We at TextileFuture found some interesting items for the Newsletter today. The first item is on how to become “Leaders in business sustainability”. It is based upon a sponsored article in Raconteur by the Dassault Group.
The second feature “The four gloal forces breaking all the trends” is a feature by McKinsey Consultants, and presents some interesting facts on what forces will influence the future of businesses.
The third item is based upon studies of Freedonia, entitled “Chip Shortage may change How Cars are produced” and is intended to get you an insight into the automotive industry.
Leaders in business sustainability
The promise of corporate sustainability is as much about securing business advantage as saving the planet, yet neither promise will be realised without systemic change.
By guest authors Oliver Balch, Ellen Manning, Ben Rossi from Raconteur
“Everyone thinks of changing the world, but no one thinks of changing himself,” mused Russian author Leo Tolstoy in 1900. Bar the possible addition of “or herself”, the adage stands the test of time.
Change is again in the air. The world faces multiple pending crises, from an irreversible climate catastrophe and a biodiversity implosion through to growing inequality and a pandemic-crippled economy.
As the principal engine of private enterprise and employment, business finds itself locked into the global debate about how to put the world back onto a more even keel. Enter the term “sustainability”. First popularised in development circles in the 1980s, it has been widely adopted by the private sector over the last decade in response to demand for action.
From Guest author Oliver Balch from Raconteur
The promise of sustainable business is twofold. First, is risk mitigation. By reducing their impact on society and the environment, companies can hedge against the negative operational and regulatory costs attached to pending crises.
Burying your head in the sand is no longer an option, warns Peter Bakker, chief executive of the prominent corporate membership group, the World Business Council for Sustainable Development (WBCSD).
In a major new report by the council, Vision 2050: Time to Transform, focusing on the need to reform capitalism, Bakker warns that even a single threat like climate change or the loss of nature could wipe out companies’ future “licence to operate”. He adds: “And if there is one thing that we have all learnt from the COVID pandemic, it is how interconnected these challenges are.”
Sustainability’s second promise centres on opportunity. Get your environmental, social and governance, or ESG, systems straight and you’ll gain an edge on competitors. On paper, it looks convincing. Smart people want to work for ethically managed, purpose-driven companies, just as consumers want to buy from them and investors want to invest in them.
Economists are a little more sanguine. The most comprehensive recent analysis comes from the NYU Stern Center for Sustainable Business report ESG and financial performance: Uncovering the relationship by aggregating evidence from 1,000-plus studies published between 2015 and 2020. The report assessed 246 academic papers on ESG’s link to financial performance. More than half (57 per cent) showed a positive correlation, the meta-analysis finds.Note, such studies only look at immediate financial returns. Sustainability’s biggest wins, advocates insist, accrue in the long term.
Hence, Larry Fink, chief executive of BlackRock, the largest asset management firm in the world, talks of climate change not only as a threat, but as a “historic investment opportunity”, in a letter to investors. Why? Because a combination of regulation, technology and consumer demand is pushing the economy to decarbonise. Companies at the forefront of eco-innovations today, Fink’s logic runs, will be the firms out in front tomorrow.
As with any major change process, a cabal of naysayers and laggards still exist. With titans of economic orthodoxy, like the US organisation Business Roundtable, now explicitly endorsing stakeholder, rather than shareholder, capitalism, such stragglers are a shrinking minority.
Instead, for most business leaders, the key question is not why to adopt a long-term sustainable business strategy but how.
Lindsay Hooper, executive director at the Cambridge Institute for Sustainability Leadership, has two main pieces of advice: one, be crystal clear on your company’s purpose; two, set firm objectives that are both ambitious and verifiable.
Don’t think you can improvise on the hop, she adds: “Making only reactive decisions or chasing trends are unlikely to result in a robust strategy that can optimise performance and impact in the long term.”
Treating sustainability as an optional add-on won’t cut it either. Reducing the subject to emissions, charity or any other single business issue, however important, is a recipe for failure, says Trevor Hutchings, director of strategy at UK professional services firm Gemserv.
The wake-up call that COVID-19 has delivered to business is echoed in recent research. In a survey by software firm Dassault Systèmes, two in three (65 per cent) Dutch and UK business leaders in the life sciences and energy sectors see the pandemic as an opportunity to “reshape” their companies on more sustainable grounds.
With sustainability, it’s all or nothing, he argues: “Sustainability needs to be hard-wired into the company purpose, strategy and commercial model so it’s treated as an integral part of running a business.”
When it comes to the nuts and bolts of designing a robust sustainability strategy, the WBCSD’s report offers as good a guide as any. One of the report’s essential insights is the systemic nature of current major challenges and thus the need for business leaders to work together in pursuit of change. As the report makes clear: “The transformation of systems does not take place in silos, it is the result of actions taken across multiple industries and throughout societies.”
Outward-looking as sustainability must be, it still requires comprehensive integration into companies’ internal policies and processes to be effective. Integration is hard work. To steal from Tolstoy again, genuine sustainability requires companies to “change themselves”. As personal experience teaches, transforming oneself is no easy task.
“One of the biggest challenges leaders face when pursuing sustainable business strategies is authenticity: walking the talk,” says Jen Rice, executive coach and strategist. Leaders first need to ask themselves what values they really stand for and what positive contribution they want to make, she advises. Find this sense of “felt purpose” – Rice calls her business-leader clients “rebels with a cause” – and authenticity will follow.
Putting your money where your mouth is also helps. Hence, the habit of cutting-edge sustainable businesses to integrate “gritty” ESG targets into executive compensation packages.
As Peter Truesdale, a director at the specialist consultancy firm Corporate Citizenship, puts it: “Sustainable behaviour has to be rewarded.”
Engaging employees outside the boardroom is also critical. Finding ways to recognise and support workers’ private sustainability concerns can be a powerful way of bringing corporate commitments to life.
Take Unilever. Over the coming years, the Anglo-Dutch consumer goods giant is inviting all its 150000-plus employees to define their own personal purpose and then draw up action plans to see these realised.
Full integration means achieving a similar level of alignment across all stakeholder groups, from consumers and local communities to business partners and, yes, even tax authorities.
Again, it’s no easy task. Just look at most companies’ procurement practices, says Alex Morgan, chief markets officer at the environment charity Rainforest Alliance.
All too often, corporate purchasing decisions are made “in a bit of a vacuum”, he argues, leading to “internal tension” and sub-par sustainability outcomes. Valid as the upsides of sustainable business certainly are, it requires conviction, patience and no small amount of elbow grease to achieve them.
Ultimately, however, it comes down to companies’ willingness to change themselves. Only then will long-term business benefits flow or our planet change meaningfully for the better.
Virtual twins bring almost infinite possibilities and are key when it comes to businesses pushing forward with product development, streamlining processes and championing sustainability.
By guest author Ellen Manning
Sustainability has become a key priority for businesses around the world, especially following the disruption of the global coronavirus pandemic. According to research with more than 1,000 business leaders in the UK and the Netherlands, by sustainable innovation company Dassault Systèmes, 65 per cent said the pandemic provided the catalyst to reshape their organisation in a more sustainable way, rethinking and prioritising resilience for the future.
But putting sustainability into practice often forces wholesale changes that are intimidating and potentially risky.
Enter virtual twins, which not only help mitigate risk when it comes to developing sustainable products and processes, but encourage businesses to act more sustainably. A virtual representation that serves as the real-time digital counterpart of a physical object or process, they are much more than a 3D model on a computer, says Alan Prior, vice president of industry consulting at Dassault Systèmes.
“We describe the virtual twin as not only the representation of something physical but also the ideas that led to that product being created, the concepts explored, the decisions made, the requirements set out. And then how it gets produced, distributed and sold and its behaviours when it gets used, maybe even the feedback from the consumers,” he says. “So the virtual twin exists in parallel with the physical product. It’s so much richer than simply a digital copy because it has the life cycle, history and legacy.”
Why innovation is key to sustainability
A virtual twin can be used to explore everything from more sustainable products to creating new, more sustainable processes. The Dassault Systèmes report Leaders in Business Sustainability recognised while businesses struggle to prioritise some areas as they deal with post-pandemic disruption, they should be focusing on priorities that will allow them to survive its aftermath, including innovation, on which half of all companies said they were maintaining their focus and a quarter more said they were putting higher emphasis as a way of ensuring survival.
Virtual twins are the ideal way to explore innovation. “Businesses can explore design options, how the product behaves in different environments, usage, material options, different packaging, because it’s a safe environment in which to do those investigations,” says Prior. “The virtual twin opens up the possibility to do things we would not want to do physically or can’t afford to do. And it can be done very quickly at low cost.”
How virtual twins are helping explore sustainable products and processes
That freedom to explore is already being used in various ways. Innovating packaging to make it more sustainable is one area Dassault Systèmes has been involved in. It may seem simple to reduce materials in packaging, but it still has to stand up to being filled or packed on a production line, transported and more. Virtual twins not only simulate changes in material thickness or type, but can be used to explore changing whole business models, such as switching to refillable containers.
Another use-case is the development of more efficient ship engines. Dassault Systèmes worked with Finnish ship builder Wärtsilä to create a virtual twin to explore the building of efficient propulsion units for shipping and ensure the engines maintain top performance, allowing experimentation with everything from fuel to engine design without building new, expensive prototypes.
Not just sustainable products, but sustainable processes
While virtual twins bring clear sustainability benefits in product development, this is not the only area where they can help businesses become more sustainable. In the sphere of drug manufacture, Dassault Systèmes helped develop a virtual twin to refine a process rather than a product, examining the effect of variables from production line speed to factory layout, individual processes and changes in temperature and altitude.
“It’s about exploring all the options in a safe environment. If you’re going to make a significant investment, you want to mitigate risk before you start,” says Prior.
Mitigation is key in encouraging businesses to embrace sustainability. “By using more sustainable processes, the business itself becomes more sustainable; building fewer physical prototypes, using less material, and the end-product is more sustainable. It is a double win,” he says. “The business becomes more efficient and uses resources more efficiently. The business can be more robust, more resilient to the kinds of challenges we’ve seen over the last year.”
With resilience a strategic priority for more than three quarters (77 per cent) of business leaders, according to Dassault Systèmes’ research, sustainability plays a key role. “It’s a competitive world and sustainability is a competitive advantage,” Prior adds. “Companies can go out of business when they don’t keep up with trends. It is so important companies embrace the technology available to them to meet the sustainability goals their consumers expect.”
The Leaders in Business Sustainability event takes place virtually on 8-10 June 2021.
Séverine Trouillet, Dassault Systèmes’ global affairs director, EuroNorth, shares her thoughts on sustainability in business
What does sustainability really mean when it comes to business and why is it so important?
Having observed the massive disruption that businesses are going through, we believe business sustainability is around business models, products and people. I think there’s a real sense of urgency around sustainability; we’re in the decade to deliver because of the crisis around environment degradation, scarcity of resources and inequalities. Companies are realising they need to take action to survive and thrive.
How key is innovation when it comes to helping businesses achieve sustainability?
What we saw accelerated in the COVID-19 crisis is that going digital and accelerating innovation is a leap in the right direction for business sustainability. By diminishing reliance on paper-based evidence and travel, and increasing collaboration through virtual platforms, you can reduce your carbon footprint and innovate more sustainably. One key example is virtual or digital twins. A report launched by Accenture at the World Economic Forum calculated that having a digital twin allows you to reduce emissions, reduce waste and speed up your innovation. So, if you make sure your leadership teams understand that you need to adopt technologies faster, such as digital twins, then you will realise the sustainable leap at the same time.
What is the future and importance of sustainability in business?
With the 2030 United Nations Sustainable Development Goals, and companies’ and governments’ own targets, this urgency will continue growing. So sustainability is here to stay, supported by technology. You will have consumers voting with their wallets more and more, so for companies to survive they will have to listen to these consumers who are demanding products that have less of an impact on the environment and can be repurposed, fixed or recycled.
Digital technology is enabling companies to meet their ambitious ESG goals, aligning sustainability with profitability in the minds of decision makers.
By guest author Beni Ross
The expectation that companies must do good beyond the bottom line is reflected in the shift from shareholder primacy to stakeholder capitalism, whereby customers, employees, suppliers, the local community and the environment influence business decision-making as much as profit. By failing to consider environmental, social and corporate governance (ESG) issues, organisations now risk being left behind by their competitors.
Deploying tech-based solutions to meet sustainability objectives has allowed businesses to reexamine the value of sustainability. For corporate leaders, ESG has become more integral to decision making, while in many industries tech has provided new opportunities to pursue a systems-based approach to sustainability.
For decision makers, the ESG agenda has transformed from niche conversations tucked away in large organisations to a mutually reliant relationship in which sustainability drives profitability.
The integration of sustainability processes has matured beyond infancy stages, as the business case for ESG has become clearer through real-life examples of the impact when getting it right or, indeed, getting it wrong. This is most evident in the surge of focus on social factors, which previously were eclipsed by the environmental and governance elements of ESG.
“Businesses can no longer sustain profitability if they only serve their short-term shareholder needs,” says Elena Philipova, global head of ESG at Refinitiv, the data and training provider owned by London Stock Exchange Group. “The links between ESG and financial results are becoming clearer and more documented. Previously, tangibles made up 80 per cent of a business valuation. Now intangibles make up the 80 % Companies have to transform.”
The costs of inaction are too high for companies to be drawn to the outdated perception that implementing sustainable practices is a costly exercise that presents little to no financial gain. Those ahead of the game testify to the opposite: a more sustainable business model can lower their cost of capital by attracting better talent, serving clients more effectively and being more resilient.
In a study by HSBC, 78 per cent of UK companies said they expect their greater focus on sustainability to result in increased sales over the next year. And according to McKinsey, the potential value unlocked by companies with a more long-term approach – consistent investment rates, quality earnings and sustainable margin growth – could reach $3 trillion by 2025.
Over the past five years, approaches to ESG and sustainability have evolved to become more systems based. When Thai Union, one of the world’s largest seafood companies, first launched its sustainability strategy in 2015, the focus was on a few high-profile issues. However, the more it worked on solutions, the more it uncovered about the systems driving those challenges.
By investing significantly in full traceability for its products, Thai Union has been able to verify its environmental and labour standards while collecting data, through monitoring and supply engagement, which enables consumers to track a can of tuna back to the vessel that caught it.
“The best way to maximise value is to invest long term in the ecosystems and communities essential to the business,” says Dr Darian McBain, global director for corporate affairs and sustainability at Thai Union. “ESG-minded businesses use their influence to urge adoption of sustainable practices across the value chain, driving long-term business and stakeholder value.”
Digital technologies, when adopted well, can empower sustainability practices. For Thai Union, this includes cameras and sensors on boats for additional monitoring and data collection to optimise fisheries management. These same technologies enabling seafood traceability have huge potential across industries, strengthening protections for workers and the environment. Meanwhile, blockchain technology is enabling Thai Union and others to connect supply chains.
But tech-driven sustainable change has also been motivated by global movements. According to the World Benchmarking Alliance, a non-profit organisation which benchmarks companies against the United Nations’ 17 Sustainable Development Goals, technology has a significant, though currently untapped, role to play in helping companies meet their sustainability objectives. The measurement frameworks that sit behind these digital technologies are equally important.
Global packaging and processing business Tetra Pak is on a journey towards carbon-neutral carton packages that are made fully from renewable or recycled materials, which requires significant breakthroughs in several technologies. As part of its sustainability strategy, the company is continuously developing new packaging solutions and upping its investments.
“We believe there are three key ingredients to realising ESG goals: the ability to set and demonstrate progress in line with science and societal expectations; a collaborative approach across the value chain; and a true innovation drive,” says Markus Pfanner, Tetra Pak’s vice president for sustainability.
“Digitalisation is improving collaboration within manufacturing firms, so sustainability goals can be communicated from the C-suite to the factory floor. Everyone knows their role in driving sustainability initiatives forward, as well as how these align with business objectives,” he adds.
Companies separating sustainability strategy from their core business growth and profitability strategy will find it costs more. By integrating ESG considerations into core decision-making – asking what needs to be done to ensure success over the coming decades – sustainability and profitability become mutually reinforcing. But first that means breaking ESG out of a siloed department to ensure long-term, sustainable thinking is truly ingrained in the business’s operations.
At its upcoming event, Dassault Systèmes will be exploring the ways in which companies can make more sustainable decisions. The 8-10 June 2021 event’s three key themes demonstrate how business sustainability is essential for long-term success.
By Dassault Systems
When most people hear the word “sustainability”, they think of the environment. And, absolutely, cleaning the oceans, decarbonising the air and cooling the planet are all incredibly important areas we need to be focusing on as a global society.
But these are the symptoms, not the causes. If we’re going to reverse the damage we’ve done over the past few hundred years, we’re going to need people, lots and lots of people, to change how they live their lives, which means sustainability also has a social angle.
The simple truth is the biggest contributors to environmental damage are companies because historically it’s been more profitable to think and act short term, than to worry about whether the Earth will be habitable in 500 years.
While companies can be blamed for their role in creating our current situation, no other group is better placed to fix it. With their financial resources, quality of people and global reach, companies uniting together are our best chance of building the better world we all want.
There are two major motivators to making businesses want to get on board this movement. The first is that society is demanding change. Society wants to see companies acting more sustainably in how they package and ship goods, how they power their factories and hundreds of other areas. Those that are good for society and our world will be rewarded with custom, those that aren’t will wither and die.
The second reason is that it also makes good business sense from an operational point of view. In evolving to become more sustainable, companies will also become more resilient. More efficient. More cost effective. They will become better businesses, better suited to the changing world around us.
Whether stronger businesses are a by-product of creating a more sustainable world, or a more sustainable world is a by-product of creating stronger businesses, we all win.
Dassault Systèmes first saw these trends happening in 2019 and set up the Leaders in Business Sustainability event in response.
The goal was to educate, inspire and support companies in making this transformation through our three business sustainability pillars:
1. Sustainable business models and fostering agility – Understanding the inhibitors and enablers of delivering more sustainable business models.
2. Sustainable products and speed of innovation – Understanding how to deliver the next generation of tangible and intangible products and services, improving their flexibility and speed to market.
3. Sustainable people and workforce of the future – Understanding how to increase the know-how and skills of existing workforces and prepare them for the shifting work patterns of the future.
To attend the Leaders in Business Sustainability virtual event on 8-10 June 2021, please register now
Sponsored by Dassault Systèmes, the 3DEXPERIENCE Company, is a catalyst for human progress. We provide business and people with collaborative 3D virtual environments to imagine sustainable innovations. By creating virtual experience twins of the real world with our 3DEXPERIENCE platform and applications, our customers push the boundaries of innovation, learning and production. Dassault Systèmes brings value to more than 290,000 customers of all sizes, in all industries, in more than 140 countries. For more information, visit www.3ds.com
The four global forces breaking all the trends
By guest author Richard Dobbs, James Manyika, and Jonathan Woetzel from McKinsey. Richard Dobbs is a director of the McKinsey Global Institute and a director in McKinsey’s London office, James Manyika is a director of the McKinsey Global Institute and a director in the San Francisco office, and Jonathan Woetzel is a director of the McKinsey Global Institute and a director in the Shanghai office.
This article is an edited excerpt from No Ordinary Disruption: The Four Global Forces Breaking All the Trends, (Public Affairs, May 2015). To learn more about it and order copies, please visit Amazon, Barnes & Noble, or other leading bookstores.
The world economy’s operating system is being rewritten. In this exclusive excerpt from the new book No Ordinary Disruption, its authors explain the trends reshaping the world and why leaders must adjust to a new reality.
In the Industrial Revolution of the late 18th and early 19th centuries, one new force changed everything. Today our world is undergoing an even more dramatic transition due to the confluence of four fundamental disruptive forces—any of which would rank among the greatest changes the global economy has ever seen. Compared with the Industrial Revolution, we estimate that this change is happening ten times faster and at 300 times the scale, or roughly 3000 times the impact. Although we all know that these disruptions are happening, most of us fail to comprehend their full magnitude and the second- and third-order effects that will result. Much as waves can amplify one another, these trends are gaining strength, magnitude, and influence as they interact with, coincide with, and feed upon one another. Together, these four fundamental disruptive trends are producing monumental change.
1. Beyond Shanghai: The age of urbanisation
The first trend is the shifting of the locus of economic activity and dynamism to emerging markets like China and to cities within those markets. These emerging markets are going through simultaneous industrial and urban revolutions, shifting the centre of the world economy east and south at a speed never before witnessed. As recently as 2000, 95 % of the Fortune Global 500—the world’s largest international companies including Airbus, IBM, Nestlé, Shell, and The Coca-Cola Company, to name a few—were headquartered in developed economies. By 2025, when China will be home to more large companies than either the United States or Europe, we expect nearly half of the world’s large companies—defined as those with revenue of USD 1 billion or more—to be headquartered in emerging markets. “Over the years, people in our headquarters, in Frankfurt, started complaining to me, ‘We don’t see you much around here anymore,’” said Josef Ackermann, the former chief executive officer of Deutsche Bank. “Well, there was a reason why: growth has moved elsewhere—to Asia, Latin America, the Middle East.”
Perhaps equally important, the locus of economic activity is shifting within these markets. The global urban population has been rising by an average of 65 million people annually during the past three decades, the equivalent of adding seven Chicagos a year, every year. Nearly half of global GDP growth between 2010 and 2025 will come from 440 cities in emerging markets—95 percent of them small- and medium-size cities that many Western executives may not even have heard of and couldn’t point to on a map.1 Yes, Mumbai, Dubai, and Shanghai are familiar. But what about Hsinchu, in northern Taiwan? Brazil’s Santa Catarina state, halfway between São Paulo and the Uruguayan border? Or Tianjin, a city that lies around 120 kilometres southeast of Beijing? In 2010, we estimated that the GDP of Tianjin was around USD 130 billion, making it around the same size as Stockholm, the capital of Sweden. By 2025, we estimate that the GDP of Tianjin will be around USD 625 billion—approximately that of all of Sweden.
2. The tip of the iceberg: Accelerating technological change
The second disruptive force is the acceleration in the scope, scale, and economic impact of technology. Technology—from the printing press to the steam engine and the Internet—has always been a great force in overturning the status quo. The difference today is the sheer ubiquity of technology in our lives and the speed of change. It took more than 50 years after the telephone was invented until half of American homes had one. It took radio 38 years to attract 50 million listeners. But Facebook attracted 6 million users in its first year and that number multiplied 100 times over the next five years. China’s mobile text- and voice-messaging service WeChat has 300 million users, more than the entire adult population of the United States. Accelerated adoption invites accelerated innovation. In 2009, two years after the iPhone’s launch, developers had created around 150000 applications. By 2014, that number had hit 1.2 million, and users had downloaded more than 75 billion total apps, more than ten for every person on the planet. As fast as innovation has multiplied and spread in recent years, it is poised to change and grow at an exponential speed beyond the power of human intuition to anticipate.
Processing power and connectivity are only part of the story. Their impact is multiplied by the concomitant data revolution, which places unprecedented amounts of information in the hands of consumers and businesses alike, and the proliferation of technology-enabled business models, from online retail platforms like Alibaba to car-hailing apps like Uber. Thanks to these mutually amplifying forces, more and more people will enjoy a golden age of gadgetry, of instant communication, and of apparently boundless information. Technology offers the promise of economic progress for billions in emerging economies at a speed that would have been unimaginable without the mobile Internet. Twenty years ago, less than 3 % of the world’s population had a mobile phone; now two-thirds of the world’s population has one, and one-third of all humans are able to communicate on the Internet.2 Technology allows businesses such as WhatsApp to start and gain scale with stunning speed while using little capital. Entrepreneurs and start-ups now frequently enjoy advantages over large, established businesses. The furious pace of technological adoption and innovation is shortening the life cycle of companies and forcing executives to make decisions and commit resources much more quickly.
3. Getting old isn’t what it used to be: Responding to the challenges of an aging world
The human population is getting older. Fertility is falling, and the world’s population is graying dramatically. While aging has been evident in developed economies for some time—Japan and Russia have seen their populations decline over the past few years—the demographic deficit is now spreading to China and soon will reach Latin America. For the first time in human history, aging could mean that the planet’s population will plateau in most of the world. Thirty years ago, only a small share of the global population lived in the few countries with fertility rates substantially below those needed to replace each generation—2.1 children per woman. But by 2013, about 60 % of the world’s population lived in countries with fertility rates below the replacement rate. This is a sea change. The European Commission expects that by 2060, Germany’s population will shrink by one-fifth, and the number of people of working age will fall from 54 million in 2010 to 36 million in 2060, a level that is forecast to be less than France’s. China’s labour force peaked in 2012, due to income-driven demographic trends. In Thailand, the fertility rate has fallen from 5 in the 1970s to 1.4 today. A smaller workforce will place a greater onus on productivity for driving growth and may cause us to rethink the economy’s potential. Caring for large numbers of elderly people will put severe pressure on government finances.
4. Trade, people, finance, and data: Greater global connections
The final disruptive force is the degree to which the world is much more connected through trade and through movements in capital, people, and information (data and communication)—what we call “flows.” Trade and finance have long been part of the globalization story but, in recent decades, there’s been a significant shift. Instead of a series of lines connecting major trading hubs in Europe and North America, the global trading system has expanded into a complex, intricate, sprawling web. Asia is becoming the world’s largest trading region. “South–south” flows between emerging markets have doubled their share of global trade over the past decade. The volume of trade between China and Africa rose from USD9 billion in 2000 to USD211 billion in 2012. Global capital flows expanded 25 times between 1980 and 2007. More than one billion people crossed borders in 2009, over five times the number in 1980. These three types of connections all paused during the global recession of 2008 and have recovered only slowly since. But the links forged by technology have marched on uninterrupted and with increasing speed, ushering in a dynamic new phase of globalization, creating unmatched opportunities, and fomenting unexpected volatility.
These four disruptions gathered pace, grew in scale, and started collectively to have a material impact on the world economy around the turn of the 21st century. Today, they are disrupting long-established patterns in virtually every market and every sector of the world economy—indeed, in every aspect of our lives. Everywhere we look, they are causing trends to break down, to break up, or simply to break. The fact that all four are happening at the same time means that our world is changing radically from the one in which many of us grew up, prospered, and formed the intuitions that are so vital to our decision making.
This can play havoc with forecasts and pro forma plans that were made simply by extrapolating recent experience into the near and distant future. Many of the assumptions, tendencies, and habits that had long proved so reliable have suddenly lost much of their resonance. We’ve never had more data and advice at our fingertips—literally. The iPhone or the Samsung Galaxy contains far more information and processing power than the original supercomputer. Yet we work in a world in which even, perhaps especially, professional forecasters are routinely caught unawares. That’s partly because intuition still underpins much of our decision making.
Our intuition has been formed by a set of experiences and ideas about how things worked during a time when changes were incremental and somewhat predictable. Globalization benefited the well established and well connected, opening up new markets with relative ease. Labour markets functioned quite reliably. Resource prices fell. But that’s not how things are working now—and it’s not how they are likely to work in the future. If we look at the world through a rearview mirror and make decisions on the basis of the intuition built on our experience, we could well be wrong. In the new world, executives, policy makers, and individuals all need to scrutinize their intuitions from first principles and boldly reset them if necessary. This is especially true for organizations that have enjoyed great success.
While it is full of opportunities, this era is deeply unsettling. And there is a great deal of work to be done. We need to realise that much of what we think we know about how the world works is wrong; to get a handle on the disruptive forces transforming the global economy; to identify the long-standing trends that are breaking; to develop the courage and foresight to clear the intellectual decks and prepare to respond. These lessons apply as much to policy makers as to business executives, and the process of resetting your internal navigation system can’t begin soon enough.
There is an urgent imperative to adjust to these new realities. Yet, for all the ingenuity, inventiveness, and imagination of the human race, we tend to be slow to adapt to change. There is a powerful human tendency to want the future to look much like the recent past. On these shoals, huge corporate vessels have repeatedly foundered. Revisiting our assumptions about the world we live in—and doing nothing—will leave many of us highly vulnerable. Gaining a clear-eyed perspective on how to negotiate the changing landscape will help us prepare to succeed.
Chip Shortage may change How Cars are produced
This is an Newsletter from TextileFuture based upon a Whitepaper by guest authors of Freedonia.
Semiconductor chips are in short supply due to an unprecedented chain of events. This is causinga ripple effect throughout the global automotive industry that may impact not only what vehiclesare produced in the future but also where new chip manufacturing is located.
How Did We Get Here?
The underlying trigger of recent chip shortages was the COVID-19 pandemic, which temporarily closed some semiconductor manufacturing plants and reprioritized the types of chips being made.
However, the response of chip producers and of end users – like the automobile industry – to the pandemic brought to light serious supply chain issues that have been quietly growing for decades.
On the demand side, more consumers working at home during the pandemic sharply increased the market for electronic products such as laptops, smartphones, and gaming consoles. At the same time, car companies werereducing production and cutting orders for chips due to concerns about COVID’s potential impact on sales. Inresponse, chip producers trying to keep up with spikingdemand for high-grade chips shifted output toward products used in consumer electronics and away from automobiles.
But demand for cars rebounded faster than expected even as supplies of chips were further reduced by fires at two semiconductor plants in Japan – the most recent at Renesas Electronics, a leading supplier specifically to the automotive industry. Semiconductor fabs, which normally like to be at about 90 % capacity utilisation to maintain profitability, could not appreciably increase production to meet the growing demand.
Lead times for automotive semiconductor chips are now stretching out 6 to 12 months and, as a result, automobile manufacturers are temporarily closing plants or otherwise reducing production.
Pretty much every global motor vehicle manufacturer has been impacted – including Ford, General Motors, Honda, Toyota, Stellantis (formerly Fiat Chrysler), Nissan, and Volkswagen – withFord seeing some of the biggest losses. Some producers are partially producing vehicles butwaiting to finish and ship them until chip supplies arrive.
As a result, consumers and commercial businesses who are now ready to buy new vehicles findlimited options and long wait times. The rental car industry, which sold off much of its fleet in 2020 due to weakness in the travel industry, can’t buy enough vehicles to keep up with spiking demandfor its services as people start travelling again, leading to high rental fees and loss of business to alternatives.
Fragility of Supply Chain exposed
At issue is the global motor vehicle supply chain and the dominance of Asia in semiconductor chip production. The risks of having too much supply concentrated in one region or country was highlighted by an earlier shortage of masks in the beginning months of the pandemic. Asia, more specifically China, is the dominant global producer of masks, and when the country shut down manufacturing operations (and subsequently limited mask exports in order to keep up with domestic demand) hospitals around the world found themselves in a desperate situation with surging numbers of patients and limited supplies of protection gear.
The same thing has happened with semiconductor chips and end users like the automotive industry that rely heavily on just-in-time manufacturing (JIT). According to Ashwani Gupta, the
Chief Operating officer at Nissan, in a recent Wall Street Journal article: “The repercussions of an unprecedented crisis like Covid highlight the fragility of our supply-chain model.”
Motor vehicle producers rely heavily on the JIT model, and the supply chain for semiconductor chips used in vehicles is long and complex. The current supply chain is unable to react quickly to changes in demand in part because semiconductor manufacturing plants are expensive to build and maintain and because there are limited suppliers concentrated in only a few places.
Also, the chaos and uncertainly in the first few months of the pandemic caused some companies to overreact. According to Thomas Bowne, Chief Economist at The Freedonia Group, “The severity of the problem was the combination of the JIT mindset along with what turned out to be an overly pessimistic assessment of the effect of the lockdowns on MV demand. Any MV producer who would have kept taking delivery of semiconductors last spring instead of cancelling orders would now be sitting pretty”.
According to some sources, up to 75 % of semiconductor manufacturing is now in Asia, and manufacturing of the chips needed by automobile companies is especially concentrated there. Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s most advanced chip producer and a leading supplier of the chips used in US auto production.
Ongoing political strife between the US and China is of particular concern for those relying on Taiwan’s supplies of semiconductor chips. In 2020, the US imposed restrictions on the exports of certain semiconductors to China. In addition, China’s threat to take control of Taiwan, which would give it control of Taiwan’s semiconductor industry, reinforces the need for end users to broaden their sources of supply.
According to some sources, up to 75 % of semiconductor manufacturing is now in Asia.
New US Semiconductor Production Coming
The fallout from the COVID pandemic is increasing questions about the wisdom of keeping production of critically important supplies such as semiconductors under the control of a few countries.
In an interview with CBS News, Pat Gelsinger, CEO of Intel, highlighted the situation facing US semiconductor manufacturing: “25 years ago, the United States produced 37% of the world’s output. That share has declined to just 12 %.”
The lack of semiconductor production in the US is placing renewed emphasis on rebalancing the supply chain. Intel has been lobbying the US government to help increase domestic chip production through the use of incentives such as subsidies and tax breaks. President Biden’s infrastructure plan has proposed USD 50 billion to help the US semiconductor industry expand capacityand to promote semiconductor research and development.
Industry participants like Intel and TSMC have announced billions of dollars of investment to expand fab capacity, but it’s unlikely to have a tangible impact on the supply situation until 2023: Intel, the largest US semiconductor chip producer, doesn’t currently make chips for automotive uses but plans to start producing them in the US soon. The company is building two new fabricating facilities in Arizona and also plans upgrades to a fab in New Mexico.
TSMC has announced plans to build a plant in Phoenix, Arizona, although the facility is targeted at producing chips for high-end electronics products, the type of chips that currently aren’t made in the US.
According to Matthew Rolfe, Operations Manager for Freedonia Focus Reports, “Semiconductor fabs must operate as clean room environments and are equipped with bleeding-edge equipment manufactured by essentially one company in the entire world (ASML). It understandably takes time to build and ramp up production.”
Rolfe also points out that it’s taking longer to make leading-edge processors as cutting edge chip making technologies now rely on multi-patterning, which not only increases the number of production steps but also lowers yields and increases manufacturing costs.
25 years ago, the United States produced 37 % of the world’s semiconductor output. That share has declined to just 12 %.”
Will the Automotive Industry Change its Ways?
The strange confluence of events that triggered the shortage in automotive semiconductor chips has led motor vehicle producers to reassess their use of the JIT model and their reliance on a limited list of preferred suppliers. Some companies are now stockpiling crucial vehicle parts and expanding their list of approved suppliers. A number of companies are investing in their own production of key parts such as batteries. Volkswagen, for example, has announced plans to build six new battery production facilities in Europe. General Motors is partnering with LG Energy to build a second lithium battery plant in the US.
Flexibility will continue to be a key for successfully reinventing the automotive supply chain, as evidenced by the few vehicle producers who were less impacted by the current shortage. For example, Tesla reacted to the shortage quickly by developing new processes that allowed it to switch to new suppliers and by using new microcontrollers.
Freedonia’s Latest Vehicle Production Forecasts
The Freedonia Group’s latest macroeconomic forecasts have US light vehicle production growing 6.5 % in 2021, with additional growth of 10.8 % for 2022.
According to Bowne at Freedonia, “The major takeaway is that the loss of production in 2021 will not all be made up even by the end of 2022. Also, a longer term effect of the shortage is that it may sharpen automakers’ focus on prioritizing production of the more profitable vehicles and speed up a transition away from producing units with options or trim packages that are less popular.”
Global vehicle production is expected to increase over 10 % in 2021. However, following declines of 15 % in 2020, that growth will still leave production below 2019 levels.
For more information on the semiconductors market please see: Semiconductors: United States
The major takeaway is that the loss of production in 2021 will not all be made up even by the end of 2022.”
Freedonia Knowledge Centre
In addition to the purchase of individual Freedonia Focus Reports on demand, access to the entire portfolio is available via The Freedonia Group’s online Knowledge Centre. Organisations such as investment banks, consultancies, private equity firms, NGOs, and corporate and academic libraries find subscriptions a convenient, cost-effective means to keep pace with new and updated releases, to answer research questions without delay.
Also see our full industry study http://Global Motor Vehicle Outlook 2020.
Each month, The Freedonia Group – a division of MarketResearch.com – publishes over 20 new or updated Freedonia Focus Reports, providing fresh, unbiased analysis on a wide variety of markets and industries. Published in 20-30 pages, Focus Report coverage ranges from raw materials to finished manufactured goods and related services.
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