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Predictions, Prophets, and Restarting Your Manufacturing Business Amid COVID-19

manufacturing

Predictions, Prophets, and Restarting Your Manufacturing Business Amid COVID-19

COVID-19 has created a drastic effect on global health and the economy. Every nation is struggling to deal with the challenge of keeping its residents protected against coronavirus. Businesses are witnessing huge financial losses owing to a reduced/lack of workforce and other resources. If we talk about the manufacturing industry, it also has been hit hard by the corona crisis, and the fact that it has a huge role to play amidst coronavirus lockdown, this impact is felt the most by everyone.

The global supply chain got disrupted because of coronavirus, and since it originated in China, which is considered as the biggest manufacturing market globally, the ability of the manufacturing industry to meet the needs of the customers came down significantly.

So, let us throw some light on the impact of coronavirus on the manufacturing industry, and figure out some effective ways that can help manufacturers restart their business proficiently.

The Prophets and Prediction

The Prophet: The problem with prophecies is that they are based on data that is just a few weeks old, which is not sufficient for business leaders to make hard, cold business decisions when it comes to coming back in the market.

The Prediction: With social distancing becoming a norm, most of the people look forward to buying online. This clearly means that the scope of eCommerce is on the rise, and manufacturers will be looking to make a shift gradually.

Restarting Your Manufacturing Business

Every business is looking to return to the market, but due to the measures that are being adopted to reduce or prevent coronavirus are affecting the supply chains directly, which, in turn, is leading to disruptions in the manufacturing operations worldwide.

If we talk about the manufacturing industries like automobiles where production is done on a massive scale, the schedules for production are rigid and efficiency-optimized. In a similar way, the working of supply chains is dependent on schedules that are fixed like months ago based on the demand projections. Still, automobile owners are looking forward to remodeling such systems to be able to meet the irregular demand atmosphere.

Every crisis consists of several challenges, but one should look for opportunities within them. So, keeping the new norms of personal protection and social distancing, businesses need to redesign their business models.

To help businesses get started again, we are providing some guidelines that will help them to:

-Evaluate the organization’s COVID-19 safety compliance and requirements.

-Restructure the workplace for personal safety and protection.

-Implement procedures for personal protection.

-Put into practice the action plan for restarting to ensure a secure future of the company.

As per a Deutsche Bank analysis, the growth of GDP on the global level will be lower in 2020 due to the coronavirus effects. This effect will leave its impact on most of the U.S. and Europe, with growth forecasts on the global front also likely to drop by 0.2 percent.

Taking Care of the Workforce

The manufacturing industry is dependent on its workforce, and most of them proceeded towards their hometown owing to the fear of contracting coronavirus. In order to get its workforce back, a manufacturing company must keep track of the health status of every worker, along with gaining knowledge on the happenings in their areas through digital mediums. This will help them in knowing from which parts of the country they can call back their workforce to restart the manufacturing processes.

However, at this point in time, most of the manufacturers have to wait, and even if they are able to start the operations with a minimal workforce, they will be unable to manage their other important processes like accounting. In such cases, opting for Outsourcing manufacturing accounting services becomes imperative.

Securing Supply and Inventory

Instant delivery and globalization have turned out to be huge risk areas. Suppliers, including sub-suppliers, are all going through a similar situation. During such crisis situations, a huge concern comes to the top since procurement teams are unable to have close contact with their manufacturing suppliers. This, in turn, restricts them from monitoring the capacity of the production on a weekly/daily basis or evaluating the latest logistics prices and routes.

Now, with COVID-19, supply and inventory are in a position where there is a high risk of contractual defaults and severe legal action concerning the inability to fulfill orders on time or otherwise.

Why do Manufacturers Need to Rethink their Restart Strategies?

Most of the manufacturers are ready with their restart strategies and looking forward to implementing them ASAP. These new strategies are primarily focused on:

-The use of digitalization to receive data and have a superior visualization of the supply chain with control-centric solutions.

-Automation and robots to enhance the flexibility of the plant, including the capacity to run significant processes remotely or alone.

There is no denying that manufacturers are moving in the right direction, but they need to figure out for how long and at what pace they can carry out their production with a minimal workforce, technology support, and funds. The reason being local and international supply chains are disrupted, and one cannot say till how long this situation remains the same.

If a manufacturer is heavily dependent on the demand of a specific region or country, he may have to slow down his operations due to a lack of demand because of COVID-19. Low demand means a low supply and returns, leaving little funds for the manufacturer to operate. So, manufacturers need to assess their new strategies from every angle so that they are ready to face the forthcoming unexpected challenges.

This is a challenging situation for manufacturers for sure, and they cannot halt their operations for long. The above-mentioned suggestions will surely help manufacturers to not just get started but ensure smooth business operations in the future. Yes, they need to devise strategies, keeping in mind not just the present scenario but the possibility of forthcoming events, to stand strong against any unfavorable circumstances that might arise in the future.

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Gia Glad works as a Business Development Manager at Cogneesol, a well-renowned company offering data management, technology, accounting, and legal services. While handling the projects, she has witnessed a lot of changes over the years. She has been thoroughly researching and sharing her viewpoints about these industry trends and changes on many platforms across the Internet.

semiconductor

CONTROLS ON SEMICONDUCTOR TRADE ARE A HARBINGER FOR “TECHNO-NATIONALISM”

Major nations are in a race to achieve supremacy in the “technologies of the future” that include data analytics, robotics, AI and machine learning, surveillance technology and 5G networks. What all these new technologies have in common is the semiconductor microchips that drive them. Gaining the technology upper hand requires the secure production or supply of advanced semiconductors, which makes the controls on trade in semiconductors a harbinger for how “techno-nationalist” trade policies are reshaping global supply chains.

China’s failure to launch?

The global semiconductor industry was historically dominated by a small group of primarily American semiconductor companies. In the past two decades, a handful of Asian semiconductor companies including Toshiba (Japan), Samsung (South Korea) and TSMC (Taiwan), have managed to grow market share. Latecomers in Asia benefited from a combination of ambitious industrial policies and government support, a narrow focus on specialization and innovation, and access to key foreign partnerships and foreign direct investment.

The Chinese government seeks to replicate these models on a much larger scale under its Made in China 2025 industrial policy. Geopolitics may prevent China from achieving its goals. Key Chinese tech firms, including Huawei, HikVision, and SenseTime, now find themselves on a U.S. restricted entities list, which means “controlled” American technology may not be sold to them.

Global Semi Shares

China’s push to reduce semiconductor tech dependence

The Chinese market is almost entirely dependent on foreign firms for microchips. Domestic production accounts for just nine percent of China’s semiconductor consumption – leaving 91 percent of China’s demand to be satisfied by imports, 56.2 percent from the United States.

Yet semiconductor technology is vital to China’s manufacturing base and to China’s top exports that include smartphones, personal computers, and smart televisions. China’s continued dependence on U.S. and foreign semiconductor technology has been a catalyst for Beijing to double down on policies to promote homegrown companies.

China’s National Integrated Circuit Plan calls for $150 billion in R&D funding from central, provincial and municipal governments, twice as much as the rest of the world combined. U.S. companies spent $32.7 billion on R&D in 2018, followed by European companies ($13.9 billion), Taiwanese companies ($9.9 billion), Japanese companies ($8.8 billion) and Korean companies ($7.3 billion).

Some 30 new semiconductor facilities are either under construction or in the planning stages in China – more than any other country in the world. But even the most sophisticated fabricator in China must rely on licensing chip designs from foreign firms and on high-volume commercial production lines outside of China. And foreign firms still dominate niches in China’s semiconductor market such as microchip packaging and testing, semiconductor equipment, memory and AI chips, as well as contract microchip making.

National champions require international supply chains

China is not alone in its interdependence on global value chains. Leading American, European, Japanese and South Korea semiconductor companies have all developed and optimized geographically dispersed production networks. Research and development, design, manufacturing, assembly, testing and packaging have become hyper-specialized with activity taking place across multiple countries as microchips cross borders dozens of times before being finally embedded into a finished product.

Chinese tech companies have been able to grow and innovate because of unfettered access to collaborative relationships with foreign research and academic institutions, as well as access to foreign companies through acquisitions and (often state-funded) mergers – until recently.

Semi R&D Spending

American trade countermeasures

The U.S. government has taken steps to block Chinese acquisitions and investments in American technology companies and has also made critical changes to the U.S. export controls program. The U.S. Department of Commerce manages a list of “emerging” and “foundational” commercial technologies or products which can be used for military purposes. It recently expanded the technologies included on the Controlled Commodity List (CCL). Technologies on the CCL require issuance of an export license prior to sale and transfer to a foreign market.

An export control is not, by itself, a prohibition to sell or buy a traded good. In the vast majority of cases, when the facts surrounding a controlled item are reviewed (including who the buyer is and how the controlled item will be used), U.S. government agencies issue export licenses. But export controls and related measures add a layer of uncertainty to global value chains, potentially turning long-time suppliers into unreliable suppliers.

Part and parcel of the Chinese Communist Party’s approach to leapfrogging in the semiconductor industry is to appropriate special technology funding toward “military-civil fusion,” designed to bring tech startups and private companies together with the People’s Liberation Army. The deepening of those direct links virtually ensures that innovations and technologies pertaining to industries of the future will be considered by the U.S. government as dual use technologies subject to scrutiny, control and prohibitions when it comes to exporting them from the United States, especially to China.

A special designation

U.S. companies or individuals may also be denied or restricted from doing business with restricted entities/parties or with “specially designated nationals”. In May 2019, the U.S. government designated Huawei, China’s telecommunications giant, a restricted entity. In this scenario, the application for an export license to a Huawei entity would be presumed denied, effectively banning the sale of American technology to Huawei or any of its 68 non-U.S. affiliates in other countries.

The designation has widespread ripple effects. Huawei purchased some $70 billion components and parts from more than 13,000 suppliers globally in 2018 – approximately $11 billion worth of microchips from American technology companies alone. American companies may not sell to Huawei and Huawei must replace all U.S. technology from its smart phones, which previously included U.S. radio frequency chips, DRAM and NAND chips, design software and Google’s Android operating system.

Prohibitions may be applied to individual end-users, to financial institutions that may seek to process transactions for a restricted buyer or supplier, and to academic and research institutions that may be prevented from using technologies from restricted entities in their research.

Driving a wedge and choosing sides

Washington’s countermeasures aim to impede the Chinese Communist Party’s ability to promote U.S. technology and intellectual property transfer to Chinese entities – either by stopping sales of technology, stifling investment flows into China’s semiconductor industry, or blocking the acquisition of strategic assets from U.S. and foreign companies by Chinese state-backed entities.

This evolving trade policy landscape will inevitably lead to the reconfiguration of global value chains as companies comply with export restrictions. Foreign companies that seek to maintain their relationship with a restricted entity must reduce the value of U.S. content to below an acceptable “de minimis” level, increase the value of non-U.S. made products in their sourcing and production, or avoid doing business with U.S. companies altogether. This has induced companies to move value-added operations out of the United States, to ring-fence operations in China, or to consolidate into more vertically integrated value chains.

In an attempt to close the de minimis loophole, the U.S. government has modified the “foreign direct product” rule. In the example of Huawei, this change prevents foreign manufacturers from supplying Huawei, the Chinese tele-communications manufacturer, with microchips and other products, if the production of these items uses any U.S. technology, including manufacturing equipment, designs or software. U.S. firms dominate these technology niches.

This change was clearly aimed at Taiwan Semiconductor Manufacturing Company (TSMC), which manufacturers microchips for HiSilicon, Huawei’s subsidiary. Cutting off the supply of microchips to HiSilicon presents an existential crisis for Huawei, as no Chinese companies are capable of producing leading-edge microchips on par with TSMC and other foreign manufacturers.

Compliance has become more complicated as the ranks of restricted entities swell. Nearly 170 Chinese individuals and entities (across a wide swathe of industries) are on the U.S. Specially Designated National list. U.S. companies must navigate restrictions that are enforced by more than a dozen different U.S. government agencies.

American firms are also concerned about diminished opportunities to do business in key global value chains, effectively ceding market share to Chinese and other foreign firms not under similar restrictions. Limited or foregone sales in China may reduce funds for R&D. Restrictions also choke off collaborative innovation across specialized clusters and between human capital networks. Huawei and other Chinese tech companies are looking to withdraw from U.S.-influenced supply chains, forming alliances with non-American technology companies, putting TSMC, Samsung and others in the position of having to choose sides.

Just the beginning

When Washington announced Huawei would be placed on the U.S. Restricted Entity List, Huawei’s management tapped 10,000 engineers, requiring them to work continuously in shifts to re-write code and re-design specifications so that Huawei might minimize the damage of U.S. export controls.

The United States is not alone in its trade countermeasures. Europe is also turning to techno-nationalism. Brussels recently issued a report that emphasized the importance of working with America to create an economic model that would compete directly with Beijing, particularly with the intent of blocking the Chinese Communist Party’s attempts to influence global standards in 5G and other next-gen technologies. Japan has blocked Huawei 5G technology.

By enacting policies intended to protect against theft or transfer of domestic semiconductor technology from opportunistic or hostile state and non-state actors, governments have opened more fronts in the deepening tech war with China, which portends to reshape existing global value chains for semiconductor production. And semiconductors are just the beginning.

This article is drawn from a detailed research report: Semiconductors at the heart of the US-China tech war

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Alex Capri

Alex Capri is a Research Fellow with the Hinrich Foundation, Senior Fellow at the National University of Singapore, and Lecturer in the Lee Kuan Yew School of Public Policy. He was previously the Partner and Regional Leader of KPMG’s International Trade & Customs practice in Asia Pacific, based in Hong Kong.

This article originally appeared on TradeVistas.org. Republished with permission.
wayfair decision

How the U.S. Supreme Court Wayfair Decision Affects Small Business

The Wayfair Case

In 1992, the Supreme Court, in a case referred to as “Quill,” ruled that the lack of substantial physical presence in a state is sufficient grounds to exempt a business from having to collect and remit sales or sellers use taxes to a state.

This precedent protected small businesses from “burdensome” administrative processes that would have interfered with and limited interstate commerce.

The “Quill” case ruling laid down the law that ruled our land until June 21st, 2018.

On that day, the current Supreme Court reversed the “Quill” decision in a new case referred to as Wayfair.

Economic Nexus

Economic nexus, as established in the Wayfair case, was defined as $100,000 or 200 transactions per year shipped to South Dakota residents or companies as the threshold for requiring an out of state company to be subject to sales and use tax collection.

In the 2018 Wayfair decision, the Supreme Court said states could require companies with an “economic nexus” to their state to collect sales and use taxes.

The potential to encumber small businesses who sell outside of their home state by forcing them to track and comply with a different set of sales tax laws for each state is a very real burden.

Non-compliance can result in penalties and back taxes.

Compliance

Without an automated solution, managing compliance could be a full-time job due to the complexities of state tax regulations.

This may include navigating 10,000 plus sales tax jurisdictions across the country, many of which are amorphous and do not conform to city or county boundaries, or zip codes.

Compliance may require using different tax bases (taxable product categories, i.e., clothing, food items, etc.) in each state (except for the SST member states who agree to standard taxability within their state).

Another obstacle can be figuring out all the arcane rules related to taxability of handling, shipping and certain product usage rules that also vary from state to state.

Learning to use each state’s portal to report and pay sales and use taxes (even as these are being changed to keep up with reporting changes) could prove to be challenging.

Compliance could require monitoring sales tax changes across the same 10,000 plus jurisdictions and tracking their own sales dollars and transaction counts by state.

Tracking the different thresholds of each state on how soon they must begin collecting sales and use tax after hitting that state’s threshold amount (believe it or not at least one state expects tax on the first transaction after the threshold is reached) can provide even more complexity.

Resellers & Exemption Certificates

I’ll share a story that I recently heard from a former state sales tax auditor.

He found that many distributors do not do a good job of administering the resale exemption certificates issued by the state that the reseller’s customers reside in.

And if that certificate was not properly filled out and signed, he would then disallow the exemption and all that revenue would be declared taxable.

In addition, penalties and interest would be added on top of the uncollected tax.

Since every state has its own forms for resale certificates and its own rules for renewal of certificates (or not), administration is not a small task. And unfortunately, a task that is sometimes not given the importance it deserves until an audit is coming.

You Have Options

It would be much better to prepare before the states start their hunt for revenue so you can formulate a plan, rather than wait.

We suggest first and foremost if you get a letter from another state asking you to provide information to them, call your lawyer and your sales-tax-specialist accountant immediately, and before you provide any information discuss your situation and your options.

In addition to planning to handle these new requirements, we encourage small business owners to build your infrastructure and prepare your data so that you can handle this.

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John Miller is President of Passport Software, Inc., a leading provider of accounting, manufacturing, distribution and business software solutions for small to medium-sized businesses. Founded in 1983, Passport Software’s goal is to help clients with the effective use of technology in order to focus on profitability and improving their business processes.

This article was originally published in smallbizclub.com. Republished with permission.

manufacturing

Why Technology – Not Tariffs – Is the Key to Reviving US Manufacturing

Reshoring has captured the imaginations of politicians and economic developers for years, particularly in parts of the country hit hard by the loss of manufacturing jobs. The COVID-19 crisis gave reshoring advocates another rallying cry, as supply chain disruptions rippled through the economy and the general public awoke to the fact that we are dependent on Chinese manufacturing for most of our medical supplies.

Some will no doubt call for a response in the form of tougher trade policies – tariffs that aim to level the playing field and to deter Chinese “dumping” of cheap, below-profit goods with which US manufacturers can’t hope to compete.

But while tariffs can be an effective weapon in the short term, they won’t help revive American manufacturing. In fact, they might do serious damage, especially amid an economic downturn. Most economists now believe the 1930 Smoot-Hawley Tariff Act, which leveled crippling tariffs on US imports from all over the world, played a significant role in sinking the country deeper into what would become the Great Depression.

Fortunately, tariffs aren’t the only way. We can reverse the decline of domestic manufacturing and return factory jobs and investment to US soil, but the key isn’t policy – it’s technology.

American manufacturers can regain their global competitive advantage by widely investing in and deploying automation and robotics that will enable them to produce everything from auto parts to cellphone screens cheaper, faster and better than factories in China and elsewhere.

The technology won’t replace workers. They’ll be needed to operate and maintain the sophisticated machinery involved. Much of the investment I’m calling for will be in people – training Americans to work with the kind of technology that can transform and revive our manufacturing sector. We call this Industry 4.0.

Doing What Americans Do Best

Before I explain further, I should lay some groundwork. Even as wages for Chinese workers have risen in recent years, they remain much lower than US workers’ pay. Other countries can undercut China, leaving Europe as the only part of the world where American manufacturers have any sort of cost advantage.

That means we must do what America does best: innovate. If we can get ahead of the curve by investing technologies such as robotics, Internet of Things and 3D printing, we can automate shop floors in a way that speeds production, sparks new-product development and creates new high-skilled factory jobs. We can also produce competitively priced goods that enable our local manufacturers to grow by taking market share from rivals overseas.

Jergens Inc. is a 78-year-old company in Cleveland, with a campus on an abandoned railyard site. The company, one of the world’s largest manufacturers of standard tooling components, vises and other workholding equipment, has fully embraced automation – but not as a way to eliminate jobs.

“With every robot, more jobs at Jergens are created,” says Jack Schron, the company’s president. “We use one robot to get higher production on one of our popular items. Right next to that robot are skilled technicians assembling these same items for small-run, custom applications. Because of the one, the other follows.”

Automation has actually increased headcount in some Jergens departments; because the robots helped increase production and broaden its offerings, Jergens has hired more sales, marketing and shipping workers.

A Technological Cold War

Jergens is far from alone, even among the subset of Northeast Ohio manufacturers I work with. What we learn from them is that automation is more affordable, more accessible and more effective than ever.

Unfortunately, far too many small and mid-sized companies in our industrial heartland understand this. That’s partly why few have taken the first steps toward automation. In a February survey by our organization, 94 percent of manufacturers in Northeast Ohio said they were actively innovating – but more than 60 percent said they weren’t using or just starting using automation, and half said they didn’t plan to increase automation spending.

Too many American manufacturers don’t understand the technology, or how their shop floors or market strategies could benefit from automation. Others see the potential but don’t have the funds to invest, or see the investment as too risky, or fear the lag between investing and seeing a return would destroy their balance sheets.

None of those things is true, but various combinations of flawed perceptions, lack of knowledge, lack of funding and risk aversion prevent factory owners and leaders from investing in technology that would make them more profitable and competitive.

Meanwhile, China has been investing in automation technology for years. The country has now become the world’s largest and fastest-growing market for industrial robotics, according to the International Federation of Robotics. The mental image of Chinese sweatshops is no longer accurate (though other countries still use those methods). Google “manufacturing process” and you’ll see highly automated, high-tech manufacturing facilities in China.

Put simply, we’re in a cold war of technological advancement that very few people – including many manufacturing leaders – see and even fewer understand. And we’re losing. Could COVID-19 provide the motivation we need to fully embrace innovation, advance toward Industry 4.0 and win the innovation war? It absolutely could. Or perhaps American manufacturers will embrace Industry 4.0 for simple business reasons – it will undoubtedly make them more profitable.

Whatever it takes, investment in technology is a critical step toward a new, sustainable era of reshoring. And at the very least, widespread investments in technology will create better-paying, safer, more stable jobs in parts of our country hit hardest by the deindustrialization of the last 30 years.

That is the promise of Industry 4.0.

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Dr. Ethan Karp is an expert in transforming companies and communities. As President and CEO of the non-profit consulting group MAGNET, he has helped hundreds of manufacturing companies grow through technology, innovation, and talent. He is passionate about driving economic prosperity in his home region of Northeast Ohio. Dr. Karp is a recognized thought leader on manufacturing issues and a frequent media commentator on the future of manufacturing in America. Prior to joining MAGNET in 2013, Dr. Karp worked with Fortune 500 companies at McKinsey & Co. He received undergraduate degrees in biochemistry and physics from Miami University and a Ph.D. in Chemical Biology from Harvard University.

MAGNET is part of the NIST and Ohio Manufacturing Extension Partnership (MEP) program to support small and medium manufacturers across the US.

Global Trade Magazine Opens Nominations for 8th Annual “Americas 50 Leading 3PLs”

Global Trade Magazine has officially kicked-off its 8th annual “America’s Top 50 Leading 3PLs” nominations. This year’s selected nominees will showcase the most competitive movers and shakers transforming domestic and international logistics, exceeding client expectations while maintaining an exemplary company profile with competitive solutions.

Following last year’s focus on “needs-based” and “high demand” categories, the 2020 feature will spotlight specialty industries including E-commerce/Omni-Channel, Temperature-Controlled, Hazmat, Distribution, Freight Forwarding, and much more.

“It’s a measure of the quickly growing/changing/evolving global marketplace that arguably the most critical industry serving it, Third Party Logistic Providers (3PLs), continues to grow, change and evolve at a dizzying pace,” explained former senior editor Steve Lowery.

Global Trade Magazine will determine the final 50 nominations based on industry reputation, outstanding operational excellence, game-changing initiatives, disruptive technology solutions, and unmatched levels of innovation. This list showcases leading companies while providing a comprehensive list for businesses seeking new partnership opportunities.

“It’s easy to say that one must move faster, deliver services quicker, be more innovative and have organizational agility to flex with the world, but it takes something quite different to lead the cultural transformation that is required to make these goals a reality,” said Rich Bolte, CEO of BDP.

“Leadership will have to change as well. Leaders will be measured by their ability to innovate and create potential disruptions. The old paradigm of measuring only performance and execution has changed.”

To see a complete list of recipients, please visit globaltrademag.com to view the current issue.

Nominations are currently open and will be accepted through August 15 at 5 p.m. CST.

CLICK HERE TO NOMINATE YOUR 3PL

foreign

The Proposed Expansion of Mandatory Foreign Investment Filings During the Pandemic

In the midst of the pandemic, the Committee on Foreign Investment in the United States (“CFIUS”) has proposed several revisions to its regulations (“Regulations”) that change when short-form filings (called “declarations”) are required with respect to covered foreign investments of U.S. businesses which work with critical technology [2]. What is most significant for foreign investors is that the proposed rules expand the mandatory declaration and required CFIUS review to include critical technology transactions that range well beyond the 27 industries originally designated by CFIUS – to cover all sectors of the economy [3].

The raison d’etre for this proposed CFIUS rule change is not entirely clear. While the modification largely reads as being technical in nature, CFIUS does, however, observe that other, unspecified “national security considerations” are involved. Thus, a reasonable inference from current circumstances is that CFIUS seeks the ability during the Covid-19 crisis to review acquisitions by China in a broader range of business sectors in order to assess in advance the national security risk, if any, in situations where financially struggling U.S. firms with innovative dual-use technology might be more willing than before to consider such investments as a lifeline.

Interested parties in the business community should note public comments are due by June 22, 2020.

The Proposed Expansion of Mandatory Filings for Critical Technology Transactions

By way of background, under the existing Regulations, a mandatory declaration is required for transactions involving certain U.S. businesses that: 1) produce, design, test, manufacture, fabricate, or develop one or more “critical technologies”; and 2) use the critical technology in specified ways in one or more of 27 specified industries. Significantly, under the revisions, CFIUS eliminated the second prong of the requirement – i.e., the nexus to 27 industries, and refocused the requirement instead on companies that have critical technology that would require certain export licenses or other authorizations to export, re-export, transfer (in-country) or retransfer the critical technology to certain transaction parties and foreign persons in the ownership chain.

CFIUS indicates that the new focus of the mandatory filing requirement on export control requirements for critical technologies “leverages the national security foundations of the established export control regimes, which require licensing or authorization in certain cases based on an analysis of the particular item and end-user, and the particular foreign country for export, re-export transfer (in-country) or retransfer.” 85 Fed. Reg. 30894.

While that is true enough, in fact, the existing standard already is based on the export control standards. The term “critical technology” was and still is, defined as technologies that are subject to export controls (i.e., articles or services on the U.S. Munitions List, items on the Commerce Department’s Control List, and other specialized lists)[4]. Now, in addition to being subject to export controls (e.g., on one of the enumerated lists of controlled items), the technology must specifically be subject to a licensing requirement.

In effect, CFIUS has doubled down on export controls as the criteria for mandatory filing – the item must be on a controlled list and a license must be required for the particular foreign acquirer that is a party to the transaction.

The Significance of the Proposed Change in Mandatory Filing Requirement

Is this licensing requirement a meaningful distinction for foreign investors? While many of the items on these export control lists do require licenses or other authorizations for export, this is not necessarily the case for the export of all items to all countries for all uses. On some lists (e.g., the Munitions Lists), every article and service requires a license for export to all locations. On others (notably the Commerce List, the main list of “dual-use” technologies), items controlled are only licensable for certain countries and certain purposes to certain end-users, as designated on the list.

Overall, however, the universe of items on controlled lists versus those on the lists where licenses are required probably aren’t all that different – i.e., the range of mandatory filings is not very meaningfully limited by this change. Notably, for certain near-peer competitor countries like China and Russia, the distinction is particularly limited. Indeed, for these countries, many items on the Commerce List will require licenses in any event. Moreover, since China is under a U.S. arms embargo in place for many years, any export of an article or service on the Munitions List would certainly require a license (which would not be granted).

In any event, even if the new nexus to export license requirements narrows somewhat the class of critical technology transactions subject to mandatory declarations, this change is undoubtedly more than offset by the elimination of the required nexus to the 27 specified industries. Under the proposal, foreign acquisition of any U.S. business – regardless of what industry it works in – would require a mandatory declaration where the business utilizes critical technology provided that certain export licenses or other authorizations would be required to export such items to the foreign acquiring party.

On balance, this change is significant. It broadens the scope of the mandatory filing requirement to a wide variety of acquisitions involving critical technology applications from medical devices to commercial vehicles to a wide range of high tech sectors. Foreign investors thus would need to be considerably more diligent in considering the CFIUS risk with respect to structuring a broader range of these acquisitions.

Why the Expansion of the Mandatory Filing Requirement?

Why the expansion of mandatory declarations and does it relate to the pandemic?  CFIUS offers only vague explanations – noting its further consideration of public comments made in prior rulemakings, the Committee’s additional experience assessing mandatory declarations, and “other,” unnamed, national security considerations” [5].

One very possible set of such “national security considerations” is to afford CFIUS the ability to investigate a considerably broader range of transactions involving China where any critical technology requiring a license is involved. Since many dual-use items on the Commerce Control List and everything on the Munitions List do require licenses for China, the expansion of jurisdiction would be significant – as it applies without regard to the industry where the critical technology is used.

The logic of this expanded approach would be that, under Chinese laws and policies on civil-military fusion, any Chinese company, regardless of industry, could be required to divert the critical technology it is acquiring to the state sector for military use. Thus, it arguably makes sense for CFIUS to seek to examine these technology deals across the board.

This action also would be consistent with a range of other recent Administration actions during the Covid-19 crisis – from restrictions on participation in the U.S. bulk-power infrastructure to additional export control restrictions on Huawei – all of which appear to be focused on limiting U.S. high tech engagement with China.

Why now? The pandemic has raised the specter of foreign firms from potential adversaries buying sensitive assets at steep discounts. Numerous European governments are very focused on protecting sensitive assets against distress buying.  In this context, recent comments by Ms. Ellen Lord, the Under Secretary of Defense for Acquisition and Sustainment, suggest concern that during the pandemic smaller U.S. companies that support the aerospace and defense sector could experience “significant financial fragility” and therefore be more vulnerable to acquisition by potential adversaries [6]. She also noted the prospect of “nefarious” acquisitions involving the use of shell companies during the pandemic and indicated a desire for CFIUS to have more authority to address these situations. Thus, it just may be that the proposed revision to the Regulations is an effort to address this felt DoD need.

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A partner in Eversheds-Sutherland, a global law firm, Mr. Bialos [1] previously served as Deputy Under Secretary of Defense for Industrial Affairs and co-chairs the firm’s Aerospace and Defense practice.

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References

[1] A partner in Eversheds-Sutherland, a global law firm, Mr. Bialos previously served as Deputy Under Secretary of Defense for Industrial Affairs and co-chairs the firm’s Aerospace and Defense practice.

[2] 85 Fed. Reg. 30893 (setting forth amendments to 31 C.F.R. §800). The mandatory filing requirements were established pursuant to the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”).  The proposed amendments also make clarifying changes with respect to mandatory declarations in transactions involving foreign States. Specifically,  section 800.244 of the Regulations (see 85 Fed. Reg 30898) would, among other things, change the definition of “substantial interest” with respect to transactions where a general partner, managing member or the equivalent is involved, to clarify that the foreign state’s interest is only relevant it applies only where a general partner, managing member, or equivalent “primarily directs, controls or coordinates the activities” of the entity that is the acquiring party.  In effect, this change narrows to a limited extent the range of transactions with foreign government involvement where a mandatory declaration is required.

[3] CFIUS accomplishes this expansion through a series of technical amendments to the Regulations: Section 800.254 (defining U.S. “regulatory authorization” to refer to the types of export licenses that require mandatory declarations); section 800.256 (introducing the concept of “voting interest” to include foreign persons in the ownership chain that would need to be analyzed from an export control standpoint to determine if a license would be required to transfer the technology in question to that party); and 800.401 (which re-scopes the mandatory declaration requirement for critical technology transactions).  See 85 C.F.R. 30895-8.

[4] 31 c.f.r. § 800.215.

[5] 85 Fed. Reg. 3894.

[6] See Transcript, Press Briefing of Ellen Lord, Undersecretary of Defense (A&S) Ellen Lord on COVID-19 Response Efforts (April 30, 2020).   Available at: https://www.defense.gov/Newsroom/Transcripts/Transcript/Article/2172171/undersecretary-of-defense-as-ellen-lord-holds-a-press-briefing-on-covid-19-resp/

covid

Post-COVID Logistics: Retooling for the Future

The impact of COVID-19 continues to be felt across global economies and businesses, but for the supply chain and logistics industry, challenges go beyond the present and threaten the future of operations and business continuity. These challenges redefine what prediction could look like for the logistics industry and what considerations should be taken to keep the supply chain moving.

Global Trade had the opportunity to speak with business owner and author of “The GOP’s Lost Decade: An Inside View of Why Washington Doesn’t Work,” Jim Renacci on what changes the industry can anticipate as the current health crisis continues to change the pace for global business.

What planning measures will logistics players need to consider in a post-COVID environment?

There is no doubt that COVID-19 has changed the way manufacturers/logistic players will need to review their supply chain management post-COVID-19 and access their supply chain vulnerabilities. The crisis has demonstrated that reliance on sourcing from two geographic areas could pose a risk.

During the crisis, while supplies became unavailable, many companies were forced to start looking for new supply chains as many of their overseas suppliers had to limit or reduce shipments significantly. Post-COVID planning will include asking current suppliers to take on more and different product lines. It is already happening with many current business relationships. Also, the reliability of the supply chain…. over cost…. will be more of a priority.

In what ways have supply chain players supported their customers and consumers during the crisis?

Manufacturers/supply chain players are supporting their customers by shifting and increasing supply chain needs where possible. In many instances, secondary suppliers have started adding product lines where possible. With any crisis, opportunities will be there for the business that can move quickly and adapt to change.

How will the manufacturing site selection process shift in a post-COVID world? 

Manufacturing site selection processes in a post-COVID world should include seeking locations within the US and other countries that have access to highly trained engineers, top tier R&D, access to advanced manufacturing technologies as well as private and public institutions and universities. Site selection should also include countries that offer a competitive investment package as more and more countries post-COVID will be looking to entice companies to locate or relocate inside their jurisdictions.

In what ways can logistics players use the disruption from COVID-19 to benefit their operations in the future?

Current disruption due to COVID-19 will allow companies to reassess their vulnerabilities but also their strengths. With these disruptions, companies can retool for the future. They can adjust for their weaknesses and benefit from their strengths.

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Jim Renacci is the author of The GOP’s Lost Decade: An Inside View of Why Washington Doesn’t Work. He is also an experienced business owner who created more than 1,500 jobs and employed over 3,000 people across the Buckeye State before running for Congress in 2010. Jim represented Ohio’s 16th District in the House of Representatives for four terms. He is also the chairman of Ohio’s Future Foundation, a policy and action-oriented organization whose goal is to move the state forward.

reshoring

CAN WE MEASURE WHETHER “RESHORING” IS REAL?

Ribbon Cuttings and Political Ads

Announcements about plant openings and closings make good political fodder. Politicians from both parties are guilty of extracting trends from single events, leaving context behind: “Jobs are coming home!” “Traitorous companies are leaving the United States!”

A popular claim over the years is that Washington policies have succeeded in either shaming or incentivizing American companies to bring manufacturing “back” to the United States, even if manufacturing overseas had been additive to domestic production. How can we know whether such “re-shoring” is actually occurring, and to what degree?

A Reshoring Index

Kearney recently released the seventh edition of their annual Reshoring Index, which attempts to do just that. The U.S. Reshoring Index tracks total manufactured goods imports from 14 traditional offshoring partner countries including China, Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka and Cambodia, as a percentage of U.S. domestic gross output of manufactured goods.

After rising almost steadily over the last decade, imports from those 14 countries contracted 7.2 percent in 2019 while U.S. manufacturing output remained steady. The decline is due almost entirely to fewer imported goods from China in reaction to the U.S.-China trade war, which also suppressed U.S. manufacturing exports. Notwithstanding the shock of the trade war, China’s share of the U.S. import market declined for the sixth year in a row.

According to Kearney, the U.S. market imported 12.1 cents worth of offshore production from these Asia-based “low cost countries” (LCCs) for every $1 of domestic manufacturing gross output, down from 13.1 cents in 2018. On the basis of the index, the United States experienced a net reshoring in 2019, as producers chose to source more goods domestically.

imports from LCCs

Diversification Away from China

The Kearney report also began tracking the so-called “rebalancing” of American company-centered supply chains to understand whether U.S. manufacturing imports are diverting from China toward other Asian LCCs. Overall, the LCCs exported $31 billion more in manufactured goods to the United States in 2019 than in 2018, with Vietnam garnering almost half of the shifting imports. Troublingly, a portion of U.S. imports from Vietnam represent China-origin goods diverted through Vietnam to dodge U.S. tariffs.

Nearshoring: Buying More from Mexico

Not only are imports shifting away from China toward the rest of Asia, Kearney finds another trend: increased sourcing of goods from Mexico, characterized as “nearshoring”. Mexico has some advantages over LCCs in Asia and a longer relationship with many U.S. manufacturers through NAFTA.

Over the last seven years that Kearney calculated its near-to-far trade ratio, there were approximately 37 cents worth of manufacturing imports from Mexico for every dollar of U.S. manufacturing imports from Asia LCCs. Last year, however, that ratio increased to 42 cents as U.S. imports of manufactured goods from Mexico shot up 11 percent between 2017 and 2018 and another 4 percent in 2019 as tariffs on goods from China escalated.

Asia LCCs v Mexico

But Not Necessarily for Economic Reasons

As economist Caroline Freund explains, reshoring does not necessarily reduce risk: “A better strategy to reduce the risk of potential supply-chain disruption would be for firms to reduce dependence on any individual supplier.” While it’s not clear the reduction in sourcing from China will benefit domestic suppliers, it does seem apparent that what’s motivating the shift in imports is diversification away from China.

As Freund says, firms will reshore if it is more profitable and less risky to move production close to the market. They will also reshore if compelled to do so through trade and other national policies such as “Buy America” requirements. The big question is whether supply chains restructured on that basis will make economic sense.

We’ll be watching the Kearney Reshoring Index to understand whether continued tension in the U.S.-China trade relationship and post-pandemic policies keep moving the reshoring needle.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fifteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.
supply chain employee

Supply Chain Employee Engagement – 5 Benefits for your Business

Whether you operate out of a small warehouse or work as an international shipping company, employee engagement can be pivotal for your business’ ongoing success. According to Inbound Logistics, 85% of employees have reported that they feel disengaged from their jobs around the globe. However, those that feel engaged have reported 41% lower absenteeism, 24% less turnover and 70% fewer safety accidents on the job.

In terms of employee management, Forbes published a report which stated that 89% of HR leaders agree that ongoing employee feedback and engagement is crucial. Likewise, 89% of workers whose companies engage its employees are likely to recommend them as good workplaces to their friends and associates.

These numbers showcase that supply chain employee engagement factors into your business’ performance far more than it might seem at first glance. The way you treat your employees will have ripple effects on your overall output, brand reputation, and the subsequent bottom line as a direct result. Let’s take a closer look at why supply chain employee management matters so much, as well as the practical benefits of implementing it going forward.

Why Supply Chain Employee Engagement Matters

Let’s look at why supply chain employee engagement is pivotal before we move on to the benefits of active communication with your employees. Supply chain management is an industry with a flat vertical curve when it comes to warehouse and storage management employees. The HR structure typically isn’t built with vertical advancement and career development in mind (apart from mandatory hard skill development).

However, this doesn’t mean that you can’t pay closer attention to your employees, their feedback, opinions, suggestions and personal goals. Tyler Jonas, Head of HR at Top Essay Writing spoke recently: “All employees have equal rights for engagement. You don’t have to offer elaborate rewards, position advancements or paycheck bumps to make your employees happy. Sometimes all it takes is to open a line of communication and discuss what can be done to make the work environment more enjoyable for everyone.”

Some of the common complaints and bottlenecks which hinder supply chain employees’ performance include:

-Lack of hands-on leadership and coordination from managerial staff

-High focus on supply chain ROI instead of employee wellbeing

-Poor health coverage and off days management

-Undefined employee advancement systems

Benefits of Supply Chain Employee Engagement

Let’s assume that you’ve rooted out the above-mentioned bottlenecks in your company’s supply chain management – what happens next? As you can see, the complaints most employees have in terms of engagement are not irrational – they are simply absent from the supply chain management pipeline. If you decide to pursue to correct these shortcomings, you will effectively gain a plethora of benefits in regards to your employees, including the following:

1. More Efficient Coworker Communication

Supply chain employees who are satisfied with their work methodology and engagement are far more likely to cooperate and coordinate efficiently among themselves. This will come as a natural outcome of better communication with the upper management and their efforts to make the work environment more appealing.

Aim to emancipate your employees to cooperate autonomously. Let them know that you value their opinions, experience and expertise – delegate certain decisions to their discretion to facilitate coworker communication. Once that happens, your employees will feel free to communicate their thoughts and concerns for the benefit of your company as a whole.

2. Higher Employee Retention

A major point of concern for the supply chain management sector lies in employee retention and how to entice people to renew their contracts regularly. As we’ve mentioned previously, employees who don’t feel valued or engaged by the company will likely seek greener pastures. This will leave you with a roster of employees who are there simply because they have no other option at the moment.

Such a scenario can quickly lead to a toxic work environment which will reflect poorly on your overall quality of service and brand reputation. You can avoid both points by investing time and resources into establishing a communication channel with your employees proactively rather than reactively. Don’t wait for things to go bad in your supply chain management department before opening a dialogue – increase your retention rates early on.

3. Better Productivity & Morale

Coworkers who are satisfied with the way they are being treated by the upper management will subsequently perform better in their daily work routines. This same rule applies to supply chain management as well as other industries which naturally involve a more hands-off approach from the management.

Regardless, engaging your staff frequently and communicating about what works and doesn’t in the company will help gain a lot of points in your favor. This will inevitably raise the morale and energy in your staff, leading to further improvements in productivity and their sense of belonging in the company.

4. Lowered Margin for Errors

Shipping errors and supply chain mistakes, in general, are something you want to mitigate as much as possible in your company. While mistakes are bound to happen even in the best-maintained companies, their frequency will speak volumes of how you treat your employees. Dissatisfied employees who lack any faith in their managerial staff are likely to make accidental mistakes simply because they lack the morale to do otherwise.

These mistakes can cost your company tremendously in terms of reputation, resources, time and B2B partners if they persist. However, by introducing a communication channel with your supply chain employees early on, you will effectively lower the margin for error significantly. Employees will pay far closer attention to their work and do their utmost to avoid mistakes simply because their managerial staff cares about them more.

5. Healthy Coworker Competition

Lastly, a major benefit of engaging your supply chain employees goes back to their internal communication. More specifically, employees who are simply happy with their work environment are likely to develop internal camaraderie and healthy competition among coworkers.

This will raise your staff’s morale significantly and ensure that people are more satisfied with their place in your company due to consistent vertical communication. Remember that while your B2B networking may be efficient, ground-level operations still depend on the efficacy and dedication of your supply chain employees. Facilitating a healthy coworker competition and emancipating your staff through it will bring about a plethora of improvements in your supply chain pipeline.

Parts of a Whole (Conclusion)

A company consists of numerous departments which all rely on one another to make the company viable on the market. As such, paying closer attention to your employees in supply chain management will allow the company to thrive internally. Besides the obvious increase in productivity, this will also improve your reputation on the market and make your company more attractive to future employees. Meet your staff halfway and establish a meaningful dialogue – you will undoubtedly be pleasantly surprised with the results.

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Kristin Savage nourishes, sparks and empowers using the magic of a word. Along with pursuing her degree in Creative Writing, Kristin was gaining experience in the publishing industry, with expertise in marketing strategy for publishers and authors. Now she works as a freelance writer at ClassyEssay, Studyker and Subjecto. Kristin runs her own FlyWriting blog.

hemp

Plant-Based vs. Synthetic Ingredients in Consumer Products: Why You Should Add Hemp to Your Ingredient List

For the past 50 years or so, industries across the globe have rushed to synthesize everything as a matter of convenience. Synthetics allow manufactures to mass-produce products to meet rising consumer demand, which exploded after World War II. But as the 20th century ended, consumers began to question the wisdom of that choice and grew concerned about the potential health and environmental impacts of synthetics.

Today, consumer trends show a desire to return to natural products, to connect with the planet, and to buy and use items that contain ingredients people can understand. Manufacturers around the globe have started to take notice, and they have rushed to ditch synthetics and catch up with the plant-based revolution.

Are Cannabinoids the Missing Secret Ingredient?

The problems for companies trying to meet consumers’ demands for natural products are often complex. For example, it’s a challenge to find effective plant-based alternatives to many of the synthetic ingredients in products. However, one potentially overlooked natural ingredient is on the rise — hemp.

For the past 50 years, the growth and use of the cannabis plant in all its forms has been illegal in the United States and many other countries. The legality of the plant is the key reason it has never been integrated into many consumer products.

In the time since the Hemp Farming Act of 2018 passed and legalized the cultivation, study, and use of hemp in the U.S., we’ve learned a lot about the potential applications of the different cannabinoids (i.e., compounds) present in the hemp plant. Because hemp has so many compounds, it has diverse potential applications. For example, some of the phytochemicals naturally present in hemp (e.g., terpenes and phytocannabinoids) can effectively replace some of the synthetic ingredients in household products.

Now that many of the legal restrictions have been lifted in the U.S., Canada, and other countries, industries across the globe finally have access to hemp sources that can be used as natural ingredients in their products.

Imagine disinfectant wipes that are not only as effective as traditional wipes but also made entirely of plant-based ingredients instead of harsh synthetic chemicals. Toothpaste could naturally fight harmful bacteria that cause disease and other oral health concerns without any synthetic chemicals that have harmful side effects. The possibilities of plant-based ingredients are endless, and it’s time manufacturers fully embrace them.

Using Cannabinoids for Plant-Based Products

In the consumer products industry, a growing number of companies are using hemp extracts with cannabinoids, such as cannabidiol (CBD). Yet even with the legal freedom to use these ingredients, manufacturers still face significant challenges in switching out synthetic substances for hemp extracts and other plant-based ingredients.

First, they need to choose the right hemp extracts for their products and make sure their customers understand and can track those ingredients. Manufacturers also need to know the implications of including certain types of hemp extracts in products sold in countries with varying cannabis laws. With the following tips, manufacturers can use high-quality hemp extracts to enhance the natural content and appeal of their products:

1. Brush up on the laws in any country where you operate.

The growth and use of hemp extracts with CBD and other cannabinoids are largely legal in North America, which is a hub of international trade for any market. But the specific laws that govern its use —particularly in oral and topical health products — are mostly localized.

Laws governing the use of hemp extracts in these products may differ across states in the U.S., and those same laws can vary significantly from legislation in Canada. As a result, you’ll need to pay close attention to both local and federal laws wherever your customers reside.

2. Research the right extracts, and test repeatedly.

Because hemp has such a wide variety of compounds, you should learn how the different types of extracts can apply to your products. Plenty of research has gone into the cannabinoids of tetrahydrocannabinol (THC) and CBD, but there are more than 100 other phytocannabinoids in the hemp plant.

Research and test multiple variations repeatedly to discover what works best with your consumer products. With natural, synthetic-free ingredients, you’ll also have to test different methods to perfect your new formulas.

3. Conduct studies to prove the enhancement of your products.

As more outside studies add weight to the benefits of plant-based products — including those with hemp extract and its phytoconstituents — there are plenty of opportunities to conduct your own scientific research to prove your product’s performance.

The best way to do this is through well-designed clinical and consumer insight studies. Research that highlights a product’s day-to-day benefits (such as a natural alternative for a cleaning product or a plant-based body balm to massage into tired or tense muscles) provides the most appealing data to consumers.

4. Understand any marketing challenges.

After nailing down the specific hemp extracts you want to use and then testing your products, revisit the specific regulations in the different states, provinces, and countries that make up your customer base. When it comes to marketing plant-based products that contain hemp extracts, the rules can be tricky.

In Canada, for instance, you’re not allowed to promote brands that use hemp with CBD, and these products are only sold through licensed online or brick-and-mortar distributors. There are various places you can market hemp brands and products in the U.S., however, but you need to avoid making any disease-related claims that would render your product an unapproved drug.

While these might seem like tough challenges to overcome — how are you supposed to showcase your product if you can’t market it? — consumers will put effort into finding brands focused on providing natural, synthetic-free consumer products.

Choosing to go plant-based not only frees your products of potentially harmful synthetics, but it also gives you a much broader customer base. The rush to create “fake,” synthetic products is over. We have now entered the plant-based revolution.

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Photo: Michael Cammarata at the New York Stock Exchange.

Michael Cammarata is the president and CEO of Neptune Wellness Solutions, an innovative wellness company offering high-quality, environmentally friendly, natural alternative products. Michael is also the co-founder and former CEO of Schmidt’s Naturals, one of the world’s fastest-growing wellness brands and a Unilever acquisition. He is on a personal mission to invest in and scale companies globally that will make sustainable innovation and modern wellness solutions accessible to the world.