Analysis: a weak economy more of a threat to logistics than cyber attacks
© Mohamed El Khamisy
Source: The New York Times
However, even though market reaction has been mixed so far, many observers seem to agree the alignment of IT solutions to shippers’ evolving needs should speed up in a fast-changing environment, where legacy systems should be abandoned.
“Cyber security woes are the tip of the iceberg for shippers, their suppliers and their clients,” the London-based advisor of a consumer staples company with worldwide exposure told me this week. He thought “blockchain could be the ultimate solution, but we are not there yet as it needs acceptance, trust and new investment”.
The next big thing
As far as blockchain is concerned, Goldman Sachs, one of its main backers, argues that it is the next big thing in the IT world; one reason being that if there’s any attempt to alter the ecosystem, “a previously created block, the hash that’s encoded in the next block won’t match up anymore. This mismatch will continue through all subsequent blocks denoting an alteration in the chain”.
Source: Goldman Sachs
But does it also mask bigger issues in supply chain activities and in the real economy?
Reaction
On 6 July the chief executive of Freightos, Zvi Schreiber, noted that, following last week’s cyber attack on Maersk, “it’s far from surprising that Maersk bookings on the Freightos AcceleRate platform dropped by about 35%”.
He added: “But despite disruptions at the world’s largest carrier, freight prices in the last week of June barely budged.”
With the shipping world in a flux, it is easy to conclude that many shippers might end up being seriously troubled – particularly the smaller ones.
Consumer behemoths as well as other producers are unlikely to feel the pinch over the long term, given their economic moats and advanced tech capabilities, and Maersk itself will unlikely be harmed meaningfully over the short term.
“The shutdown could cost over $50m in lost cargo bookings for Maersk, as some cargo was diverted to other carriers during the past week,” Alphaliner estimated.
After all, cyber attack victims Maersk and FedEx’s TNT Express managed to find ways to keep customers’ cargo moving, and the data I sighted indicates the damage for other shippers is contained. Moreover, the latest financial plans of some of the major players testify to a situation that needs to be addressed, but remains mostly manageable.
That also is what the public markets have pointed to over the last few days – news of the Maersk hack passed almost unnoticed by investors and its rally continued unabated on the stock exchange.
Finance
By pure coincidence, just a few hours after the cyber attack became public, Switzerland’s Nestlé – which ranks seventh among global supply chain operators, according to Gartner’s league tables (2017 Supply Chain Top 25) – announced its intention to splash out up to almost $21bn to buy back its own stock over the next three years, which equates to almost 10% of its current market cap.
Source: Gartner
Analysts at Royal Bank of Canada told investors on 6 July that Nestlé’s new chief executive “Mark Schneider’s influence is becoming apparent on several fronts”, and “following years of narrowing sales outperformance versus the sector, he has spelt out Nestlé’s management’s desire to invest in growth”.
The broker added: “At the same time, increased restructuring spend suggests that Nestlé’s getting serious about cost reduction.” After 2017, when the analysts forecast flat ebit margins in line with guidance, while they assume a steady growth rate for core margins, “with 140 basis points to come by 2020”.
However, this is a modest growth trajectory, RBC added, compared with Unilever – the Anglo-Dutch company leads Gartner’s rankings and announced a €5bn buyback in May – and France’s Danone, “whose guidance implies over 300 and 200 basis points of margin growth respectively over the same period”, according to RBC analysts.
The broker remains cautious on the sector: changing consumer habits might have something to do with that but possibly, I speculate, relatively high trading multiples and the risk posed to consumer staples stocks by rising interest rates in the US, rather than weakening fundamentals, also play a part.
The free cash flow yield of most of the shippers I cover regularly – and most find themselves on Gartner’s top 25 list – have suffered only minor financial damage, but certain developments deserve a mention.
For example, Reckitt Benckiser, which ranks outside the top 25 supply chain providers based on Gartner’s league tables, issued a statement on 6 July essentially saying the situation was under control, yet some £800m in equity value were wiped off its market cap.
Source: Reckitt
The big issue
“The consumer and retail industries are the most exposed to digital changes,” an air cargo operator told me this week, “but then supply chain risk is not only about the tech transformation and latest news on Petya.
“It’s about delivery, [and] several carriers under-delivering, as well as infrastructure adequacy, work ethic and human resources.
“For example, I doubt a shipper like Avon was particularly pleased recently with the performance of its carrier, Silk Way, which manages and transports its goods. It’s been messy for some time at least in Europe, and we are also partly to blame for a shortage of skilled workers.”
Avon’s performance (Source: MarketWatch)
Earlier in May, Thomson Reuters reported that Avon was hit by a surprise quarterly loss as it “found fewer takers for its beauty products amid intense competition and economic slowdown in its key markets”.
“The real economy could end up being a much bigger problem than cyber attacks,” my source concluded.
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