be an important lever to pull in order to convince more corporations to commit to more sustainable operations. This will carry a network effect: as more corporations sign on, the ones that do not will eventually be penalized for not actively fighting climate change. Though the means are levered upon corporate selfishness, they may justify the end-goal of stigmatizing those who do not actively fight climate change.
– To address your question directly, I personally do not think it would be fair to require financial institutions to step away from funding potentially environmentally un-friendly endeavors. The reason is simple: where could we draw the line? Even for Dakota Access, an argument could be made that the pipeline was creating jobs, that the energy company which owned the pipeline was spending money as part of its own Corporate Responsibility Program to support the communities in which it operates, and that the pipeline itself was providing a value-additive service for many oil and gas companies whose hydrocarbons had no other viable ways to market (and, at a lower cost than the alternative which was rail – ironically, rail is much more dangerous than pipelines are and can be equally as dangerous for the environment). I mention these things because every story has two sides, and it would be very difficult to draw some sort of objective line between “good” and “bad” investments. Another example: couldn’t we make an argument that a grand majority of WF’s investments – or any corporation, for that matter – could be deemed “environmentally unfriendly”? Consider a manufacturing company, or a company that hasn’t invested in “clean” office operations. These companies are contributing to the carbon footprint – should WF be barred from investing in them, too? Furthermore, even if the larger financial institutions were barred from investing in such projects, they would most likely just be able to find capital elsewhere if the economics justified it (assuming an efficient market) – negating the point of imposing restrictions on WF in the first place.