Thanks for the great article, Ben. Reading this reminded me of an interesting anecdote on the maquiladora program in Mexico from a company I worked with during my last job. The tax implications for US businesses with maquilas (manufacturing operations that can import and export from Mexico duty/tariff-free) actually go both ways, as Mexico’s 2014 Tax Reform now taxes the operations of certain facilities located in Mexico known as “Shelter Maquiladoras”. Shelter maquiladoras arise when a US company enters into an agreement with an independent contractor in Mexico to essentially find a location and run administrative and HR support for its Mexican manufacturing operations, easing the transition and regulatory hurdles associated with establishing the facility. The below article explains the difference in maquiladora options:
While the shelter program provided tangible benefits to smaller companies without the capacity to deal with day-to-day operations in Mexico, under the new rules, US companies are now required to establish these shelter maquiladoras as “permanent establishments” for tax purposes, subjecting their Mexican profits to the country’s flat 30% tax. It should be noted that a 2016 tax law now allows a four-year protection period for companies entering into shelter maquiladora contracts before they are required to become permanent establishments. An alternative to the shelter maquiladora would be establishing a directly-owned subsidiary in Mexico, which requires the company go through all of the regulatory and other hurdles but may make more sense given the new tax regime.
Overall, I doubt this applies to Ford, as I am sure a company of its size has directly-owned subsidiaries running its plants, but I believe a number of US companies have taken advantage of this program and figured it may be beneficial to share for those facing decisions regarding whether to locate manufacturing in Mexico in the future. The below article does a pretty good job of explaining the new tax rules and may be of interest. Thanks again.
Thanks AHL, in addition to you having my favorite article title, you also pose one of the most interesting supply chain dynamics to me. While climate change and natural disasters obviously impact many people and businesses, the impact on consumable goods industries that rely on these regions is particularly acute. I think that Del Monte is doing the prudent thing in diversifying its business into adjacent products, similarly to what the power industry has done with fuel types, to mitigate this environmental risk. However, the difficult questions, as you pointed out, remain:
• How much can a business diversify away from its core competency without causing more harm than good, and
• What more can a business that requires to be located in a susceptible region do to protect itself?
I don’t see banana demand declining significantly fore the foreseeable future, so if not Del Monte, someone else will need to address these issues.
Your article reminded me of a similar dynamic that is occurring in the coconut industry today. While demand has skyrocketed in recent years due to increased popularity of coconut water, oil and other products, supply faces major long-term shortages, as coconut trees require years of growth before bearing fruit, have been subject to years of underplanting, and are confined to hurricane prone regions in the Caribbean and the Philippines. As a much more fragmented industry, it seems it may be difficult for this industry to take the necessary steps to alleviate these issues. However, the below article poses an interesting potential alternative in using tissue culture cloning to grow the industry in unnatural regions like Australia. It may be interesting to check out and provide an additional potential alternative to Del Monte’s banana issue.
Eduard, this is an extremely interesting article that I find touches on many of the important issues that challenge the aircraft supply chain as a whole. I believe that you are right that American and other airlines should take steps now to ensure their future viability as the environment continues to change.
Unfortunately, I believe that Alex is right and that, in this industry, the name of the game is profitability, which has had a surprisingly negative effect on the rate of adoption of the newer, more fuel-efficient aircraft, at least as it relates to replacing the current fleet. One of the most fascinating dynamics that I see in this industry is the role that fuel prices play in airline fleet behavior. When fuel prices are high, airlines are incentivized to invest in new planes to capture the efficiency benefits. Likewise, when fuel prices are low as they have been over the past few years, airlines typically can’t justify replacing old planes with new ones and will fly those older, less efficient planes.
While next generation plane production and orders continue to grow significantly (orders at this year’s Paris Air Show were the most since 2013 ), anecdotally from my prior job I recall that retirements declined significantly (both on an absolute basis and as a percentage of total fleet) from 2013 through 2016 – a period when WTI oil prices fell from $98.17 per barrel to a low of $26.19 in 2016. Consequently, I’m afraid much of the production growth is driven by increased air traffic, improved sentiment following the global recession, and the continued rise of the middle class in Asia rather than replacing the old fleet with less efficient engines. The fleet continues to age!
However, I believe that airlines do understand the need for increased efficiency over the long-term. As fuel prices continue to stabilize as we have seen this year, hopefully airlines will revisit those investments and begin to replace the aging, less efficient planes.
Thanks Violina – very interesting article.
Ryan, to your point on the labor impact that self-driving trucks will have on the US trucking industry, I believe that the pushback has already occurred, as over the summer the House Energy Committee omitted trucks from a bill barring states from blocking self-driving autonomous vehicles. This comes as a result of significant lobbying from the 1.4 million-member Teamsters Union. The below article from Reuters describes the dynamics behind the vote. It will be interesting to see how this situation plays out in Congress through the rest of the Trump Administration, given Trump’s platform of prioritizing US jobs.
However, one dynamic at play in the US that may hasten the adoption of self-driving cars in the US may also be the ability for each state to regulate their own traffic laws to a certain extent. The article mentions that Missouri approved a platooning regulation earlier this year. While state-level adoption may not foster the broad adoption needed in the US due to the interstate commercial nature of the trucking industry, it theoretically should provide ample opportunity to prove out the safety and benefits of the concept and could influence federal approval in the future.
Ginny, thanks for sharing this on such an important and fascinating concept. I completely agree that this is a system that absolutely should be implemented. Wish that we had this in New Orleans back in 2005.
One of the additional challenges that I think the Red Cross will need to address is the marketing and communication of the FbF system with the public. Given that ‘Contributions’ constituted ~23% of the American Red Cross budget and presuming the 5:1 reactive spend to proactive spend ratio rings true for contributions, a shift toward more proactive spend may challenge 19% of the funding base and cause the program to be unable to generate adequate funding necessary to invest in the data collection improvements that you mention. I fear of the instance when the Red Cross acts proactively to reduce the impact of a disaster that their algorithms get incorrect, given the negative press during Hurricane Harvey surrounding the Red Cross’s ineffectiveness during the 2010 Haiti earthquake.
If the Red Cross plans to further the FbF program, I believe that it needs more adequate marketing to show its positive impacts in disasters that have occurred. I had never heard of the program and certainly hadn’t heard of the differences it made in Togo, Peru or Bangladesh. I think that building awareness will be key to ensuring continued funding for the program and of the Red Cross in general.
Relatedly, I completely agree that threshold alignment and standardized operating procedures are key to the program’s viability. However, I think that they need to take it a step further and be more transparent regarding those thresholds, as I could not find them as I looked online. By providing the public with its procedures and making the public aware of the benefits that the program entails, I believe that they will be able to more effectively mitigate the risk of reduced donations and may entice more people to donate proactively to the cause, as Francie mentions.
Caue, thanks for the very thought-provoking and timely post.
Regarding GE’s ability to use additive manufacturing (AM) to de-risk or overcome growing protectionist policies, I wonder if some of the characteristics of the engine supply chain prevent the viability of the investment GE would need to make to distribute industrial AM capabilities across its multinational footprint. Currently, GE does not have the physical capacity or engineering know-how to produce all of its engine parts in-house, and relies heavily on external suppliers for its current & next generation of engines (i.e., LEAP, GEnx), which is just ramping up production with next generation Boeing and Airbus planes and should drive the business for the foreseeable future. Changing the engineering specifications for these engines now likely isn’t viable. Further, for new engines, GE will need to deliver to the Boeing and Airbus facilities where the planes are being assembled, so a more distributed footprint likely doesn’t benefit the original equipment market.
Thus, any continued growth in AM capabilities are likely limited to replacing engine parts in the aftermarket. The problem I see, however, is that MRO shops and independent airlines typically first look to repair aftermarket parts or replace them with used parts over purchasing new parts at list price because it is significantly cheaper. Perhaps the reduced cost for new 3D-printed parts will allow GE to reduce prices to become competitive, but I am skeptical. All of these factors, I believe, likely limit the effectiveness of a highly distributed AM network, as – to Drew’s point – the benefits may not justify the cost to achieve.
However, I still believe additive manufacturing to be a significant driver of continued innovation in the aero-engine market over the longer-term. An important determinant in the viability of engine parts is the ability to perform under stressed heat conditions in the hot section of an engine, which can be in the thousands of degrees. Critics have been skeptical of the ability to achieve this for the hot section using AM for a while, but earlier this year Siemens – GE’s primary competitor in the industrial gas turbine space – achieved the first successful test of AM blades under full conditions. GE’s 2016 acquisition of Arcam AB in 2016 also adds titanium aliminate (TiAl) capabilities to its AM manufacturing, which may enable it to enhance its hot section AM capabilities. [Links to articles below]
Siemens 3D Gas Turbine Blades: https://www.siemens.com/press/en/feature/2014/corporate/2014-03-3d-druck.php?content%5B%5D=CC
GE Report on 3D Printing: https://www.ge.com/reports/epiphany-disruption-ge-additive-chief-explains-3d-printing-will-upend-manufacturing/
I think that the overall cost reductions and efficiencies of AM that you describe in your report, coupled with GE’s search for alternatives to casting suppliers Precision Castparts and Arconic who have significant pricing power right in the supply chain right now, will ultimately drive GE to continue its push to broaden its use of additive manufacturing on future engine platforms. It’s a very interesting time in the aero-engine supply chain.