INDEX

INTRODUCTION 3

EXECUTIVE SUMMARY 4

GLOBAL BUSINESS AND MACROECONOMIC TRENDS 7

Introduction 7

The Macro Indicators 7

Key Drivers of Supply Chain and Price Volatility 10

Implications of Global Economic and Geopolitical Trends 14

2019 TRENDS IN PROCUREMENT DIGITAL TRANSFORMATION 16

Digital-First Mindset 16

“Agile” Procurement as Main Partner to Technology and Overall Business 17

Continued Market Domination of Source-to-Pay Applications 17

Guided Workflows to Enhance Procurement Results and End-User Experience 18

Expansion of Cloud Procurement Solutions Into Direct Procurement and Supply Chain 19

Category-Centric Transformation 19

Disruptive Technologies to Strengthen Data Science Capabilities 20

Disruptive Technologies to Strengthen Smart Automation Capabilities 22

Digitally Savvy, Economically Aware and Analytically Capable Talent 23

SUPPLY MARKET TRENDS AND INSIGHTS BY CATEGORY 24

Direct Materials and Commodities 24

Logistics 27

Information Technology and Telecommunications 31

General and Professional Services 34

Marketing and Advertising 38

CAPEX and Construction 41

MRO 43

Packaging 46

Chemicals 48 Introduction

“Praemonitus praemunitus.”

Loosely translated from Latin, this means: To be forewarned is to be forearmed. That is, in essence, the mission of our annual GEP Outlook, now in its seventh year of publication. And in today’s climate of sustained volatility, busy procurement and supply chain executives need every available tool they can get to help navigate global supply markets and to guide their teams through opinion and hype.

Our annual Outlook report is designed to be a practical planning tool with respect to both macro- level supply chain dynamics as well as category and commodity trends and innovations. It is based on GEP’s collective experience in managing over $125 billion in spend across all sectors and geographies. Our aim is to provide the reader with a broad range of perspectives and thoughtful analysis of the emerging best practices we see as adding measurable value to our clients. And perhaps more importantly, to provide a collection of viewpoints that put these trends into a broader, more strategic context.

Context, more than content, is king in a world characterized by sustained volatility of all varieties: economic, political, technological and environmental. To survive and thrive in a volatile environment requires both acumen and agility — to anticipate and react to the shocks and disruptions that lie ahead. A quote often attributed (erroneously) to the great naturalist Charles Darwin states: “It is not the strongest of the species that survives, nor the most intelligent. It is the one that is most adaptable to change.” Procurement and supply chain executives would do well to heed this warning — and to read this report, of course — to ensure smooth sailing for the year ahead.

3 Executive Summary

There was plenty of good news for enterprise leaders in 2018 as the global economy delivered healthy GDP growth of 3.1 percent. So why are sales of anti-anxiety products like weighted blankets, essential oils and adult coloring books soaring through the roof?

Because, putting it succinctly, 2019 is bringing us much to be anxious about. Despite the headline growth, enterprises experienced new levels of volatility in commodity and energy pricing, in interest and exchange rates, and generally in international trading conditions. 2018 finished with a rocky fourth quarter and now a moderate level of deceleration is expected due to the following factors:

• Rising trade tensions between the United States and its major trading partners

• Growing levels of nationalism and protectionism that inhibit trade

• Uncertainty surrounding Brexit and its larger impact on the European Union

• Worsening supply chain risks and costs due to intensifying climate-related events

• Volatile energy markets with the U.S. asserting power over OPEC regarding production and pricing

• Potential market corrections driven by record debt levels coupled with rising interest rates

To adapt to this “new normal” of heightened market instability, procurement and supply chain leaders will further embrace the twin aims of a) building a highly agile and responsive operating model, and b) fully digitizing source-to-pay processes to deliver more effective and efficient services to their stakeholders.

Innovations across direct and indirect sourcing categories will abound as digital solutions mature and gain commercial acceptance in all sectors. Enterprises will look to procurement managed service providers (MSPs) to extend their capabilities deeper into core direct materials categories for improved sourcing, risk management and supplier collaboration.

4 With a “Digital First” mindset, procurement leaders will move beyond automating their own activities to become leading advocates for digital transformation writ large — bringing new ideas, suppliers and tech-driven innovations to their stakeholders and helping enable digital-first strategies across all functions.

Procurement leaders will also focus on improving end-user experience to increase client satisfaction and self-service capabilities. Intuitive, digitized workflows such as “guided buying” will quickly connect each unique stakeholder with the right product, supplier, pricing, terms and buying channel. End-user empowerment will take significant time and pain out of the ordering process and drive higher savings through improved contract compliance.

On the emerging technologies front, 2019 will

Blockchain technology that holds be a big year for Internet of Things (IoT)-enabled the potential of streamlining and solutions, as 5G networks come online and disintermediating complex supply new sensor-driven technologies are adopted chains will move beyond initial pilot in the workplace and supply chains alike. phases to more complete solutions. With IoT infrastructure rapidly developing, we expect machine learning solutions to quickly commercialize across all aspects of manufacturing and supply chain management. Data management strategies will rise in importance to underpin these artificial intelligence (AI)-enabled innovations.

Similarly, blockchain technology that holds the potential of streamlining and disintermediating complex supply chains will move beyond initial pilot phases to more complete solutions. Industry- specific variations will grow and begin to demonstrate the full power of distributed ledger technologies. Broad levels of adoption will be hampered, however, until national and cross-border trade rules catch up with this disruptive technology.

Robotic process automation (RPA) will remain a valuable efficiency driver with efforts evolving from ad hoc approaches to robust centers of excellence. These will be led by cross-functional teams with strong governance models to coordinate all process and system interdependencies and to maintain a growing array of bots in service.

5 The logistics function will take the digital lead in 2019. Chronic driver shortages, increasing transportation costs, and capacity constraints around large cities will push shippers and carriers to continue innovating with fleet optimization techniques such as automated truck platoons, zero- emission cargo ships and “smart warehousing” capabilities.

Additionally, AI-enabled service providers and tools will be adopted across marketing, manufacturing and distribution functions to provide predictive analytics, improved planning and more touch-free operations. The role of IT, and IT governance, will continue to diffuse as “Anything-as-a-Service” models grow across all functions. Cybersecurity will become more complex and business-critical as technology-enabled services become more ubiquitous.

In general, the softening economy will increase pressure on procurement and supply chain leaders to deliver higher returns and more satisfied customers through digitized and AI-enabled processes and operating models. Market and supply chain volatility will remain high, and supply chain professionals will upskill their digital capabilities to better manage supplier and cybersecurity risks and to provide agile responses to unforeseen market shocks.

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6 Global Business and Macroeconomic Trends

Introduction

The global economy, as measured by GDP, grew at a healthy 3.1 percent in 2018. These gains, driven by China, the United States and India, more than offset sluggish activity across much of the remaining large economies including Europe, Japan, Russia and Brazil.

Looking ahead to 2019, overall growth is forecast to decline slightly to 3.0 percent. In isolation, the outlook looks quite positive. However, the trading environment is growing more volatile and there are increasing warning signs of potential deceleration. The drivers include lower growth expected in the coming years across Europe and China — and now possibly the U.S. — that may well overshadow expected gains within emerging markets.

In this section, we look at the major trends impacting the global economy in 2019 and the underlying drivers of change. We analyze the geopolitical landscape as it relates to global supply chains and trade in general. This involves a review of the implications on global supply chain executives, so they are better prepared to weather the potentially tumultuous trading conditions coming our way.

The Macro Indicators

Five key indicators help to objectively evaluate the global trading environment in 2019. When viewed in combination, these indicators help substantiate our neutral-to-negative economic outlook for 2019 and highlight the key drivers of this anticipated deceleration.

A. GDP Growth — The World Bank forecasts that global growth will decline to 3 percent in 2019. This latest growth forecast already reflects a downward revision made in Q4 2018 that was driven in part by increased U.S.-China trade tensions. In our view, this neutral forecast may not fully capture the potential downside risks to growth in those volatile developing markets nor the rising instability seen across Europe.

7 GDP Growth — Historic and Forecast 2015 2016 2017 2018 2019 2020 World 2.8% 2.4% 3.1% 3.1% 3.0% 2.9% Advanced Economies 2.3% 1.7% 2.3% 2.2% 2.0% 1.7% United States 2.9% 1.5% 2.3% 2.7% 2.5% 2.0% Euro Area 2.1% 1.8% 2.4% 2.1% 1.7% 1.5% Japan 1.4% 1.0% 1.7% 1.0% 0.8% 0.5% Emerging Market & Developing Economies 3.7% 3.7% 4.3% 4.5% 4.7% 4.7% East Asia and Pacific (EAP) 6.5% 6.3% 6.6% 6.3% 6.1% 6.0% Europe and Central Asia (ECA) 1.1% 1.7% 4.0% 3.2% 3.1% 3.0% Latin America and the Caribbean (LAC) -0.4% -1.5% 0.8% 1.7% 2.3% 2.5% Middle East and North Africa (MNA) 2.8% 5.0% 1.6% 3.0% 3.3% 3.2% South Asia (SAR) 7.1% 7.5% 6.6% 6.9% 7.1% 7.2% Sub-Saharan Africa (SSA) 3.1% 1.5% 2.6% 3.1% 3.5% 3.7% Table 1 Source: The World Bank

B. Debt Levels — Estimates show total global debt to be 20 percent higher than pre-recession levels at approximately 217 percent of global GDP. Furthermore, a large portion of corporate debt is now in the form of shorter-term bank loans as opposed to longer-term bonds. Despite improved capital controls since the last financial crisis, the effect of such a significant global debt burden, both in the corporate and consumer sector, is a significant risk factor to track in an environment of rising interest rates and slowing growth.

C. Interest Rates — Borrowing rates are projected to increase in 2019 in both the U.S. and in the EU so as to stem inflationary pressures. China, on the other hand, has signaled a likely reduction in bank rates to fuel its waning growth. On balance, monetary policies are tightening in developed markets, and these rising interest rates will likely dampen both consumer spending and capital investments. Borrowing costs will also likely rise within emerging markets. The net impact may be nominal, but the combination of higher interest rates and lower growth may be a destabilizing factor in certain fragile economies that have high levels of dollar-denominated debt such as Turkey, Argentina, Brazil and South Africa.

8

Short-Term Interest — Historic and Forecast 5.00% Euro Area (17 Countries)

4.00% Japan

3.00% United States 2.00%

China 1.00%

0.00%

2017 2018 2019 2020 -1.00% Figure 1 Source: Organisation for Economic Co-operation and Development

D. Labor Costs — Unemployment rates in both the U.S. and China are now at or below their structural minimums. Consequently, we expect to see upward pressure on service- sector costs, especially in the business services and tech sectors where rare skills are in high demand. Blue-collar wages, although helped by increases in minimum wage rates in some markets, will likely remain relatively flat as factory automation continues to displace jobs faster than they are created.

Unemployment — Historic and Forecast 12% China, People’s Republic of 10% Germany 8% Japan 6% United States 4%

2%

0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Figure 2 Source: International Monetary Fund (IMF)

9 E. Energy — Forecasting oil prices proved to be a virtually futile effort in 2018, with crude oil prices (per barrel) swinging from $61 up to $77 and back down to $62[1] — and that was just the last 12 months. Volatility is the continued theme for 2019 as OPEC producers act to drive out excess capacity and better chase the flattening global demand. Pundits forecast 2019 prices in the low $60s to mid-$70s per barrel. The U.S., now the global leader in oil production, is incentivized to keep prices low and stable to fuel domestic growth. For this reason, we will risk the “fool’s challenge” again and “predict” that average prices come in on the lower end of this range.

In summary, the overall growth outlook for 2019 (and 2020) is a marginal decline, but market sentiment is clearly waning. There are emerging fissures that threaten global price stability for labor, capital and commodities. Given the breadth of factors at play, the risk remains high in our estimation and warrants mitigation planning (to say the least). The following section describes those top factors and the impact they may have on supply chains.

Key Drivers of Supply Chain and Price Volatility

The commodity markets may have kept us awake in 2018, but it was the geopolitical environment that pushed many of us to full-blown insomnia. Without meaning to sound alarmist, 2018 saw many fundamental pillars of global trade (and Western-style democracy) being tested in ways we haven’t seen since the Cold War. And 2019 looks set to be equally riveting (and sleep depriving). The main drivers of supply market volatility and risk are listed below.

A. Rising Trade Tensions and Protectionism — Supply chain leaders should plan for increased trading costs and risks by establishing alternative supply strategies to hedge against rising tariffs and other cross-border “friction.”

After decades of supporting an expansionist trade policy and establishing robust trading pacts with its key allies, the past year saw the U.S. seemingly reverse its position as a global consensus builder and supporter of free trade. Under the current administration there is unlikely to be a change from this sharp redirection. This turn towards populism and protectionist policies is not limited to the U.S. Consider the baseline conditions as we enter 2019:

1 Based on crude oil, average spot price of Brent, Dubai and West Texas Intermediate, equally weighed. Source: Index Mundi

10 • The U.S. and China are locked in a trade war that runs the risk of escalating sharply in 2019. It has already significantly shaken market sentiment and driven up trading costs on a range of key commodities.

• The U.K. is no closer to understanding what the outcome of Brexit will be than at the time of the referendum — although no scenario short of a full reversal bodes well as the U.K. agonizes over the consequences of this isolationist move and suffers from the immediate impacts on its economy and currency.

• Across Europe there are rising levels of populism, isolationism and civil unrest that have weakened the stability and strength of the EU trading bloc at a time when they can ill afford it. Germany, France, Italy and Spain are each contending with significant internal social challenges that are discouraging enactment of necessary market reforms to create a more attractive trading environment for investors and supply chain managers alike.

• Around the globe we witnessed populist leaders take office in Brazil, Mexico and the Philippines. Increasing rates of “better off alone” rhetoric portends more, not less trading instability.

WTO and UNCTAD Merchandise Trade Volumes 2014 2015 2016 2017 2018 2019 Volume of World Merchandise Trade (% annual change) 2.7% 2.4% 1.8% 4.7% 3.9% 3.7% Exports Developed Economies 2.1% 2.2% 1.1% 3.4% 3.5% 3.3% Developing Economies 2.7% 1.9% 2.5% 5.3% 4.6% 4.5% North America 4.6% 0.8% 0.6% 4.2% 5.0% 3.6% South and Central America -2.1% 1.8% 2.0% 3.3% 2.8% 2.8% Europe 1.5% 2.9% 1.2% 3.5% 2.9% 3.2% Asia 4.5% 1.4% 2.3% 6.7% 5.5% 4.9% Imports Developed Economies 3.3% 4.3% 2.1% 3.0% 3.2% 3.0% Developing Economies 2.6% 0.7% 1.6% 8.1% 4.8% 4.5% North America 4.3% 5.4% 0.0% 4.0% 4.3% 3.6% South and Central America -2.5% -6.3% -6.7% 4.0% 3.6% 4.0% Europe 3.0% 3.6% 3.3% 2.5% 3.1% 3.0% Asia 3.7% 3.8% 3.5% 9.8% 5.7% 4.9%

Table 2 Source: World Trade Organization (WTO) and United Nations Conference on Trade and Development (UNCTAD)

11 With these conditions, we anticipate further trade tensions and cross-border supply chain friction in 2019. We are also concerned that the protracted uncertainty and volatility will have a destabilizing effect on the emerging markets — which otherwise are poised to deliver fast growth.

Supply chain professionals should be prepared for further moves away from multilateral, rules-based trading systems. Pockets of coordination, as exemplified by the Trans-Pacific Partnership and select bilateral agreements, are not enough to offset the rise of protectionist measures. A single trade policy shift can quickly change the economics of production. Such a rapidly evolving landscape in 2019 will demand a high level of foresight and adaptability from supply chain leaders. Contingency plans addressing alternative sources of production and supply will prove essential.

B. Dynamic Labor Conditions — Market conditions require clear strategies to contend with low unemployment in much of the developed world and rising wages in East Asia.

Labor markets are projected to remain tight in 2019 in the U.S. and other developed countries such as Germany and Japan. This will put upward pressure on wages for employees and external service providers. Organizations with variable labor requirements will be most susceptible to the increased cost of securing qualified employees and should take proactive steps to prevent any impact on business operations. That said, a further slowdown in growth would serve to counterbalance these tight labor conditions in late 2019, since firms have more incentive to contain costs and protect profits in a slow economy.

As emerging economies continue to mature in the year ahead, they will produce more high-skilled workers which in turn drives up labor costs. China exemplifies this trend, with median wages in certain cities now surpassing those in parts of Eastern Europe. Global trade conflicts, in combination with the continued labor rate increases, are forcing the

12 U.S. and other developed economies to look far beyond China for the next source of low-cost manufacturing. The destinations for 2019 will include established manufacturing hubs such as Bangladesh and Vietnam, along with other emerging destinations such as Ethiopia, which is being advertised as Africa’s 21st-century center for manufacturing.

In both the developed world and emerging economies, labor conditions are forcing organizations to look toward automation and operating efficiency to counterbalance this major cost driver. An example of this is Amazon, which hired 20,000 fewer workers for the 2018-19 holiday season as compared with the prior year despite an increase in volume. The specific, emerging opportunities presented by AI in the area of procurement and supply chain are explored in more detail throughout this report.

C. The Costs of Climate Change — The rising costs of changing weather patterns require, at the least, active mitigation planning and an external platform for the genuine and urgent coordination of CSR efforts.

Seventeen of the planet’s 18 warmest years on record (since measurement started in 1880) have occurred since 2000. Infrastructure and crop damage costs — and the insurance premiums to cover them — have similarly worsening patterns. Despite promising commitments made at the Paris Agreement, global temperatures and emissions rose again in 2018. The forecast is not promising in either the short or long term. Indeed, the recent National Climate Assessment Report produced by the U.S. made for grim reading: By 2100, economic costs in the U.S. alone are projected to reach $500 billion per year due to crop damage, lost labor and extreme weather events.

We expect steady increases in supply chain disruptions, capital budget requirements and overhead costs in most regions as a result of global warming. In the U.S., climate-based regulations will likely remain flat to negative under the current administration. Elsewhere, Europe is likely to continue to invest and regulate in support of renewable energies due to heavy reliance on

13 foreign oil and commodities. China too is likely to increase regulations and investments in clean energy due to rising health-care costs and impacts on worker productivity.

We recommend that supply chain leaders assess the risks of severe weather Millennials are actively aligning their events on their supply chains using purchases with firms that have a weather pattern heatmaps and climate clear strategy to ease environmental trend data to identify vulnerabilities. impacts, and that trend is likely We also advocate active steps be taken to continue. in 2019 to contend with the physical, regulatory and reputational risk posed by climate change. Forward-thinking supply chain leaders should set and track metrics and enact policies that help curb overall emissions and mitigate the risks and costs of weather-related disruptions.

In the year ahead, those firms that establish substantive CSR strategies that reflect an authentic desire to effect change will stand out among their peers. Millennials are actively aligning their purchases with firms that have a clear strategy to ease environmental impacts, and that trend is likely to continue. This clear top-line impact, along with its threats to a stable cost base, make climate change a high-priority area for strategic planning and action in 2019.

Implications of Global Economic and Geopolitical Trends

After one of the longest, albeit gradual and unevenly distributed periods of economic expansion and wealth creation on record, supply chain leaders should prepare themselves for a more unpredictable business climate in the coming years. Overall growth will likely be flat with downside risks outweighing the upside potential. Individual markets and regions will obviously trend differently, but the macro factors of global growth, debt levels, interest rates, commodity prices and political/social stability are each moving in the wrong direction. Such conditions can change, and quickly, but their collective impact will bring an inevitable focus on cost containment and risk management in the short term. We recommend a series of proactive steps to prepare for the supply chain impact of these business conditions:

14 • Account for the potential impact of a reduction in China’s growth on major categories such as shipping and commodities

• Factor in the potential cost and impact of increased tariffs, especially on small- to mid-size suppliers, and in the U.S. and China markets

• Track supplier risk diligently, including solvency risks as interest rates rise and demand in key markets slackens

• Look to emerging markets both for sources of growth and for supplier capabilities

• Anticipate cost increases in business and tech services where wage increases are most likely and skills in the highest demand

• Continue to drive automation and efficiencies throughout supply chains, especially in the areas of IoT and AI-driven predictive analytics

In the new year, we expect similar overall macroeconomic results as in 2018, although with emerging economic headwinds and higher market volatility. It will likely be another unpredictable year of fluctuating energy and commodity prices, punctuated with regional market shocks driven by difficult-to-predict political, social and climate-driven events. A challenging environment for supply chain leaders will demand agility and responsiveness above all else.

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15 2019 Trends in Procurement Digital Transformation

Procurement’s digital journey has accelerated rapidly in the last few years with the converging forces of cloud computing platforms, associated disruptive technologies and unified source-to-pay (S2P) applications. Recently, a “democratization of transformation” effort has emerged. Digital enablement is more capable; easier to acquire, implement and access; and more cost- effective than ever before. Larger companies with more budget and resources will no longer be the only ones that pursue transformation — small and mid-sized companies will also seek change.

Key trends in digital procurement transformation for 2019 highlight the convergence of capability creation, innovation and technology.

Digital-First Mindset

Leading companies are pursuing “Digital-First” strategies. “Digital First” involves leveraging existing and rapidly emerging modern technologies such as artificial intelligence (AI), cloud-based solutions, advanced predictive analytics, cognitive computing and natural language processing (NLP) to transform business models, modernize their functional strategies and digitize end-to-end processes to drive innovation. Technology will no longer be a tool for helping processes — it will be the definer of new capabilities within the Technology will define new organization, such as advanced, best-practice capabilities within the organization, processes in which manual ones are automated such as advanced processes in which and some are eliminated entirely. manual ones are automated and In this “digital first” world, procurement will take some are eliminated entirely. an active role. As a strategic partner that interacts

16 not only with the supply base but also with internal functions and business units, procurement will continue to play a part in defining a digital transformation strategy and enabling other departments to fulfill their digital duty. Rather than just digitizing or eliminating process steps, procurement’s holistic S2P solutions will empower end-to-end visibility, deeper insights and greater collaboration internally and externally. Forward-thinking organizations will use this opportunity to build a broader innovation ecosystem around S2P applications, enabling pockets of local innovation in specific business lines or partner applications tied to the core S2P solution.

“Agile” Procurement as Main Partner to Technology and Overall Business

Companies will move to an “agile” approach to procurement transformation implementation by developing a transformation journey spanning multiple years. Organizations will learn that change is a constant. Their transformation journeys will perpetuate themselves by driving the introduction of new emerging technologies, digital talent, new capabilities, greater insight creation and continuous training of the workforce to keep up with the pace of change.

Cloud-based solutions and external services will continue to make new functionalities and capabilities easier to acquire and adopt. In turn, organizations will implement agile talent acquisition strategies including internal and external crowdsourcing options to source the needed talent. As we see in agile software development, procurement transformation pilots will drive learning, solution evolution and acceptance.

Continued Market Domination of Source-to-Pay Applications

Most CPOs and CIOs are now aware of the disruptive nature of a fully integrated S2P platform. The majority of CIOs and CPOs we have had discussions with have told us that they have already moved or are in the process of moving most of their S2P processes to cloud S2P applications. High-performing organizations have made major strides in decoupling key procurement processes and data from their Enterprise Resource Planning (ERP) systems and leveraging cloud-native S2P applications that can operate independently to store data and enable end-to-end process

17 flows — from category strategy to invoicing. This flexibility, combined with the scalability and security of cloud solutions, has yielded significant business benefit and we expect this trend to continue its acceleration in 2019.

Guided Workflows to Enhance Procurement Results and End-User Experience

Despite the rapid strides in technologies, procurement still grapples with lack of contract compliance and poor end-user experience. The two main causes of these problems are over-parenting by procurement and the lack of an integrated solution to support end-user requirements. These persistent problems have been solved by a number of leading organizations through an elegant combination of technology, business process and data.

“Guided Workflow” solutions, as currently deployed by several leading manufacturing and energy companies, ensure that the end user’s experience is comparable to consumer sites such as Google and Amazon. This solution doesn’t require users to have complete knowledge of buying channels or procurement policy. Rather, it builds trust in the S2P application which guides them through the right options via combinations of pre-configured workflows, NLP and AI.

For example, a user wants to make a purchase, so she types in a query or tells Alexa her request. NLP- and AI-based tools recognize the demand trigger, identify the user’s intent, link it to the right S2P document, identify the workflow trigger, and select the contracted item and price. The workflow pinpoints the right approval mechanisms, appropriate buying channels, payment

Sample Process Scenario

Start Enters into Suggests Selects If category is Navigates to Requisition is End "guided categories category punchout punchout link, created in buying" system, using spend enabled, adds item to main system searching to system triggers punchout site with lines purchase a supplier logo cart, and returns specific good with the link to main system shopping cart

End User System

18 mechanism, matching requirements and other hand-offs. In the absence of a contracted item, the system would look for qualified suppliers or sourcing events, allowing the user to raise a new request or potentially send out a spot quote. Many such workflows can be configured with flexibility in rules and system processing, allowing the user to execute the task seamlessly.

We have observed the results of such deployments yielding compliance improvement more than 40 percent and dramatically improved user-satisfaction scores. We expect to see this trend continue across 2019, with more companies empowering users to conduct end-to-end transactions independently, with procurement stepping back to orchestrate the ecosystem via the right combination of data, tools and processes.

Expansion of Cloud Procurement Solutions Into Direct Procurement and Supply Chain

Many forward-thinking organizations are building a broader innovation ecosystem around their solution by enabling pockets of local innovation in specific business lines or partner applications tied to the core S2P solution.

Such ecosystems will expand. We forecast that The cloud-native platform — most companies will limit their ERP activity to enhanced with the integration of big core finance and manufacturing workflows, and data, AI and robotics — will allow for will shift other activities to cloud S2P platforms unified supply chain solutions with with associated partner capabilities. Cloud-based procurement at the center. procurement solutions will expand into newer procurement areas including direct materials, item master, bill of materials, ordering, stock integration, vendor managed inventory, forecasting and inventory management. The cloud-native platform — enhanced with the integration of big data, AI and robotics — will allow for unified supply chain solutions with procurement at the center.

Category-Centric Transformation

Virtually all supply markets are undergoing significant transformation and disruption unique to their sector and driven by digital innovation. Established players can quickly lose their edge and be supplanted by new entrants leveraging new innovations. In 2019, procurement needs to intensify its focus on these changes in their supply markets, assess their suppliers’ digital capabilities and work toward joint innovation.

19 Marketing is one of the categories that will be at the forefront of digital transformation. In 2019, the industry expects 65 percent of digital media spend to be traded programmatically, where computers will decide which ads to buy and how much to pay for them, often in real time. Spend categories such as maintenance, repair and operations (MRO) are also placing greater focus on real-time data visibility, predictive analytics and labor automation. For example, in MRO, 3D printing is progressively gaining momentum and will eventually change the way manufacturers design, produce and stock spare parts. Instead of maintaining base levels of low-turning inventory, companies will directly 3D print spare parts when needed. This will result in a significant reduction in production cycle times, inventory, labor and shipping costs.

As organizations understand and internalize the potential synergy from procurement working with technology, they will take necessary steps to address category-specific challenges and become an advocate for digital transformation.

Disruptive Technologies to Strengthen Data Science Capabilities

In procurement, looking at historical spending only provides a partial view. Nowadays, category and sourcing managers are looking to big-data solutions with sustainable and scalable data management processes to cope with large volumes of data, funneling in from multiple ERP systems, supplier master data platforms and financial markets. We will soon start to see a new collaboration between data science and procurement teams, applying machine learning and AI to shape unorganized data sets into actionable ones, recognize patterns in spend behavior and forecast future budgetary trends. Several innovative examples of “Big Data Evolution” include:

• Expressive Bids — Traditional sourcing and awarding decisions, made via in-person negotiations, are becoming more complex due to the shift from plant-based sourcing to global, category-based sourcing. Many of today’s e-procurement systems have reverse auction capabilities to tackle this complexity. Yet, even reverse auctions do not fully enable buyers to express their business rules and prevent suppliers from voicing their production efficiencies (or differentiation).

Expressive bids, leveraging AI and machine learning, provide an innovative solution to these problems by enabling bidding on self-constructed packages of items, rather than on predetermined lots, and triggering conditional discount offers. For example, in the logistics

20 industry, expressive bids allow forwarders to group different lanes into individual lane bundles and specify a discount for each lane bundle. If the provider receives the allocation for a complete bundle, a response is triggered in the system and the quoted discount applies.

• Cluster Analysis With Artificial Intelligence— Cluster analysis will bring efficiency to spend analytics, as it will help prepare the data for linear performance pricing (LPP) to analyze and negotiate pricing on direct material components. By applying intelligent algorithms, patterns can be found in material text such as invoices, purchase orders or master data. These materials can be clustered automatically, based on information contained in the text.

For example, when different names for the same material, such as steel, are detected across multiple data sources, they can be brought into clusters. The clean data can then be used to standardize materials, change specifications and benchmark prices from different suppliers. As a result, the buyers can make strategic decisions on how to allocate future spend across the supply base to mitigate future risks.

• Artificial Neural Networks (ANNs)— ANNs are highly sophisticated information processing systems capable of modeling complex relationships, similar to how the human brain processes information. Their power lies in their ability to handle nonlinear relationships and predict future behavior even when data sets are incomplete.

Leading procurement firms are now testing whether ANNs can be used to help forecast, predict or simulate invoice spend of indirect categories based on orders from direct categories. For example, when spend analysts calculate material price variances (MPVs), ANNs will identify and learn from cause-and-effect relationships and explain origins of variance in material prices and volumes. This in turn will lead to better forecasts and bring efficiencies to supply chain planning.

21 Disruptive Technologies to Strengthen Smart Automation Capabilities

In the near future, procurement teams as well as procurement software providers will continue to invest in or acquire robotic process automation (RPA) capabilities. RPA used in conjunction with AI will automate routine and repetitive tasks, driven by rules-based processing and business logic. More sophisticated use cases will emerge by combining scripted RPA with AI and other emerging technologies. These include:

• Smart Contracts — Computer protocols are created to digitally facilitate, verify and enforce the performance of a contract. Smart clauses will automatically draw performance data and measure it against contract requirements, calculate credits due and apply against invoices. They will improve the entire S2P process and lower transaction costs by reducing faulty or duplicate orders and eliminating overpayments or underpayments to suppliers.

• Smart Sensors for Forecasting — Smart sensors will add value to demand In the near future, procurement management, forecasting and new product teams as well as procurement development. For example, smart sensors software providers will continue to will enable analysis of point-of-sale data invest in or acquire robotic process and provide key insights into purchasing automation (RPA) capabilities. behavior and product performance.

• Smart Sensors for Asset Maintenance — Combined technologies will leverage predictive analytics to inspect and maintain physical assets. Internet of Things (IoT) will be used to track location, temperature and machine output. As a result, operational cost reduction initiatives will have better data to optimize inventory, predict failures before machines malfunction, and schedule maintenance when assets are not fully utilized.

RPA will remain applicable to organizations looking for process efficiencies. Robotic desktop automation (RDA) will continue to produce a different degree of automation and will combine with NLP capabilities to enhance S2P processes. A sampling of RPA initiatives includes:

22 • Self-Serve AI Spend Classification— Automates data consolidation, cleansing and categorization at a granular level and frees up time and resource investments. As clean spend data becomes the “source of truth” across the organization, it unlocks elevated spend analytics and cost-cutting capabilities.

• NLP-Enabled Voice and Chatbots — Drastically improve the user experience, whether they become a single point of contact between the customer and supplier to direct purchases, or are leveraged in tandem with traditional help-desk services.

Digitally Savvy, Economically Aware and Analytically Capable Talent

Organizational and skills assessments are the first steps toward building a digital-centric procurement organization. This year, organizations will continue to advance their understanding of capability gaps, and whether they can be filled through training and developing their existing workforce, introducing talent infusion and rotational programs, or by lateral hiring. Procurement organizations will also increasingly look at alternatives such as partnering with third-party solution providers or outsourcing the necessary talent for shorter contract terms.

Given the critical role technology now plays in procurement, knowledge of cloud-based solutions, disruptive technology, and big-data analytics are becoming highly desired attributes for job candidates. Successful organizations are the ones that are giving equal weight to people skills and technology skills. As human-machine collaboration continues to increase its normative status in the procurement function, the composition of the workforce will correspondingly shift away from those who feel intimidated by software toward those who are happier working with technology.

23 Supply Market Trends and Insights by Category

Direct Materials and Commodities

In 2019, direct procurement leaders will seek opportunities for process digitalization and supplier innovation to enhance business agility and improve collaboration. Key focus areas will include:

• Increasing transparency and visibility, and developing capabilities to identify trends that can impact demand, capacity or price through efficient use of big data.

• Migrating from the traditional, email-based supplier communication channel to more powerful, multipoint communication and collaboration channels.

• Increasing adoption of fully unified, cloud-native procurement tools to support the end-to- end procurement process and improve speed, visibility and effectiveness.

Leveraging Digitization for End-to-End Direct Materials Management

Cloud-native solutions with improved data management architectures and AI-driven analytics can capture, cleanse and maintain supply chain data more effectively and efficiently. Procurement will be able to effectively support agile production demands and manage supply chain risks by In 2019, direct procurement leaders extending the data collection cycle from product will seek opportunities for process development to distribution. Bill of materials digitalization and supplier innovation (BoMs) created within a project lifecycle to enhance business agility and management (PLM) solution can be used as improve collaboration. inputs to trigger other procurement software functionalities — such as automatic publication of RFPs. Other tools will create up-to-date “should cost” pricing models based on AI-driven market intelligence, commodity index trackers, and historic purchase trends to support improved negotiations with suppliers.

Historically, successful manufacturers and retailers have maintained close working relationships with their top suppliers, in-person or over email. However, these communication channels are not ideal to capitalize on supplier-driven innovation. Today, cloud-based collaboration hubs allow manufacturers to collaborate in real time with multiple suppliers, share drawings and make recommendations.

24 Commodity Markets

Geopolitical tensions and policy risks, summarized below, will lead to increased price volatility over the short term:

• Growing trade tensions and tariffs between major economies

• Rising U.S. interest rates

• Continued appreciation in the U.S. dollar exchange rate

• Brexit-related impacts on trade

• The reintroduction of sanctions on Iran by the U.S.

• The impact on agriculture prices and yields based on catastrophic climate events

However, as consumers and producers adapt, the effects of sanctions and additional tariffs will moderate.

• Oil — The uncertainty in the oil market will affect both hard and soft commodity markets. Brent and WTI prices will average below 2018 levels due to factors including rising U.S. shale output, an anticipated surge in OPEC production, and sanctions (and waivers) on Iranian oil. Economic instability in Libya, Iraq, and Venezuela can contribute to an oversupply as these countries are expected to produce more oil than 2018 levels. However, OPEC and its allies might decide to cut production to ensure Brent continues at the $70s level for 2019.

We estimate an overall production cut of around 0.8–1 MBPD by OPEC and its allies will determine the new price point. In that case, Brent will average in the low $70s and WTI in the high $60s. If no production cuts are announced, Brent will drop to high $50s and WTI to low $50s.

25 • Metals — On average, 2019 metal prices will be similar to prices in 2018.

¤¤ Zinc and Lead: Prices will stay steady through 2019 or marginally decline. Supply will continue to increase from new mines, as the global production is slated to rise by 2 to 3 percent YoY as against a stable demand growth. Lead prices will continue to remain steady on the back of a change in market dynamics due to the trade tariffs. The fiscal and monetary stimulus in China will strengthen the demand for copper in China as it continues to account for more than 50 percent of the global demand. Stronger supply from Chile due to expanding mines will ensure that supply stays in line with the demand levels. A net increase of less than 5 percent is anticipated for 2019 YoY.

¤¤ Aluminum: Aluminum prices witnessed an overall increase of about 9 percent in 2018 due to the import tariffs and supply issues arising from sanctions. However, existing mines are set to increase their production outputs such that any easing of sanctions would effectively stabilize prices in 2019.

¤¤ Steel: Stringent environmental policies will continue to constrain China’s steel production. Price for iron ore will depend on the extent to which China’s environmental policies reduce ore imports and cut domestic production. Rising production levels in Australia and Brazil will further put downward pressure on iron ore prices.

¤¤ Precious Metals: Silver prices are forecast to recover from the slump in 2018. Current oversupply of platinum will continue into 2019. Demand for gold will continue to remain strong from India and China during 2019. However, further strengthening of the U.S. dollar may limit the downside risk to the prices if coupled with stricter U.S. monetary policy.

• Agricultural Commodities — According to the World Bank’s Grain Price Index, grain prices are projected to edge up 1 percent in 2019 after an estimated 10 percent rise in 2018 resulting from a drought in Europe and Central Asia that affected wheat prices. Oils and meals prices are expected to increase more than 2 percent in 2019, reversing a 2 percent decline in 2018.

26 Several risks underpin these forecasts: volatility of energy and fertilizer prices — both of which are key inputs to grains and oilseeds; an escalation of trade frictions, domestic support policies, continued strengthening of the U.S. dollar, and further currency depreciations of commodity exporters. Other risks include adverse weather patterns and diversion of food commodities to biofuels. Energy prices, affecting agricultural commodity prices, directly (through fuel use) or indirectly (through fertilizer and other chemical use) are expected to marginally increase in 2019 (1 and 2 percent, respectively). The World Bank suggests that a 10 percent increase in energy prices is associated with a 6 percent increase in fertilizer prices and a 2 percent increase in grain and edible oil prices.

Logistics

It was a carrier’s world in 2018, as carriers maintained enough pricing power to apply rate hikes to major shippers throughout the year. In addition to rising budget pressures and capacity constraints, procurement managers dealt with supply chain distortions due to tariffs, economic sanctions, Brexit-related uncertainty and significant currency fluctuations.

Although crude oil prices dipped significantly from their peak in October 2018, the uncertainty and global tariff wars will continue to cloud the 2019 logistics outlook.

Modal Trends

• Road Freight — Strong U.S. economic growth coupled with rising fuel prices, tight capacity and chronic driver shortages contributed to soaring road freight cost for shippers in 2018. Looking forward, we expect the rate increase trend to continue in North America through mid to late 2019, although the increases will not be as steep as they were in 2018. Our forecast model for North America truckload rates currently projects 2019 prices to increase 4.5 to 7.1 percent over 2018 rates.

27 North America Truckload Freight Rate Forecast 150.0 2018—2019 Forecast

140.0

130.0 Lower Bound: 4.5% Higher Bound: 7.1%

120.0 Market expected to stabilize in ~18-24 months

Index: 100 110.0 Year 2003

100.0 Jul 14 Jul 15 Jul 16 Jul 17 Jul 18 Jul 19 Jan 14 Jan 15 Jan 16 Jan 18 Jan 19 Sep 14 Sep 15 Sep 16 Sep 17 Sep 18 Sep 19 Nov 14 Nov 15 Jan 17 Nov 17 Nov 18 Nov 19 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Mar 19 May 14 May 15 May 16 May 17 May 18 May 19 Nov 16

Actual Predicted Optimistic Scenario Pessimistic Scenario

Figure 3 Source: GEP

In European markets too, shippers faced higher rates due to capacity shortages, higher shipping demand and rising fuel prices. Shippers faced supply chain disruptions as the U.K.’s anticipated exit from the EU led to congestion at many key ports and highways. We expect road freight prices to continue the moderate uptrend, which will vary by country. The Asian road freight market in 2018 saw increased prices primarily due to higher fuel prices, weakening Asian currencies, increased import volumes, seasonal capacity shortages and a shortage of professional truck drivers in countries like Australia. In 2019, the road freight rates are expected to increase marginally.

• Ocean — The key highlights of the shipping industry in 2018 were ongoing trade tensions, tariff wars, Brexit-related uncertainty and rising bunker prices. Ocean spot rates fluctuated throughout 2018 with an average 15–25 percent surge in spot rates in late 2018. On the other hand, average contract rates remained stable, rising gradually through 2018.

In 2019, the growth in supply is expected to be 5–6 percent while the growth in demand is expected to be 4–5 percent. With supply exceeding demand growth, we expect the rates to increase moderately (4–7 percent) due to idle fleet management and a more consolidated market structure.

28 • Air — Despite capacity growth outstripping demand growth, air freight rates rose in 2018 due to rising fuel prices and the willingness of shippers to pay more for guaranteed space. While the air cargo industry remains strong, global activities appear to be decelerating amid ongoing trade tensions. Growth of global manufacturing output and new orders reached two-year lows in September 2018 driven by the first contraction in global trade volumes since June 2016.

Despite demand softening, we expect air freight rates to be highly volatile in 2019. More than half of air freight volume flown between the U.S. and China is already affected by tariffs.

Small Parcel

2018 was a challenging year for small-parcel shippers. Base price increased 4.9 percent on average while suppliers continued to introduce new rules and surcharges, making small-parcel shipping more expensive.

Looking forward, global small parcel volume is forecast to increase at a rate of 17–28 percent in 2019 primarily due to worldwide e-commerce growth. Rate hikes will also continue as parcel carriers have already announced an average 4.9 percent general rate increase in domestic and international services for 2019; but as we have seen previously, the impact of the change will depend on shippers’ mix of weights, zones, services and density.

Warehousing

The North American warehousing market finished 2018 strongly. The U.S. alone posted net absorption of more than 200 million square feet, fueled by robust economic growth, government tax cuts and online sales. However, as the U.S. economy slows down, the absorption rate is expected to stabilize in 2019, and new deliveries to the market will temper rental rate growth to 2–3 percent. Vacancy rates will also stay below 5 percent in the U.S. and the metro areas of Canada.

E-commerce and retail sectors, which drove a 40–50 percent take-up for European warehouses, are expected to continue the demand thrust through next year as well. High demand for modern

29 well-located warehouses near major cities is expected to sustain the asking rental rate growth in the range of 5–6 percent in prime locations. As the wave of minimum-wage hikes across the EU countries continues, warehousing costs are expected to stay on an upward trajectory.

The APAC warehousing market will continue to see strong demand for advanced fulfilment centers near prime cities. However, rental rate growth in the region is expected to stay in the range of 2–3 percent as new construction deliveries remain strong and the U.S.-China trade dispute further slows China’s industrial output.

Logistics 2019 Outlook by Subcategory and Cost Mitigation Strategies

2019 Rate Mode Recommended Cost Mitigation Strategies Key Events/Trends to Watch For Outlook

Supplier consolidation, multimodal solutions, route Oil price fluctuation, LTL GRI in January 2019, Road Freight and mode optimization, supplier collaboration Brexit effect in Europe Volatile (becoming shipper of choice)

Ocean Freight Competitive sourcing, network optimization, Tariff wars, oil prices, regulations (IMO’s Volatile demand management, supplier footprint low-sulphur fuel mandate), post-Brexit delay and management, mode optimization port congestion, currency devaluation Air Freight Volatile

Contract negotiation (GRI cap, dimensional Technological innovations and Small Parcel weight rules, accessorial surcharges, etc.), Amazon effect demand management

Competitive sourcing, revisiting pricing Warehouse model with suppliers, network optimization, operational improvements

Mild Mild to Moderate Moderate Moderate to Severe Severe (<2%) (2-5%) (5-7%) (7-10%) (>10%)

Table 3 Source: GEP

In summary, we are expecting mild to moderate rate increases across modes/regions. This, however, should not discourage category managers from re-sourcing their logistics spend if they have not done so recently. Regardless of the market outlook or trend, if the current incumbent’s rates are higher than the market, the competitive exercises can still result in cost reduction opportunities if the spend has not been bid out recently, or if prior rate increases were not managed effectively with strong procurement involvement.

30 Information Technology and Telecommunications

While the IT market is expected to grow moderately at 3 percent to $3.8 trillion in 2019, IT budgets are anticipated to remain flat for most companies in 2019. A shift from owner/operator to service provider/business partner model, strategic initiatives targeted at cloud migration, “everything-as-a service,” and an increase in “pay-for-use” IT products/services will influence IT spend across organizational lines.

Digital transformation initiatives will continue to drive complex IT ecosystems outside of the traditional “IT department,” especially in areas such as sales, marketing and supply chain. IT leaders must continue to direct resources and funding to upgrade outdated infrastructure, address increasing cybersecurity risks and support multiple data and analytics platforms under the “run and maintain” banner. Simultaneously, IT leaders must also focus “grow and transform” efforts to embrace select disruptive technologies such as AI, IoT, and RPA to achieve cost reduction and process efficiencies.

These major changes to the technology landscape will require levels of cross-collaboration that go well beyond the typical IT-procurement partnership.

Software

The software IT domain area is expected to have the highest growth rate in 2019. Enterprise Enterprise software, business-based software, business-based software (point software (point solutions), data solutions), data management, and security management, and security software software solutions are expected to contribute solutions are expected to contribute the most to domain growth, while companies the most to domain growth, while continue to use SaaS subscriptions. With companies continue to use the migration to “everything-as-a-service,” SaaS subscriptions. IT organizations are no longer the owner- operators of a company’s software assets, since SaaS solutions require little intervention from the traditional IT department. Consequently, IT procurement professionals experience more pressure to negotiate better software deals, for longer durations, with increased focus on delivery from third parties to ensure success.

31 IT Services

The “everything-as-a-service” model is also IT and procurement will collaborate expected to fuel growth here. IT departments are to evaluate service provider offerings, trending toward the implementation of strategic capabilities and credentials, and or preferred supplier relationships for applications make purchasing decisions to fully and infrastructure support to reduce overall risk benefit from emerging technologies. and offset the direct accountability of the past. This is enabled by focusing on a few partner-level relationships that function as part of the larger IT team. Consolidating traditional service offerings and having fewer IT service providers will enable IT procurement professionals to drive better cost efficiencies in their operational portfolios.

IT and procurement will collaborate to evaluate service provider offerings, capabilities and credentials, and make purchasing decisions to fully benefit from emerging technologies. Wherever possible, the two teams should share responsibility for safeguarding technology investments and ensuring waste prevention by discussing the reusability of delivered assets and creating a comprehensive plan for future maintenance and support of new IT deliverables.

Demand for knowledgeable and experienced IT professionals will remain high in 2019 as organizations and consulting firms vie for resources in an ever-shrinking talent pool. Many companies are investing in internal training and development to retain and cultivate their existing talent pool. Some are turning to outsourcing and managed services as alternatives, after evaluating their business needs with key stakeholders.

Infrastructure

While growth in both end-user and data center infrastructure is projected to be significantly less than in software and IT services, a variety of factors indicate steady progress and activity in both areas. Data center growth will be driven primarily by modernization efforts aimed at implementing next-gen infrastructures and managing the increased storage and computational capabilities. IT infrastructure involving containers, Edge, Fog and other forms of serverless computing will drive innovation in this space.

32 In 2019 we will see growth in deployments of IaaS, PaaS and cloud-based infrastructure solutions. To help manage tight budgets for infrastructure spending, optimize cloud services utilization and curb unnecessary costs, IT procurement professionals will be further encouraged to work with their IT stakeholders.

The end-user computing space is expected to see continued moderate growth this year, fueled by standard refresh cycles as well as increased upgrades due to Microsoft Win7/10 support plans. In recent years, there has been little market differentiation among manufacturer device offerings, leading to increased switching between brands on behalf of large organizations. In 2019, we expect to see heavier focus on PC-as-a-Service (PCaaS) offerings that will lock companies into multiyear commitments and revenue streams. We encourage organizations to evaluate these offerings on a case-by-case basis to explore alternative approaches to financing and managing end-user computing environments.

Telecom

Introduction of 5G services, a new major U.S. mobile telecom player, and continued adoption of cloud-based networking solutions to replace aging legacy technology will govern the telecom domain in 2019. Each theme will drive unit costs down while transforming existing processes and influencing talent pools.

Following massive capital investment in spectrum, new towers and equipment, 5G will be commercially launched. In the U.S. market, AT&T and Verizon are the first to introduce 5G services; the effects will spill over to Europe and Asia- Pacific. Although the media focuses more on the consumer benefits of high-speed wireless technology, 5G will render many legacy business technologies obsolete as the 5G services and coverage areas expand.

The merger of Sprint and T-Mobile, expected to close early in 2019, will combine the third and fourth largest U.S. mobile carriers into a stronger third carrier. The new T-Mobile has placed a huge bet on the launch of 5G services; as a pure player with no legacy wireline business

33 to protect, T-Mobile is expected to aggressively launch disruptive enterprise services as noted above. A 5G “hot spot” has the potential to disrupt many POTS and T1 wireline applications. Sourcing programs should begin launching legacy wireline transformation plans in 2019. Wireline contract renewals should include technology substitutions and shorter terms to avoid early termination liabilities.

Private network technologies will continue to evolve from legacy MPLS to newer cloud-based, software-defined networking. There are many new SD-WAN entrants coming into the market. Sourcing plans should include tying the SD-WAN initiative to an application migration to the cloud from internal data centers. IT sourcing professionals should consider utilizing independent third-party interconnection services to drive competition and gain access to multiple cloud networks through interconnection.

General and Professional Services

Critical factors that would impact General & Professional Services (G&PS) categories in 2019 include a strong U.S. economy, the global rise in protectionist policies, and geopolitical upheaval driven by Brexit. Furthermore, supplier M&A will influence the G&PS supply landscape.

Travel

In 2019, we expect airfare costs to increase 3 percent globally, with certain markets in Asia- Critical factors that would impact Pacific and Europe seeing 5-plus percent cost General & Professional Services increases due to stronger supply and demand categories in 2019 include a strong influences. The hotel market will also experience U.S. economy, the global rise in cost increases of more than 5 percent in Europe protectionist policies, and geopolitical and 2.5 percent in North America. upheaval driven by Brexit.

To mitigate ongoing price inflation, corporate travel managers should drive compliance to preferred suppliers, strengthen corporate travel policies, maximize self-booking solutions, and engage employees with tailored communications. Corporations will increasingly utilize macro-factor benchmarking, such as total investment toward travel and cost per employee metrics, to evaluate cost effectiveness.

34 The travel management company (TMC) market will see hyper-competition in 2019 given the predominance of strong global players, strengthened by American Express’s acquisition of HRG, and growing regional TMC offerings. In 2019, TMCs will roll out further improvements to online and mobile-based services to attract and retain corporate accounts and improve customer servicing. Additionally, the application of AI and robotics will continue having a significant impact on TMC back-office activity. Corporate travel purchasers of TMC services should challenge TMC partners to see tangible efficiencies gained from the application of process automation.

Contingent/Temporary Labor

Historically low unemployment rates and a retiring baby boomer generation, paired with economic growth adding approximately 170,000 new job positions per month, presents unique challenges to temporary labor purchasing.

In 2019, companies will focus on emphasizing preferred relationships with one or a few key Human cloud, online staffing temporary labor suppliers to gain advantages platforms and crowdsourcing with resourcing capacity, cost leveraging, and solutions will provide alternative performance management. Furthermore, solutions for on-demand, contingent organizations will develop alternative resourcing work in an increasing number channels, such as ex-worker communities and of companies. leveraging of online staffing.

Companies will also increasingly expand managed services provider (MSP) and vendor-managed inventory (VMI) programs internationally. Temporary labor purchasers will need to understand supplier capabilities and tailor programs based on supplier strengths and gaps. MSP solutions will be applied to total talent management, incorporating a spectrum of the contingent workforce including contractors, freelancers, and statements of work.

Human cloud, online staffing platforms and crowdsourcing solutions will provide alternative solutions for on-demand, contingent work. In 2019, an increasing number of companies will pilot the application of these solutions in their businesses.

35 Financial Services and Advisory

The accounting and audit industry was impacted significantly in 2018 due to a variety of negative business dealings, such as KPMG’s involvement in failures by Wells Fargo, and PWC’s involvement in issues encountered by Carillion in the U.K. These issues, paired with the fact that approximately 95 percent of the Fortune 500’s audit work is with the Big Four accounting firms, raise concerns about the objectivity and continuity of the audit market. Corporate purchasing groups should align with finance to manage auditor relationships, thus making more transparent decisions on choosing partners.

Advancing technologies are shaping financial services and advisory offerings. By 2020, it is estimated that large portions of tax preparation and auditing will be automated. Organizations need partners to capitalize on these technologies — to innovate, improve service quality, and gain cost efficiencies. Continuing tax reform in many countries is another reason for enterprises to proactively monitor service and fee structures with tax partners in 2019.

Fleet

The corporate fleet arena is poised for significant transformation from the rise of autonomous driving vehicles and availability of electric vehicles. In the shorter term, corporate fleet purchasers face a move from sedans to CUVs and SUVs as the predominant corporate fleet vehicle, and increased availability of in-built tracking and safety mechanisms.

New vehicle sales are expected to increase in the range of 2–4 percent in Europe and Asia, and 6–7 percent in South America, but in the U.S. are expected to be 1–2 percent lower than 2018. Automobile OEMs are facing low to moderate growth paired with the need for substantial capital innovation investments. Given these dynamics, corporate fleet buyers can mitigate cost pressures in 2019 by focusing on the use of one primary vehicle OEM in their fleets, regionally or globally.

A continuing trend in 2019 is the ongoing development of partnerships and joint ventures by automobile manufacturers. For example, GM and Honda have partnered, and Ford and Volkswagen are rumored to do so. As these alliances emerge, corporate fleet managers will find new alternatives to negotiate preferred discounting programs.

36 Other key 2019 developments in the fleet category are the increasing application of telematics, and the use of fixed and variable reimbursement models that pay for driven mileage or provide a vehicle allowance rather than a company car.

HR Benefits and Recruiting

The HR benefits market faces major potential disruptors in 2019. First, several industry megamergers will be completed, namely the purchase of Aetna by CVS, and the purchase of Express Scripts by Cigna. In 2019, these market developments should begin to gain traction, resulting in broader and better-integrated offerings by these carriers.

Secondly, Amazon’s anticipated offerings in the health care market may gain greater visibility in 2019, including its movement into the Pharmacy Benefit Management space, and potential market solutions through its 2018 partnership with Berkshire Hathaway and JP Morgan. We would advise corporate purchasing to develop close partnerships with HR departments to help monitor and capitalize on market developments as these unfold.

In 2019, enterprises will continue to struggle with significant constraints on resource availability Amazon’s anticipated offerings in and a shifting paradigm in the accessibility of a health care may gain greater visibility younger generation of job seekers. We expect to in 2019, including its movement into see companies strengthening partnerships with the Pharmacy Benefit Management key recruiting agencies, applying recruitment space and its partnership with process outsourcing (RPO) to supplement internal Berkshire Hathaway and JP Morgan. activities, leveraging portals such as LinkedIn or Indeed to support recruiting activity, and piloting online staffing solutions in 2019.

Finally, in 2019 we anticipate more enterprises deploying technology-based solutions such as RPA for internal HR activity to gain operational efficiencies.

37 Marketing and Advertising

Media and advertising spend, driven by increased rates of personal consumption and industrial production of physical goods, is expected to grow by 4 percent in 2019. The category is becoming increasingly complex due to proliferation of channels, talent shifts toward freelancing and smaller agencies, and the role of emerging technologies in shaping the space for timely and relevant advertiser content.

Programmatic Media Buying

Zenith, a major international media buying agency, predicts 65 percent of digital media will be traded programmatically in 2019. Nevertheless, the lack of visibility between middlemen and marketers will continue to persist and ad fraud will remain a $20 billion problem. Marketers will increasingly explore ways to clean up their supply sources and reduce buying from the ad exchange.

Bringing trading in house, hiring traders away from agencies, or opting for a “non-disclosed” model with an agency trading desk can provide relief to marketers. They will also increase their demands for access to log-file data from tech partners to support greater control and transparency. Blockchain is touted as a possible solution to chronic lack of transparency within the industry. However, it will remain speculative in 2019 because it currently lacks incentives greater than those offered by technology already available to advertisers and publishers.

Digital Advertising

Facebook, Google and Amazon are continuing to accumulate data throughout their retail supply chain, collected from purchases, search engines and subscribers. The digital duopoly of Facebook and Google now command 56.8 percent of the $107 billion U.S. digital media market, a 1.7 percent drop in share, but still growing their revenue on the strength of overall market growth of 19 percent. Despite congressional action on their misuse of consumer data, advertisers have no immediate plans to pull back spending. Amazon has now become the third largest digital

38 publisher at 4.2 percent and is projected to hit 7 percent by 2020. For influencer campaigns, Facebook-owned Instagram will remain the key platform while runner-up Snapchat is projected to grow from $662 million to $1.2 billion by 2020, followed by Pinterest, currently at $552 million and projected to hit $1 billion by 2020.

TV Advertising

Broadcast ad revenue increased in 2018; after adjusting for election spending, the factor is Connected TV and Over-the-Top approximately 9 percent. Connected TV and (OTT) devices are transforming the Over-the-Top (OTT) devices are transforming the traditional television market and traditional television market, increasing household are projected to account for 50-plus engagement. Although still nascent and percent of all TV ad views by 2022. expensive, OTT and connected TVs are projected to account for 50-plus percent of all TV ad views by 2022.

Media Agencies

Many advertisers are spending well more than 30 percent of their ad budgets on digital media. Media shops, typically the main profit drivers (more than 20 percent) for holding companies, will face market share pressures due to several factors. Management consultancies are now offering programmatic media buying services, in addition to auditing and pitch management. Agencies see this as an unfair advantage and a possible conflict of interest, as their competitor in one room may be the auditor in another. From 2020 onward, we anticipate more management consultancies moving into this space, leveraging both their expansive tech credentials and “trusted advisor” status as a point of difference and operating on semi-transparent to opaque trading models. We do not predict any short-term downward impact.

Pricing for good-quality digital inventory or audience is inflationary; we expect inflation to be in the range of 6–11 percent versus 2018 across a mix of large, developed (U.S., Germany, U.K.) and developing markets (China, India). Media auditing, in its current incarnation, will be a service in decline, as the old model is becoming gamified by big agencies hiring teams of ex-auditors to beat the scoring methods.

39 Technology

Gartner predicts that “[by] 2020, customers will manage 85 percent of their relationship with a company through zero human interaction.” Marketing technology as a percent of total marketing budgets jumped from 22 percent to 29 percent in 2018, and CMOs cite technology, analytics and customer experience as the top three capabilities that will help them meet their goals.

The supplier landscape is complex and crowded. While it’s consolidating at the top, the tail is getting longer with niche solutions. Hiring competent digital marketers, coupled with a fully articulated marketing technology stack, is no longer a trend — it’s a necessity for bringing digital campaigns to life.

Voice Recognition, AI and Alternate Realities (AR)

Currently, 20 percent of all mobile inquiries are made by voice, and this figure is expected to rise to 50 percent by 2020. While the majority of voice inquiries are general in nature (e.g., weather or music), 28 percent are used for e-commerce transactions. Marketers face a unique challenge in reaching consumers who utilize voice-driven requests, as the device has primary responsibility for narrowing down proposed solutions or product suggestions.

AI and Alternate Realities (virtual, augmented, While the majority of mobile voice 360 cameras) will join creativity with technology inquiries are general in nature, to create faster, highly personalized ways to 28 percent are used for e-commerce reach consumers. AR has proven to be more transactions. practical and applicable; Facebook, Instagram, and Snapchat are the leading AR publishers and the user base is predicted to grow to 54 million in 2019. Virtual reality has stalled in gaining wider adoption, due to cumbersome equipment requirements and reduced capital investment.

Talent

In the new creative economy, where more than 37 percent of U.S. workers freelance regularly, shifts in the talent market have spawned new ways for marketers to source creative talent. Professionally managed freelance talent from online communities like Tongal and NewsCred can

40 produce high-quality content at 30–50 percent lower cost. Agencies like Oliver or NuFu specialize in building in-house agency models, helping their clients get the advantages of both internal and external shops.

Production decoupling remains a popular tactic for many marketers to lower costs, although most agencies are aggressively trying to discredit this approach as it results in major reductions in their business. However, in 2018, Procter & Gamble and the Campbell Soup Company generated headlines as they moved to achieve significant cost savings and operational efficiency through decoupling.

Agencies will continue to lead development of creative ideas and commercial campaigns, but to maintain flexibility and direction, decoupling and in-house agencies remain a viable solution for assembling the best talent mix with scarce resources.

CAPEX and Construction

Global investment in CAPEX witnessed healthy growth in 2018, driven by demand for equipment and services across most markets. Continued moderate growth of 3.6 percent is expected, positively impacting the sector’s revenue growth and profitability through 2019. However, recently introduced tariffs, tax incentives and labor market constraints have triggered a spiral of change throughout global CAPEX value chains. Uncertainty and price volatility will dampen the sector’s full potential in the near term. However, positive trends including encouraging advancements within emerging markets and the rapid adoption of disruptive IoT technologies will help drive growth.

Key Global Trends and Impact Analysis

As the U.S. and China place tariffs on several backbone products within the capital and construction sector (e.g., U.S. — 25 percent on steel and 10 percent on aluminum, China — 10 percent on LNG and chemicals), there will be uncertainty and delay in fresh capital investments. The tariffs planned for 2019 will considerably impact the bottom line of U.S.-based manufacturing

41 firms that depend on imports from, or exports to China. If firms can pass these increased production costs onto consumers and are able to restructure their supply base, they can maintain profit margins. Faster-than-expected interest rate hikes as well as normalization of monetary policy in the U.S. and the Eurozone will lead to a shift toward rental and lease businesses — as higher prices could make refreshing equipment fleets an expensive proposition.

While additional production capacity in the U.S. and China stalls, 2019 will see corporations realign their strategies to focus on existing production facilities and diversify their manufacturing footprint to new emerging economies. For example, Toshiba is planning to move industrial tooling production from China to Thailand, while Panasonic is relocating production of car electronics to Thailand, Malaysia and Mexico. As supply chains diversify to hedge the risk of tariff impacts, manufacturing capacities will see unprecedented growth in emerging economies (SEA/ASEAN).

In 2018, large corporate tax breaks led to a spike in investments in both CAPEX and working capital by major firms and stimulated the U.S. economy, which is reflected in Q2 and Q3 GDP numbers. The U.S. economy has historically low unemployment, which is creating shortages of labor and putting upward pressure on wages in some key areas like construction and engineering. In 2019, the engineering services outsourcing industry will experience further growth from its current CAGR of 30 percent. The U.S. tax overhaul will encourage more U.S.-based manufacturing with a focus on high-tech, low-touch automation that hedges against rising labor costs and labor shortages caused by tightening immigration policies.

2019 Forecast

The rising cost of steel components used in construction (up ~13 percent year-over-year in 2018) and the shortage of skilled workers in the U.S. have especially impacted the construction sector. As higher raw material and labor costs are passed on to builders and intermediaries (contractors and subcontractors), who then offset the cost increases with higher pricing, the cost of construction projects is increasing 1–2 percent.

Market reaction to date is for continued growth of leased spaces rather than new construction. Correspondingly, construction volume is expected to slow down in late 2019, alleviating price pressures to some extent.

42 Healthy demand for equipment will continue in 2019, albeit at a slower rate. As steel accounts Manufacturers across sectors are for approximately 10 percent of equipment increasingly relying on AI, big data, manufacturers’ direct costs, sectors across RPA, IoT, virtual reality, distributed capital equipment (automobile, aviation and manufacturing and 3D printing to electronics) will encounter a price increase, and make processes more agile, accurate, consequently see a diversification in their supplier efficient and safe. base for procurement. In some categories such as construction equipment, demand will continue to be strong and OEMs will be able to retain their profitability. Innovations in the packaging equipment industry, such as flexible packaging and track & trace technologies, will continue to fuel healthy growth with net sales increases of 5 percent expected in 2019.

Manufacturers across sectors are increasingly relying on AI, big data, RPA, IoT, virtual reality, distributed manufacturing and 3D printing to make process systems more agile, accurate, efficient and safe. These innovative technologies, together labeled as “Industry 4.0” or “smart automation,” integrate systems and functions within the manufacturing environment. Smart automation creates self-governing intra-plant systems, remote maintenance, energy- efficient operation and process quality optimization. Emerging technologies such as building information modeling, modular construction, use of specialized robotics, augmented reality and prefabrication will also continue to transform the construction landscape in 2019. The smart factory market is forecast to grow 9 percent in 2019 and will be a $200 billion market by 2022.

MRO

The dynamics of MRO demand and supply are closely correlated to levels of industrial production. While global GDP growth will likely remain steady thanks to personal consumption, we are anticipating a small dip in manufacturing output growth driven by trade disruption and lower-than-anticipated investment and output in emerging markets. The MRO category, which has grown to approximately $610 billion during the

43 period of global economic expansion, will likely revert to a more moderate pace of growth in the The most prominent trends for 2019 year ahead. revolve primarily around MRO supplies and include the impact MRO services will be subject to the same macro of trade disruptions, 3D printing, conditions impacting the global labor markets. and the disruptive effect of Both low-skilled and specialized maintenance Amazon Business. services will be costlier and more variable, given the tight labor conditions in North America and Europe in conjunction with rising wages in Asia-Pacific. This will drive selective insourcing for business-critical requirements and further catalyze the investment in robotics and automation for applications ranging from industrial cleaning to condition monitoring.

For those organizations that do not identify MRO-related processes as a core competency, wholesale outsourcing will present a viable alternative to direct investment in people and technology. We project the MRO integrated supply service category, and its many permutations, to grow significantly in 2019 across mid-market manufacturing firms in North America and across manufacturing enterprises of all sizes in EMEA, LATAM and APAC. The MRO integrator model has largely become saturated among the North American operations of major multinationals. With this operational stability achieved, these firms will place an increasing focus on real-time data visibility, predictive analytics, and labor automation with their integrated supply partners.

The most prominent trends for 2019 revolve primarily around the MRO supplies category and include the impact on supply chains caused by trade disruptions, mainstream adoption of 3D printing, and the ongoing disruptive effect of Amazon Business. Each of these themes and associated implications for 2019 are explored in detail below.

Tariff/Trade Barriers

A 10 percent tariff has been applied by the U.S. on a wide variety of goods. This tariff is expected to increase to 25 percent starting in January 2019. MRO distributors have navigated the tariff situation so far without any major reduction in profitability through efficiency improvements, use of operational best practices, and the provision of add-on services to customers. The persistence or

44 further escalation of these tariffs will create strains on manufacturer and distributor profitability in 2019. The consequence will likely be a list price revision, proportionate to the impact of the tariffs. Commodity MRO parts with high steel and aluminum content will be subjected to a greater price impact as compared with specialized MRO parts or OEM parts.

3D Printing

3D printing is a trend that has progressively gained momentum and will definitively change the way manufacturers design, make and repair spare parts. Instead of maintaining base stock levels of low-turning inventory, companies will directly 3D print spare parts when needed. The use of this technology will contribute to a reduction in production cycle times and inventory, labor and shipping costs. It will improve part availability at the point of use, and in general increase the number of spare parts options available. This technology also has the potential to enable buyers to directly produce some types of non-proprietary OEM spare parts that they would otherwise have been purchasing directly from OEMs at higher costs.

Customers can either have 3D printing technology at their own location, and print the required products themselves, or they can use the services of a third-party 3D printing provider that can produce the required parts according to the OEM’s design. Using this technology, buyers can also reverse integrate through in-house mold construction and rapid prototyping. Other than creating spare parts that are not readily available, 3D printing can also be used to recreate molds, templates or tools used in manufacturing. As this technology becomes more prevalent, MRO supplies manufacturers will need to develop forward-looking and innovative solutions to combat the unsanctioned utilization of proprietary designs.

Amazon Business

Amazon Business has already disrupted the MRO distribution landscape and is expected to make further inroads during 2019. Amazon’s scale of operations and offerings has significantly increased in the past several years. In the year ahead, this will drive supply chain leaders to reevaluate where Amazon Business can fit into their overall MRO distribution strategy.

There are several reasons why this model will continue to grow and disrupt the established market leaders. Amazon operates with thin margins and offers competitively priced products. Amazon’s

45 platform also has specialized seller options, such Amazon Business possesses an as minority-owned, women-owned and small extensive geographic footprint and an business, which cater to customer organizations’ impressive number of seller options, specific internal targets. Amazon Business which will continue expanding. possesses an extensive geographic footprint and an impressive number of seller options, which will continue expanding. Some products may even be available from third parties directly through drop-shipping.

Several challenges, however, that will slow the adoption of Amazon Business include:

• Weaker relationships with manufacturers as compared with seasoned distributors

• Less availability of training, technical expertise and consultative support for complex products

• Lack of associated inventory management support

Despite these constraints, procurement leaders are continuing to find a place for Amazon Business in their overall supply mix, particularly via the spot-buy channel.

Packaging

Macroeconomic movements such as trade wars, a renewed focus on sustainability, and the unrelenting rise of e-commerce will continue to break traditional market dynamics in packaging and challenge buyers of packaging to take a closer look at their existing practices. Buyers will be encouraged to innovate by working closely with the supply market to stay profitable.

Plastic

Consumer preferences and governmental policies will continue to be the primary influencers of plastic packaging demand. In 2019, the phased ban of single-use plastics across the globe will drive down the overall demand for plastics, as 12–16 percent of total industry revenue comes from plastic bags. Now that the European parliament has approved the ban on single-use plastics, others are soon likely to join the bandwagon. However, the increasing demand for flexible and functional packaging, used largely in the food & beverage industry, will keep the growth story intact. Additionally, innovation is expected to increase the penetration of plastic bottles and

46 pouches for certain medical applications. Overall, the industry is expected to grow at a modest CAGR of 3–4 percent and cross $350 billion in 2019.

2018 alone witnessed more than 10 major M&As in this space, and a similar trend will continue into 2019. Diversifying product portfolios and increasing share in a fragmented market will be the key drivers. On the pricing front, crude oil prices are expected to drop marginally from current levels, thus reducing plastic raw material prices by an average of 2–3 percent.

Sustainability will continue to influence decisions of plastic packaging users. The industry will witness an increase in recycling, with firms and brands looking to optimize their own packaging designs as well as pushing their suppliers to adopt environmentally friendly practices.

Paper

Demand for paper packaging, especially corrugated shippers and paperboard cartons, will continue to rise due to a combination of e-commerce, rising middle-class disposable income in emerging markets, and renewed focus on sustainability leading to shifts away from plastic. The industry will continue to witness consolidation among major players (don’t be surprised if International Paper renews its push to acquire Smurfit-Kappa after the WestRock-KapStone merger). This points toward ongoing and significant cost increases. While some additional supply may come online as graphic paper demand by magazines continues its steady decline, most paper mills are simply being shuttered as the conversion to packaging proves cost-prohibitive and vertically integrated market leaders are comfortable with the tighter market.

To counter price increases and optimize usage, buyers should leverage value engineering and right-sizing specifications. Innovative print technologies, such as HD flexography and digital printing to replace rotogravure and offset lithography, can help reduce cost and lower minimum- order quantities. Large buyers can also take control of the fiber supply chain, thereby utilizing mills outside the vertically integrated converters, such as Metsä Board.

47 Metal

The U.S. metal packaging industry, one of the biggest consumers of imported metal, took a big hit with the June 2018 announcement of 25 percent steel and 10 percent aluminum import tariffs. While the immediate impact was an 8–10 percent increase in metal can costs, prices have since receded somewhat. Yet structural problems in domestic industries have persisted. A very modest increase in domestic production (month-on-month 1.3 percent for steel and 3.4 percent for aluminum), multiple delivery and quality issues, and lack of capabilities to meet specific requirements of high-grade metal all added to the difficulties of U.S. metal can makers, eliciting different reactions — some have swallowed the immediate price increase, a few have scaled down domestic operations and plan to shift production overseas, while the rest have reached out to the U.S. Commerce Department anxiously seeking tariff exclusion. The recent respite, created by the exemption of imports from Japan and Thailand, has brought moderate short-term relief.

Steel prices are expected to further soften in the short term due to U.S. import cuts; however, prices are projected to rebound in the medium term, driven by an overall positive demand outlook led by emerging markets. The steady-state scope and extent of tariffs is uncertain at best, but it’s unlikely that the overarching global shift toward protectionism will reverse any time soon. Thus, metal can buyers should look to cover short- and medium-term requirements when metal prices revert to support levels and continue evaluating potentially cost-effective alternatives and designs for the longer term.

Chemicals

The chemicals sector had a very strong 2018 on the back of a rebound in the oil markets coupled with favorable policy changes that aided the industry in both developing and developed regions. The U.S. witnessed stronger than anticipated growth — and profits — due to favorable manufacturing policy changes, growth in the emerging markets and favorable shale gas economics. China, on the other end of the spectrum, saw a continued slowdown in its economy in 2018. Stricter environmental regulations led to a series of permanent shutdowns for many local chemical producers. The nascent trade war with the U.S. resulted in even more volatile supply chain economics and declining domestic output.

48 2019 market conditions will be driven by two As trade tensions rise between major events: the U.S.-China trade war and Brexit. the U.S. and China, there will be As trade tensions rise between the U.S. and wide-ranging implications for the China, there will be wide-ranging implications chemicals sector. for the chemicals sector. This, along with the uncertainty around the U.K.’s separation from the EU trading bloc, will likely have significant impacts on the overall health of the industry.

U.S.-China Trade War

China is the biggest trading partner for the U.S. chemicals industry, and the U.S. was expecting to export significant volumes of polymers to China before the trade tariffs went into effect. Much of this growth may now be in jeopardy, and we expect two likely consequences arising from these increasing supply chain costs: First, polymer exports of Gulf Cooperation Council countries will see a significant rise in 2019, as these countries have long been waiting to tap into the Chinese markets. Second, U.S. sellers will be on the lookout for alternative markets to sell any resulting oversupplies, likely targeting the emerging markets. Plastics would be the hardest-hit commodity sector because of this trade war, which will translate into lower domestic prices.

Brexit

The European chemicals industry has been slowly bracing for Brexit, and uncertainty will continue to be the buzzword for the general macroeconomic climate in the U.K./Europe. The fate of Brexit will be very relevant for the chemicals industry, especially regarding compliance with REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) regulations. Europe overall is the U.K.’s most important trading partner — accounting for over 50 percent of the U.K.’s exports and around 70 percent of imports for many important chemicals.

A downside risk to a no-deal or “hard exit” would be a disruption in trade with EU partners due to an unclear framework for trade agreements and regulatory compliance. Large U.K. consumers

49 of chemicals, petrochemicals and plastics are advised to maintain sufficient inventories to cover for the short term in case of a hard exit. Polyethylene and polypropylene are expected to face the maximum impact if a deal cannot be reached.

Additionally, newly introduced EU regulations on single-use plastics across Europe will drive lower demand and a shift to sustainable substitutes in these markets, and may signal a broader trend globally regarding the reduction of disposable plastics.

In 2019, the Asian market will drive changes in the chemicals sector. Asian chemical factory output will continue to decelerate in the short term as the domestic economy slows down and impacts of the trade war take root. Overall, chemical production as measured by the PMI is expected to remain low compared with historical levels across China, South Korea and Indonesia. However, India, Malaysia and Vietnam are forecast to experience net growth in consumption. The stricter environmental policies and pollution crackdown across China will result in a temporary oversupply as firms continue to take out excess capacity and shutter unproductive plants. This is expected to affect select commodities such as maleic anhydride, melamine, and caustic soda/chlorine in China.

Commodity Outlook — 2019 Price Trends, Compared With 2018

Commodity U.S. Europe Asia

Ethylene Drop Stable Increase

Propylene Stable Stable Increase

Polyethylene Drop Stable Increase

Polypropylene Stable Stable Increase

Caustic Soda Increase Increase Increase

Chlorine Increase Increase Increase

Sulfuric Acid Increase Increase Increase

PET Stable Stable Stable

Methanol Stable Stable Stable/Marginal Drop

Titanium Dioxide Stable Drop Stable

Table 4 Source: GEP

50 2019 will witness a global realignment of trade flows in the chemicals sector, with South Asia, Europe, and the Middle East targeting China for exports, and the U.S. looking toward Europe, South America and parts of South Asia as new markets and energy partners. The EU parliament has set the guidelines for plastics recycling, and the plastics sector must respond with new compliance strategies and react to potential revenue declines. China’s tougher-than- expected crackdown on pollution levels will be a tipping factor in the overall performance of its manufacturing industry. Commodity prices are, on balance, set to rise in 2019 with the top commodities to track being caustic soda, sulfuric acid, titanium dioxide, silicones, and plastics.

All said, 2019 will be a highly impactful year and may lead to longer-term paradigm shifts as the chemicals supply chain adapts to fast-changing market conditions and volatile relations between the sector’s top two trading partners.

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