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Medicine Shortage in the EU A Deep-dive into Its Causes and Cures by EOS Intelligence
by EOS Intelligence EOS Intelligence No Comments

Medicine Shortage in the EU: A Deep-dive into Its Causes and Cures

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With the proposal of the deeply revamped new EU pharma legislation in April 2023, the EU initiated an attempt to tackle the medicine shortfall that the union has been experiencing for over two decades now. Europe has witnessed a 20-fold rise in reported drug shortfalls from 2000 to 2018, as per research conducted by the Mediterranean Institute of Investigative Reporting (MIIR).

According to the European Data Journalism Network (EDJNet), the problem of drug inadequacies is not novel, although it got under the spotlight during the 2020-2022 COVID-19 pandemic, the energy crisis that started in early 2022, and the beginning of the Russian invasion of Ukraine in early 2022. Ironically, the fundamental reasons responsible for the medicine shortages in the EU are not solely these three events but a mixture of structural, economic, and regulatory factors that the governments often refuse to agree on.

In terms of the magnitude of the shortage during the five-year period from January 2018 to March 2023, Italy experienced the highest inadequacy in absolute terms to the tune of 10,843 medicines, followed by Czechia with 2,699 medicines and Germany with 2,355 medicines. Although Greece witnessed the lowest shortage, with 389 medicines between 2018 and 2023, the median duration for which the shortfall existed was the longest for this country, with 130 days, followed by Germany with 120 days, and Belgium with 103 days. This means that, for instance, in Greece, it is likely to take about four months and eight days for a medicine to be back on the market.

According to a survey regarding medicine shortages in the EU members organized by the Pharmaceutical Group of European Union (PGEU) between mid-November and end-December 2022, all 29 EU countries surveyed recorded drug shortfalls during the past 12 months among community pharmacists (pharmacists in retail pharmacies where the general populations have access to medications). Moreover, around 76% of the respondents agreed that the situation had worsened compared to 2021, and the remaining 24% said the situation remained the same compared to 2021. Not a single country registered any improvement in the situation compared to 2021. Furthermore, the survey also revealed that 83% of the respondents concurred that cardiovascular drugs were in short supply during the last 12 months in community pharmacies, followed by medicines treating nervous system diseases and anti-infectives for systemic use, such as antibiotics (79% each). Owing to the sample size of this survey of 1 response per country covering 29 EU countries, the findings might not be accurate but are likely to illustrate the overall trends correctly.

The problem of medicine shortages is not just limited to EU countries, as the UK is also experiencing acute drug inadequacies, including HRT (hormone replacement therapy) medicines and antibiotics, among other medicines.

In December 2022, the European Medicines Agency (EMA) announced that most EU countries are confronted with drug shortages. The question that arises is what led to the medicine shortfall in the EU and how the EU members can attempt to combat the issue at hand.

Medicine Shortage in the EU A Deep-dive into Its Causes and Cures by EOS Intelligence

Medicine Shortage in the EU: A Deep-dive into Its Causes and Cures by EOS Intelligence

Factors responsible for medicine shortages in the EU

The attributing factors to drug shortages in the EU are mainly a combination of economic, regulatory, and production or supply chain-related causes.

Economic factors

Price cap regulation on generics amidst rising costs hindering production

One of the key reasons for the drug shortfall of medicines, including antibiotics (such as Amoxicillin) in the EU is the fact that generic drug makers are not paid sufficiently for increased production of the medicine to cover the associated costs such as production, logistics, and regulatory compliance costs that are rising steeply.

To add to the woes of most European generic drug makers, the prices of the generics that the respective countries had set have remained unchanged for the past two decades, making the situation much worse.

Additionally, due to regulated prices of generic drugs, numerous European drug producers have shown a lack of interest in boosting their production capacity. This has become particularly relevant during the Russian invasion of Ukraine, which has caused a rise in energy costs. This cost increase affects the smooth functioning of factories that produce everything from aluminum for medicine bottle caps to cardboard for packaging medicines, indicating a rise in drug insufficiencies in the foreseeable future.

According to a Reuters report, six European generic drug industry groups and trade associations, as well as 13 European producers, revealed that many smaller drug makers are battling to be profitable and, therefore, are contemplating if producing antibiotics would be feasible, let alone expanding production capacity.

Government tenders indirectly force generic producers to cut production

Before inviting quotations or tenders, many European governments tend to weigh the generic drug prices with prices in other regional markets or prices of similar drugs in the home market to establish a reference price point that can be used in negotiating with producers. These governments give contracts to those producers who quote the lowest price, resulting in “further downward pressure on prices in subsequent tenders,” as per generic drug producers.

According to many European generic drug producers, the price cap regulation and the tender system of generics have spurred a ‘race to the bottom’. The European generic drug makers bear the brunt of Asian generic drug producers charging less for the same products. Consequently, some European firms were compelled to either decrease production or choose offshore production (of generics and APIs required to produce them) to low-cost locations such as India and China.

Parallel exports aggravate the shortages in low-price markets

Although some European countries have started prohibiting parallel exports (cross-border sale of medicines within the EU by sellers outside of the producer’s distribution system and without the producer’s permission) to other countries, this practice of buying drugs from low-price markets and selling them in high-price markets has resulted in the exhaustion of medicine supplies in low-price markets. This has been noticed in some EU countries such as Greece, Portugal, and Central and Eastern European member states where legislations have been put into effect that make the re-export of pharmaceuticals harder. For instance, drug shortages in Greece have been attributed to the re-export of imported medicines to regions where these medicines are sold at a higher price point than in Greece, as per a news report by the Turkish news agency, Anadolu Agency.

According to a report published by the Centers for European Policy Network in May 2021, the magnitude of parallel imports of medicines occurring in the European Economic Area (EEA) was to the tune of €5.7 billion in 2019. Furthermore, the share of parallel-imported pharmaceuticals varied considerably across European countries. To cite a few examples, Denmark’s share of parallel-imported pharmaceuticals was around 26.2% in 2018, while the corresponding figure for Austria was 1.9% in the same year. Similarly, in 2018, the share of parallel-imported medicines was around 12% in Sweden and 2% in Poland.

Production and supply chain factors

The current lack of a sufficient number of production facilities in European countries can increase the chances of drug shortfalls in the region at the time of any production problem. To illustrate this, the European Medicines Agency (EMA) cited that drug shortages in the EU are caused by production factors, raw material shortages, distribution issues, and high demand due to respiratory diseases and inadequate manufacturing capacities.

Furthermore, many pharma producers utilize the just-in-time concept of inventory management, which improves efficiency, reduces storage costs, and minimizes waste, thanks to producing goods as needed. Due to this, producers often face challenges such as the inability to adapt to changing demand volumes.

Moreover, owing to the innate reliance of drug producers on APIs, variations in the “supply, quality, and regulation” of APIs have affected medicine supplies, according to a report by the Economist Intelligence Unit. To cite an example, pharmacies in Italy have attributed the decline in the making of APIs in China to the shortfall of medicines in Italy, according to a report by Anatolia Agency, the leading Turkish news agency.

Reactions from various stakeholders in the EU pharma market

Starting from proposing a revision of the EU pharma legislation to banning parallel exports of medicines in some European countries, there are many reactions to drug shortages in the EU from various pharma market stakeholders.

New Pharma legislation in the EU by the European Commission

The proposal of the new pharma legislation in the EU by the European Commission in April 2023 came as a reaction to the acute medicine shortage in the region. It proposes measures for producers to provide early warnings of drug shortfalls and necessitates producers to keep reserve supplies in sufficient quantities for times of crisis, such as acute shortages.

Read our related Perspective:
 New EU Pharma Legislation: Is It a Win-win for All Stakeholders?

Price capping cannot facilitate sustainability

European lobby groups supporting generic medicine makers argue that price limits won’t be effective due to growing production and regulatory expenses. There was no system to review medicine prices and adjust them for inflation or when APIs became scarce in most European countries. Moreover, it is exceedingly complex to continue to keep medicines competitive after 10 years of their launch.

Ramped up production by bigger generic drug producers

The pricing framework in Europe is the primary concern of generic drug makers in the long term, not production costs. According to the global supply chain head of Sandoz, Novartis’s generic division, the current inflexible pricing framework prevents generic drug producers from adjusting prices for essential drugs according to changes in input costs.

To illustrate this, the price of 60ml of pediatric amoxicillin in 2003 in Spain was around €0.98 (US$1.05). In the following ten years, the only change that was made was to reduce the quantity of the medicine to 40ml of pediatric amoxicillin, still pricing it at €0.98 (US$1.05). However, no change has been made since 2013.

Some larger generic drug companies are ramping up the production of certain medicines, such as amoxicillin, that are in short supply. To cite a few examples, Sandoz is planning to add extra shifts in its factory in Austria to meet their increased production target of amoxicillin by a double-digit percentage in 2023 vis-à-vis 2022. Additionally, the company plans to start the operation of another expanded factory by 2024. Similarly, GSK also recruited a new workforce and increased shifts in its amoxicillin factories in the UK and France. However, for companies with smaller market shares, such as Teva, things are different as increasing production capacity is not a viable option for them as they are struggling to be profitable, and thus, there is no way they can ramp up production to bridge the market gap.

National governments and drug regulators making big changes

Some European governments are considering making legal changes to ease the current procurement system of medicines in their respective regions. Additionally, some European governments are also striving to ban the re-export of imported medicines. Germany’s government is set to contemplate making legal changes to its tender system for generic medicines in 2023, whereas the Spanish government is planning to review its pricing scheme for certain medicines, which might cause patients to pay a higher price for medicines, including amoxicillin, on a temporary basis. The Netherlands and Sweden have put in place a law that requires vendors to stock six weeks of reserve supplies to mitigate shortfalls.

Several European countries are taking initiatives to prohibit parallel exports or re-exports of imported medicines to preserve domestic medicine supplies. To cite an example, in November 2022, the medicines regulatory body in Greece expanded the list of drugs whose re-export to other countries is prohibited. Another example is Romania, which halted exports of certain antibiotics and pediatric analgesics for three months in January 2023. Also, in January 2023, Belgium issued an official order allowing the respective authorities to stop the export of medicines to other countries during crises such as shortages.

EOS Perspective

Tender or procurement and pricing strategies of medicines in the EU and the UK must be improved after in-depth analysis. This is the only way to improve production in the European region so that future shortages of drugs can be avoided, in addition to curbing heavy dependence on Asia for essential drugs.

Secondly, there needs to be a centralized EU system in place that is designed to track the supply of essential medicines in all member countries, allowing for the identification of early signs of upcoming risks or shortfalls.

The new pharma legislation in the EU is expected to help improve the availability of drugs in situations of health crises, including drug shortages. The EU could reduce medicine shortages across the region over time as it has awarded the EMA more responsibilities and established a new body called HERA that can purchase medicines for the entire union.

by EOS Intelligence EOS Intelligence No Comments

Indian Pharma Needs to Reinforce Supply Chain Capabilities

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COVID-19 has emphasized the importance of a strong healthcare and pharmaceutical ecosystem for India. The constant demand for drugs and the expectation to deliver them in time put a lot of pressure on pharma supply chains, highlighting several challenges and shortcomings. At the same time, the Indian pharma sector seems to have benefited from the situation as well, as the pandemic unlocked new avenues of growth. To seize new opportunities, the Indian pharma sector should now focus on increasing manufacturing capacity, investing in R&D capabilities, developing world-class infrastructure, and strengthening its supply chain network.

Challenging times for the Indian pharma sector

With the coronavirus wreaking havoc, the Indian pharmaceutical sector was shaken, and the pandemic inflicted several challenges on the industry.

The key challenge faced by pharmaceutical companies has been the shortage of key raw materials for manufacturing drugs. India imports 60% of APIs (Active Pharmaceutical Ingredients) and DIs (Drug Intermediates), and nearly 70% of this demand is met by Chinese companies (as of July 2020). This reliance on importing cheaper raw materials from countries such as China is a result of a lack of tax incentives, the high cost of utilities, and low import duties in India.

India’s dependence on China has affected the supply of essential APIs. The recent pandemic has magnified this problem, and in order to meet the increasing demand, Indian pharma manufacturers need to strengthen their supply chain strategies by working with multiple API suppliers, both domestic as well as international.

Another concern has been the increased raw materials and logistics costs. Between January and June 2020, the production costs at the Chinese suppliers increased due to the implementation of safety and hygiene measures thus increasing the overall cost of APIs and other materials imported by India by an average of 25%. Logistics prices also went up during the same period, with the cost of shipping a container from China to India increasing to an average of US$ 1,250, up from US$ 750. Additionally, air freight charges also went up from US$ 2/kg to US$ 5-6/kg.

Furthermore, restrictions on movement of products and other goods also posed a problem for pharma supply chain. Even though the sector was exempted from these restrictions, delays in the delivery of drugs were registered. These delays have been largely contributed to by the complexity of various processes and their elements (from raw material procurement to procuring casing and other packaging material – all of which come from different locations to the final assembly point, and their delivery can be exposed to delays at each stage). While logistics companies tried to make product deliveries on time, they were restrained by limited workforce and movement restrictions (that required clearance at every step).

Moreover, due to panic buying, scarcity of OTC and generic drugs was also observed.

Government’s push to make India self-reliant

The government has undertaken steps to strengthen the pharma sector and announced several schemes and policies to boost domestic pharma manufacturing.

To reduce import dependence on APIs and boost domestic manufacturing, the government approved a US$ 971.6 million (INR 69.4 billion) Production Linked Incentive (PLI) Scheme in March 2020 to promote domestic manufacturing of APIs and KSMs (Key Starting Materials)/DIs. Under the scheme, financial incentives ranging from 5% to 20% of incremental sales will be given to selected manufacturers of 41 critical bulk drugs (of the identified 53 APIs for which the country is heavily dependent on imports). This includes aid for fermentation-based products from FY2023–2024 to FY2028–2029 and for chemical-synthesis-based products from FY2022–2023 to FY2027–2028. It is expected that the scheme will result in incremental sales of US$ 649.6 million (INR 464 billion) and generate a large number of employment opportunities.

Moreover, in November 2020, a new PLI Scheme (referred to as PLI 2.0) for the promotion of domestic manufacturing of pharmaceutical products was announced, wherein US$ 210 million (INR 150 billion) were allotted for pharma goods manufacturers based on their Global Manufacturing Revenue (GMR). Financial incentives ranging from 3% to 10% of incremental sales will be given to manufacturers (classified under Group A – having GMR of pharmaceutical goods of at least US$ 700 million (INR 50 billion), Group B – having GMR between US$ 70 million (INR 5 billion) and US$ 700 million (INR 50 billion), and Group C – having GMR less than US$ 70 million (INR 5 billion). The objective of the scheme is to promote production of high-value products, increase the value addition in exports, and improve the availability of a wider range of affordable medicines for local consumers. The initiative is likely to create 100,000 (20,000 direct and 80,000 indirect) jobs while generating total incremental sales of US$ 41,160 million (INR 2,940 billion) and total incremental exports of US$ 27,440 million (INR 1,960 billion) during six years from FY2022-2023 to FY2027-2028.

Another scheme, named Promotion of Bulk Drug Parks, was announced by the government in March 2020 to attain self-reliance. Under the plan, funds worth US$ 420 million (INR 30 billion) were allotted for setting up three bulk drug parks between 2020 and 2025. This initiative aims at reducing the manufacturing cost as well as the dependency on importing bulk drugs from other countries. Financial assistance will be given to selected bulk drug parks to the extent of 70% of the project cost of common infrastructure facilities (for north-eastern regions and states in the mountainous areas, the assistance will be 90%). The aid per bulk Drug Park will be limited to US$ 140 million (INR 10 billion).

Furthermore, to end reliance on China, Indian pharma companies are also taking steps to strengthen their operations and manufacturing capabilities with regard to pharmaceutical ingredients. For instance, Cipla Ltd. (Mumbai-based pharmaceutical company) launched the “API re-imagination” program in 2020 to expand its manufacturing capacity by using government incentive schemes.

The announcement of the above schemes is a show of intent by the government towards building a self-sufficient pharma sector in India. It will be interesting to see how much pharma players stand to gain from these potentially game-changing initiatives. However, only time will tell if these policies are good enough for the industry stakeholders or will these schemes not be plentiful enough to truly help the manufacturers.

Indian Pharma Needs to Reinforce Supply Chain Capabilities by EOS Intelligence

Investment in API and intermediaries’ sub-sectors on the rise

Since the outbreak of COVID-19, Indian pharmaceutical companies (that deal particularly with the manufacturing of APIs, vaccine-related products, and bulk pharma chemicals) have been attracting huge investment from private equity firms. This is happening mainly because of two reasons. Firstly, the occurrence of the second wave of COVID-19 in India has increased the demand for medicines (including demand for self-care, nutritional, and preventive pharma products to boost immunity), and secondly, pharma companies across North America and Europe are shifting their manufacturing sites from China to India (to reduce dependency on a single source). Indian companies received an investment worth US$ 1.5 billion from private equity firms during FY2020-2021 (since the coronavirus outbreak), and the investment is expected to reach US$ 3-4 billion in FY2021-2022.

Some of the major deals that happened in this space included Carlyle Group (US-based private equity firm) buying a 20% stake in Piramal Pharma (Mumbai-based pharma company) for US$ 490 million in June 2020 and a 74% stake in SeQuent Scientific (India-based pharmaceutical company) for US$ 210 million in May 2020. Further, KKR & Co. (US-based global investment company) purchased a 54% controlling stake in J.B. Chemicals & Pharmaceuticals Ltd. (Mumbai-based pharmaceutical company) for nearly US$ 410 million in July 2020. Another example is Advent International (US-based private equity firm) acquiring stakes in RA Chem Pharma (Hyderabad-based pharmaceutical company) for US$ 128 million in July 2020.

From a capital perspective, COVID-19 acted as an investment accelerant that will keep the market open for opportunistic deals for many years to come. In the current scenario, investment firms are re-evaluating the pharma landscape and looking to invest in innovative ideas and products that help them grow. It is highly likely that in the coming months if the right opportunity strikes, the investment firms will not be deterred from going ahead with novel deal structures. This could include arrangements such as both parties sharing equal risk and rewards, a for-profit partnership wherein the investor specifically focuses on enhancing the digital-marketing capabilities of the pharma company (rather than sticking to just acquiring a certain share or merging with an existing company) and being open to taking more risk if needed.

Partnerships expected to increase

The pandemic has led pharma companies to rethink their operational and business strategies. For long-term sustainability, players analyze their market position, partnering with other industry stakeholders for better market penetration and value creation for their customers.

In November 2020, Indian Immunologicals Ltd. (Hyderabad-based vaccine company) announced that the company would invest US$ 10.5 million (INR 0.75 billion) in a new viral antigen manufacturing plant based in Telangana that would cater to the need for vaccines for diseases such as dengue, zika, varicella, and COVID-19 (in April 2021, the company announced a research collaboration agreement with the Griffith University, Australia to develop a vaccine for the coronavirus).

Furthermore, Jubilant Life Sciences Ltd. (Noida-based pharma company) entered into a non-exclusive licensing agreement with Gilead Sciences (a US-based biopharmaceutical company), granting it the right to register, manufacture, and sell Remdesivir (Gilead Sciences’ drug currently used as a potential therapy for COVID-19) in India (along with other 126 countries).

In February 2021, to scale up the biopharma ecosystem, the state government of Telangana partnered with Cytiva (earlier GE Healthcare Life Sciences) to open a new Fast Trak lab in Hyderabad. This facility will enable the biopharma companies in the region to improve and increase production efficiency, reduce operational costs, and make products available in the market quicker.

Future ripe for new opportunities

The pandemic has opened a stream of opportunities for India’s pharma sector which are expected to drive the growth of the sector in the long term.

China’s supply disruption and increased raw material costs have forced global pharma companies to reduce dependence on China. As an alternative, the companies either set up new API manufacturing plants (which is time-consuming) or turn to existing European or US drug manufacturers to help them meet their requirements. However, both options are capitally draining, and there is a need to find a cost-efficient solution. This presents a huge opportunity for the Indian API sector, which is also a key earnings growth driver for pharma manufacturers.

India is among the leading global producers of cost-effective generic medicines. Now, there is a need to diversify the product offerings by focusing on complex generics and biosimilars. With the guidance of the United States Food & Drug Administration (USFDA) in identifying the most appropriate methodology for developing complex generic drugs, Indian pharma companies such as Dr. Reddy’s, Zydus, Glenmark, Aurobindo, Torrent, Lupin, Cipla, Sun, and Cadila are working on their product pipeline of complex generics. Currently, the space has limited competition and offers higher margins (in comparison to generic drugs), thus presenting a lucrative opportunity for Indian players to explore and grow.

Similarly, biosimilars (referred to as similar biologics in India) are another area where Indian companies have not been faring too well in international markets, mainly due to the non-alignment of Indian regulatory guidelines with the guidelines in other markets (mainly in Europe and the USA). The government had already revised the guidelines of similar biologics (done in 2016, which provided an efficient regulatory pathway for manufacturing processes assuring safety and efficacy with quality as per cGMP (Current Good Manufacturing Practice regulations enforced by the FDA)) and introduced industry-institute initiatives (such as ‘National Bio-Pharma Mission’, launched in 2017 to accelerate biopharmaceutical development, including biosimilars, among others) to improve the situation. But now, with the intensified need for improved healthcare systems and more effective medicines, COVID-19 has presented Indian companies with an opportunity to shape their biosimilar landscape.

India holds a strong position as a key destination for outsourcing research activities. While it has been a preferred location for global pharma companies to set up R&D plants for a number of years now, becoming an outsourcing hub for pharma research is another growth area that is yet to be explored to its full potential.

EOS Perspective

Currently, the Indian pharma industry is at an interesting crossroads wherein the industry responded to the unprecedented situation with agility and persistence. The pandemic presented several opportunities and challenges for the industry and unsurprisingly, had a positive impact on the sector. The pandemic acted as a catalyst for change and investment for the pharma sector, which also responded to the challenges by adjusting to the new normal that furthered new opportunities.

In the past few months, COVID-19 has led the government to reassess the country’s pharmaceutical manufacturing capabilities and led them to take steps to make India self-sufficient. As an immediate measure, the country has been reviewing its business policies (for the ease of doing business and to attract more investment) and pharma companies recalibrating their business models, and some success has been achieved. The government should also be mindful that, in the long run, success will only be achieved when industry stakeholders are presented with a business environment (in the form of incentives, tax subsidies, low rates of interest on bank loans, utilities such as electricity and water at discounted rates, and transparent business policies, etc.) that is conducive for growth.

Moving forward, the Indian pharma companies need to be adaptive and flexible. While the sector has been resilient to the effects of the coronavirus pandemic, companies need to focus on risk management as well. Moreover, with continuous capital flowing into the sector, there is an opportunity for firms to not just broaden their scope of innovation but also to invest in critical therapeutic areas.

To emerge as a winner post-pandemic, the Indian pharma industry needs to focus on its strengths and propel full steam in the direction of opportunities presented by COVID-19.

*All currency conversions as on 20th May, 2021, 1 INR = 0.014 US$

by EOS Intelligence EOS Intelligence No Comments

COVID-19 Unmasks Global Supply Chains’ Reliance on China. Is There a Way Out?

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Dubbed as the factory to the world, China is an integral part of the supply chain of a host of products and brands. From manufacturers of simple products such as toys to complex goods such as automobiles, all are dependent on China for either end products or components. However, China’s ongoing trade war with the USA and the COVID-19 pandemic have made several brands question their supply chain dependence on this country, especially in some industries such as pharmaceuticals. Moreover, aggressive investment incentives offered by countries such as India and Japan have further cajoled companies to reassess their global supply chains and reconsider their dependence on China. However, with years of investment in the supply chain ecosystem, a shift such as this seems easier said than done.

China emerged as the manufacturing hub of the world in the 1990s and hasn’t looked back since. Owing to the vast availability of land and labor, technological advancements, and overall low cost of production, China became synonymous with manufacturing. Over the past decade, increasing labor and utility costs, and growing competition from neighboring low-cost countries such as India, Vietnam, Thailand, etc., have resulted in some companies shifting out from China. However, so far, this has been limited to a few low-skilled labor-intensive industries such as apparel.

The year 2020 has changed this drastically. The COVID-19 pandemic, along with the ongoing trade war between the USA and China, made companies realize and question their dependency on China. At the beginning of last year, COVID-19 brought China to a halt, which in turn impacted the supply chain for all companies producing in China. Moreover, several pharmaceutical companies also realized that they are highly dependent on China for a few basic medicines and medical supplies and equipment, which were in considerable shortage throughout 2020. This pushed several companies across sectors, such as pharmaceuticals, automobiles, and electronic goods, to reconsider their global supply chains to ensure reduced dependence on any one region, especially China.

Currently, several companies such as Apple, Google, and Microsoft are looking to shift their production from China to other South Asian countries, such as Vietnam and Thailand.

Some of the companies looking to reduce dependence on China:

Apple

In November 2020, Apple, along with its supplier Foxconn, expressed plans to shift the assembly of some iPads and MacBooks to Vietnam from China. The facility is expected to come online in the first half of 2021. Moreover, Apple is also considering shifting production of some of its Air Pods to Vietnam as well. In addition, it has invested US$1 billion in setting up a plant in Tamil Nadu, India, to assemble iPhones that are to be sold in India. Apple and Foxconn are consciously trying to reduce their reliance on China due to the ongoing USA-China trade war.

Samsung

In July 2020, Samsung announced plans to shift most of its computer monitor manufacturing plants from China to Vietnam. The move is its response to hedge the supply chain disruptions it faced due to factories being shut in China during the early phase of the pandemic. In addition, in December 2020, the company shared its plans to shift its mobile and IT display plants from China to India. Samsung plans to invest about US$660 million (INR 48 billion) to set up the new facility in Uttar Pradesh (India).

Hasbro

Hasbro has been moving its production out of China into Mexico, India, and Vietnam over the past year. It aimed to have only 50% of its products coming out of China by the end of 2020 and only 33% of its production to remain in China by the end of 2023. In 2019, about 66% of its toys were produced in China, while in 2012, 90% of its toys were manufactured in the country. The key reason behind the consistent switch is the souring trade relations between the USA and China.

Hyundai

During the past year, Hyundai Motors has been looking at developing India into its global sourcing hub instead of China in order to reduce its over-reliance on the latter. It has been encouraging its vendors, such as Continental, Aptiv, and Bosch, to ramp up production in India so as to move their supply chain away from China. It plans to source its auto parts from India (instead of China) for its existing factories in India, South America, and Eastern Europe, as well as a planned facility in Indonesia.

Google

Google is looking to manufacture its new low-cost smartphone, Pixel4A, and its flagship smartphone, Pixel5A, in Vietnam instead of China. In addition, in 2020, it also planned to shift production of its smart home products to Thailand. This move has been a part of an ongoing effort to reduce reliance on China, which, in fact, gained momentum after supply chain disruptions faced due to the coronavirus outbreak.

Microsoft

In early 2020, Microsoft expressed plans to shift the production base of its Surface range of notebooks and desktops to Vietnam. While the initial volume being produced in Vietnam is expected to be low, the company intends to ramp it up steadily to shift volumes away from China.

Steve Madden

In 2019, Steve Madden expressed plans to shift parts of its production out of China in 2020, given growing trade-based tensions between the USA and China. However, due to the COVID-19 pandemic, it could not make planned changes to its supply chain. In October 2020, it again expressed plans to start shifting part of its production away from China by spring 2021. It plans to procure raw materials from Mexico, Cambodia, Brazil, and Vietnam to reduce reliance on China.

Iris Ohyama

The Japanese consumer goods player expressed plans to open a factory in northeastern Japan to diversify its manufacturing base, which is based primarily in China. The company made this move on the back of increasing labor costs in China, rising import tariffs to the USA, and the supply disruptions it faced for procuring masks for the Japanese market. In 2020, it also set up a mask factory in the USA. In addition, the company plans to open additional plants in the USA and France for plastic containers and small electrical goods to cater to the local demand in these markets.

Nations using this opportunity to promote domestic production

In August 2020, about 24 electronic goods companies, including Samsung and Apple, have shown interest in moving out of China and into India. These companies together have pledged to invest about US$1.5 billion to setup mobile phone factories in the country in order to diversify their supply chains. This move is a result of the Indian government offering incentives to companies looking to shift their production facilities to India.

In April 2020, the Indian government announced a production-linked incentive (PLI) scheme to attract companies looking to move out of China and set up large-scale manufacturing units in the electronics space. Under the scheme, the government is offering an incentive of 4-6% on incremental sales (over base year FY 2019-20) of goods manufactured in India. The scheme, which is applicable for five years, plans to give an incentive worth US$6 billion (INR 409.51 billion) over the time frame of the scheme.

In November 2020, the Indian government subsequently expanded the scheme to other sectors such as pharma, auto, textiles, and food processing. In addition, it is expected to provide a production-linked incentive of US$950 million (INR 70 billion) to domestic drug manufacturers in order to push domestic manufacturing and reduce dependence on Chinese imports. Apart from incentives, India is developing a land pool of about 461,589 hectares to offer to companies looking to move out of China. The identified land, which is spread across Gujarat, Maharashtra, Tamil Nadu, and Andhra Pradesh, makes it easy for companies looking to set up shop in India, as acquiring land has been one of the biggest challenges when it came to setting up production units in India.

On similar lines, the Japanese government is providing incentives to companies to shift their production lines out of China and to Japan. In May 2020, Japan announced an initiative to set up a US$2.2 billion stimulus package to encourage Japanese companies to shift production out of China. About JNY 220 billion (~US$2 billion) of the stimulus will be directed toward companies shifting production back to Japan, while JNY 23.5 billion (~US$200 million) will be given to companies seeking to move production to Vietnam, Myanmar, Thailand, and other Southeast Asian countries.

In the first round of subsidies, the Japanese government announced a list of 57 companies in July 2020, which will receive a total of US$535 million to open factories in Japan, while another 30 companies will be given subsidies to expand production in other countries such as Vietnam and Thailand. The move is a combination of Japan looking to shift manufacturing of high-value-added products back to the country, and the initial disruptions caused to the supply chain of Japanese automobiles and durable goods manufacturers.

Similarly, the USA, which has been at odds with China regarding trade for a couple of years now, is also encouraging its companies to limit their exposure in China and shift their production back home. In May 2020, the government proposed a US$25 billion ‘reshoring fund’ to enable manufacturers to move their production bases and complete the supply chain from China, preferably back to the USA, and in turn, reduce their reliance on China-made goods. The bill included primarily tax incentives and reshoring subsidies. However, the bill has not been passed in Congress yet, and now, with the leadership change in the USA, it is expected that president Biden may follow a more diplomatic strategic route with regard to China in comparison to his predecessor.

In addition to individual country efforts, in September 2020, Japan, India, and Australia together launched an initiative to achieve supply chain resilience in the Indo-Pacific region and reduce their trade dependence on China. The partnership aims at achieving regional cooperation to build a stable supply chain from the raw material to finished goods stage in 10 key sectors, namely petroleum and petrochemicals, automobiles, steel, pharmaceuticals, textiles and garments, marine products, financial services, IT services, tourism and travel services, and skill development.

Similarly, the USA is pushing to create an alliance called the ‘Economic Prosperity Network’, wherein it aims to work with Australia, India, Japan, New Zealand, Vietnam, and South Korea to restructure global supply chains to reduce dependence on China.

COVID-19 Unmasks Global Supply Chains’ Reliance on China by EOS Intelligence

Is it feasible?

While these efforts are sure to help companies move part(s) of their supply chain out of China, the extent to which it is feasible is yet to be assessed. Although the coronavirus outbreak has highlighted and exposed several supply chain vulnerabilities for companies across sectors and countries, despite government support and incentives, it will be very difficult for them to wean off their dependence on China.

Companies have spent decades building their manufacturing ecosystems, which, in many cases, are highly reliant on China. These companies not only have their end products assembled or manufactured in the country but also engage Chinese suppliers for their raw materials, who in turn use further Chinese suppliers for their inputs. Therefore, moving out of China is not a simple process and will take a tremendous amount of time as well as financial resources.

While companies such as Google or Microsoft are looking to shift their assembling plants out of China, they are still dependent on China for parts. This is all the more relevant in the case of high-technology products, such as automobiles and telecommunication infrastructure, where companies have made significant investments in China for their supply chain and are dependent on the nation’s manufacturing capabilities for small, intricate but technologically advanced parts and components.

Moreover, despite significant efforts and reforms from countries such as India, Vietnam, and Thailand, they still cannot match China in terms of the availability of skilled labor, infrastructure, and scale, which is required by many companies, especially with regard to technologically advanced products. That being said, more companies are looking at a strategy where they are maintaining their presence in China, while also developing relatively smaller operations outside the country to have a fallback and to reduce total dependency on China. This is also dubbed as the China + 1 strategy.

Another reason going in China’s favor has been its capability to bounce back from the pandemic and resume production in a short span of time. While production had been halted from January to March 2020, it ramped up from April onwards and was back to normal standards within no time. This reinforced the faith of many companies in Chinese capabilities. Therefore, as some companies are already cash-strapped due to the pandemic, they are not interested in investing in modifying their supply chains when, in most cases, normalcy resumed in a relatively short span of time.

EOS Perspective

Companies have been looking to diversify their supply chains and reduce dependence on China for a couple of years now, however, the trend has gained momentum post the coronavirus pandemic and growing US-China trade tensions. The onset of the COVID-19 outbreak exposed several vulnerabilities in the supply chain of global manufacturers, who realized the extent of their dependence on China. Moreover, several countries realized that they relied on China for key medicines and medical supplies, which cost them heavily during the pandemic.

Given this situation, several nations such as Japan, India, and the USA – together and individually, have started giving incentives to companies to shift production from China into their own borders. While this has resulted in several companies, such as Apple, Microsoft, Sanofi, Samsung, etc., expanding their manufacturing operations out of China, it does not necessarily mean that they are moving out of China. This is primarily due to heavy investments (in terms of both time and money) that they have already made into developing their intricate supply chains, as well as the inherent benefits that China provides – technologically skilled labor, sophisticated production facilities, and quick revamping of production after a calamity.

That being said, it has come into the conscience of companies to reduce their over-reliance on China, and while it may not impact the scale and extent of operations in the country in the short run, it is quite likely that companies will phase out their presence (at least part of it) in China over the coming decade.

A lot depends on the level of incentives and facilities provided by other nations. While countries such as India, Vietnam, and Thailand can offer low-cost production with regard to labor and utilities, they currently do not have the technological sophistication possessed and developed by China. Alternatively, while Japan and the USA are technologically advanced, without recurring incentives and tax breaks, the cost of production would be much higher than that in China. Thus, until there is a worthy alternative, most companies will follow the China +1 strategy. However, with growing trade tensions between China and other nations and ongoing efforts by other nations to encourage and support domestic production, China may risk losing its positioning as the ‘factory of the world’ in the long run.

by EOS Intelligence EOS Intelligence No Comments

Are Intelligent Fleet Management Systems the Way Forward?

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Operating within an environment characterized with increased competition and regulatory pressures, fleet operators globally are in dire need for operational efficiencies that can help them to ‘do more with less’. In recent years, intelligent fleet management systems (IFMS) have become the buzz within the industry with its adoption rates on the rise. However, the key question remains – can IFMS provide fleet companies with the much needed operational excellence?

The fleet management industry is undergoing major transformation driven by internal and external factors. As traditional business models are no longer sustainable due to the constantly evolving market dynamics, fueled by increasing competition, regulatory upheaval, and rising customer expectations, fleet operators have to re-invent their operational strategies in order to compete and win in the current industry environment.

Fleet Management Industry Today

In the past, fleet operators have often overlooked investments in business systems and technologies. Therefore, many firms still operate with legacy systems which are fragmented with poor controls and processes. This eventually results in higher operational costs, misevaluated risks, poor strategies, missed business opportunities, and shrinking profits. Fleet operators need to break these barriers by closely aligning their business and IT systems to streamline firm-wide operations.

There is a pressing need for integrated business systems that can provide firms with holistic enterprise-wide view, allowing fleet managers to gain better control over their fleet operations. IFMS, by harnessing data intelligence, empowers fleet companies with better decision-making capabilities which result in reduced operational costs and optimized fleet performance. Encouraged by these benefits, fleet managers are increasingly utilizing IFMS, and the global trend towards adoption of fleet management systems is on the rise with the industry expected to witness a strong growth between 2014 and 2019 at a CAGR of 24%.

The Rising Importance of Fleet Management Systems

What Can IFMS Bring to the Table

Big Data - Big Challenges

EOS Perspective

With promising growth opportunities for the fleet management industry, especially in emerging markets, competition is going to intensify among players to capture and grow their markets shares. In order to compete and win in the evolving frontier markets, fleet operators must innovate and transform their business models, by investing in integrating people, processes, and technologies that can help them see the bigger picture. IFMS, through data intelligence, can help fleet operators to streamline operations, improve business performance, and strategic decision making. But it comes with its own set of challenges. At present, technology as well as service providers in the market place are evolving, and due to high implementation costs, IFMS adoption is presently limited to large fleet operators. However, in the coming years, as service providers are likely to gain more industry experience and expertise, data intelligence technologies and IFMS service offerings will mature and become more cost effective.

There is no doubt that in the foreseeable future IFMS will play a vital role in the fleet management industry, helping fleet operators to improve business performance and support robust growth strategies.

by EOS Intelligence EOS Intelligence No Comments

Evolving Business Needs to Pave Way for Retail Distribution Centers in South Africa

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Traditionally, retail distribution in South Africa was largely in the hands of the manufacturers, who solely owned and operated the warehouses and fleet of vehicles that were used to distribute products to retail stores. Today, this system is seen as inefficient and is increasingly losing in popularity. Leading retail chains, such as Shoprite, SPAR, Pick n Pay, and Woolworths, established centralized distribution centers and implemented warehouse management technologies to cut costs and ensure that there are no disruptions in demand and supply. While online retailers have also established central warehouses, it is still to be seen if they can implement the model with equal success as online retailing supply chain is more complex.

Back in the day, it was a well stated fact in the country and also across the world that manufacturers were responsible for moving goods from their manufacturing hubs to the retailer’s back door. These manufacturers would own and operate large warehouses and vehicles for distribution, and would supply to several retailers in its coverage area. As retailers were largely at the mercy of the manufacturer’s delivery schedule, this system put significant control of the supply chain in the hands of the manufacturer. Moreover, retailers could not cater to unexpected demand spurs, which in turn hampered their business.

Over the years, several leading retail chains in South Africa have abandoned this system and worked towards gaining complete control of their supply chains. This has resulted in them establishing their own centralized distribution centers (DCs). Under this system, retailers buy in bulk and then distribute from their DCs to various outlets on a need-be basis. This has not only helped them gain autonomy over their inventory levels, but has also reduced their distribution costs as well the lead time between order and delivery time to stores. Moreover, with self-owned distribution centers, retailers have been able to re-engineer their retail stores and improve its space utilization by dedicating a minimum required area to storage and all the remaining space to sales.

Benefits of centralized retail distribution centers are not only limited to retailers, but extend both ways in the supply chain to manufacturers and end consumers as well. This model enables the manufacturers to keep inventory levels as low as they can and eliminate the risk of obsolete or over stock positions. In addition, this model empowers smaller manufacturers, who do not have the financial strength to maintain their own warehouses or large distribution fleet. Under this model, they can compete with larger manufacturers as they only have to deliver their products to the retailers’ centralized distribution centers instead of investing heavily in their own distribution network and infrastructure. At the consumer end, retailers pass on a part of the benefit accrued (in terms of savings and discounts, respectively) from the elimination of a middle man and buying in large quantities from manufacturers.

Shoprite, a leading retail chain in South Africa was one of the first to adopt the centralized distribution strategy, giving it a strong competitive advantage. The group has distribution centers in Centurion (145,000 m2), Cape Town (45,000 m2), and Durban (11,500 m2). SPAR, another major retail group operates six technologically advanced DCs across South Africa. Two other retail chains, Woolworths and Pick n Pay, also receive their stocks from self-owned DCs. Experts estimate that retailers, which follow the centralized distribution system, manage savings of about 5-7% of supply chain costs.

In addition to working wonderfully for retail stores, centralized warehouses have lent immense support to the online retail model. While e-commerce in South Africa is still in its nascent stage (with Internet penetration at around 34%), online retailing has been growing rapidly (33% year-on-year in 2013) owing to attractive pricing, as well as improved technology and online payment security. Usually, online retailers store their goods in a central warehouse. However, the delivery of large volumes of value goods within short periods gives rise to the need for more distribution points that are located close to stores. E-commerce companies undertake direct-to-customer deliveries through their own internal facilities or through outsourced partnerships. They extensively use the services of courier and express parcel (CEP) industry to distribute their goods.

Another important aspect for efficient distribution is supply chain information technology and sharing. South African retailers have invested heavily in advanced distribution and supply chain technologies, such as RFID, electronic point of sales (EPOS), and electronic data interchange (EDI) that link the physical inventory levels with the information flows to adapt quickly to changes in demand.

The introduction of RFID into the distribution system helps in attaining real-time access and updation of current store inventory levels, along with increased inventory visibility, availability of accurate sales data, and better control of the entire supply chain.

EPOS facilitates the consolidation and transmission of aggregated sales data and other information from individual retail stores to the centralized DC. Alternatively, the centralized warehouse uses EDI to share information among all its supply chain trading partners. Over and above the inventory and warehouse management solutions, retailers also use transport route planning and scheduling system that optimizes store deliveries and integrates the operations of the distribution center and the transport division.

Although it is safe to say that the evolution of centralized warehouses have benefited retailers, manufacturers, and customers alike, the ever-evolving and digitally empowered consumer is driving the need for further innovation in the way companies, especially online retailers, are managing their distribution and supply chain operations. The rise in e-commerce and its inherent challenges and opportunities is spurring the need for greater visibility across the entire supply chain. While South African retail chains are on the right track with centralized distribution centers and warehouse management technologies, only time will tell if they manage to optimize their retail industry to the levels of the developed nations.

by EOS Intelligence EOS Intelligence No Comments

Production Re-shoring – a Great Idea That Won’t Materialize?

After years of shifting American production capabilities to China as the primary low-cost location, the trend might be somewhat changing. As costs increase in this previously cheap destination, American executives have started to question whether it still makes economic sense to spend more and more on Chinese labour and transport the products back half across the world to the final customer.

With estimations that Chinese wages double every four years, it is clear that the cost benefit of off-shoring to China is narrowing and the country might start losing its competitive edge. It has been, and will continue to be, a very slow process, and we will surely hear stories of another industry giant opening another production facility in this ‘global manufacturing centre’. Yet, the concept of re-shoring, i.e. shifting manufacturing capabilities, once off-shored in search for decreased costs, back to the USA, has been the story of several American producers for the past couple of years. While reasons vary, cost element is probably a key deciding factor, as cited to be the reason behind the re-location of some of the capabilities by Apple or General Electric.

But it is not only the cost that is forcing companies to think of bringing manufacturing capabilities back home. There is a range of reasons indicated as strong factors that should force American manufacturers to consider re-shoring:

  • Slowly, but gradually the cost benefit of off-shored production will narrow, given the faster rise in labour costs in locations such as China

  • Shipping costs associated with long-distance logistics are also increasing, e.g. shipping rates, cutbacks in logistics infrastructure, are estimated to have caused an average hike of 70% in shipping costs between 2007-2011

  • Quality inconsistency issues, both real and perceived, continue to resurface in Asia-manufactured products – flawed production lots, inaccurate specifications, as well as end customers’ continued scepticism towards the ‘made in China’ label

  • Production is increasingly executed in small lots to ensure responsiveness to fluctuations in demand volume and structure, customization requests, and to mitigate the risk of reduced liquidity with cash trapped in inventory

  • Supply chains are found to be more and more vulnerable to disruptions caused by ‘beyond control’ factors, from natural disasters (earthquakes, tsunamis in Asian locations) to political disruptions affecting smooth and timely shipping

  • Weaker dollar requires US-based companies to spend more bucks on the same foreign-based production and transportation services

  • While economic result matters most, producers also consider the customers patriotic interest to buy products that are ‘local’ to them – in terms of appeal as well as the production location, which can be an extra public relations benefit for the company re-shoring its manufacturing jobs back to the USA.

While reasons are varied and not mutually exclusive, there is still a question whether re-shoring is actually a strong trend, and whether jobs will return to the USA. The question cannot be ignored – if re-shoring turned out to be a persisting trend, it could be a well-needed kick to this crisis-shaken American economy.

Not long ago, in mid-2012, Forbes published an article, in which it asked whether re-shoring is actually a trend or more of a trickle. A simple survey conducted amongst MFG.com members, an online marketplace space for the manufacturing industry, proved that re-shoring can be a real trend, as a number of American executives indicated new contracts being awarded to them – contracts that had previously been off-shored. The re-shoring trend seems to be further confirmed by the frequently quoted 2010 Accenture report, which indicated that around 60% of manufacturing executives surveyed considered re-shoring their manufacturing and supply capabilities. The trend could be additionally supported by tax incentives proposed by Barack Obama for companies re-shoring back to the USA, as well as drives such as The Reshoring Initiative, founded by Harry Moser in 2010, aiming at promoting the concept amongst American businesses and tracking the phenomenon. According to Moser, re-shoring brought some 50,000 jobs back to the USA during the period of 2010-2012.

But, with all these points being legitimate reasons for American companies to re-think their off-shoring, perhaps the big believers in the return of the ‘Made in the USA’ era, should curb their enthusiasm just yet. It is quite unlikely that low-cost producers will return to the American soil for good – on a scale large enough to have a positive impact on American economy.

First of all, China will still hold enough advantage over the next couple of years – an unbeatable advantage of a large pool of workers available for $2 an hour wage, which, even if increases, will still be far lower than in the USA. And it is not only about the cost, but also about the relatively high elasticity of low-cost Chinese labour supply (in terms of wage accepted and workers volumes available), which even at its lower productivity, makes it still more economical to stick to factories based in China, than re-shoring on big scale to the US market. The public relations dimension of bringing back jobs has to be approached realistically too, keeping in mind that much higher productivity of American workers means that for each 4-5 Chinese jobs being cut, American market would gain probably not more than 1, making the job creation benefit much more modest than hoped for. And even if, over long term, the increasing labour cost squeezes the cost benefit tight enough to make the producers leave China, it is highly unlikely that they will turn to American workers as first priority. There are more economical options available across Asia and other geographies (perhaps at higher cost than in China but still well below American levels). We might see some of these manufacturing jobs fly to India, Bangladesh, and the emerging African continent.

It seems that this big re-shoring move might be just wishful thinking, which will translate to a few jobs brought back to the USA, in numbers not significant enough to actually make much difference.

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