I wanted to share with you some information that just came into my possession. I have a colleague who is a heavy hitter in the supply chain management/warehouse management sphere. By “heavy hitter” I mean that he has been in the field for thirty years and is a senior manager of a division specializing in that area of consulting. I don’t recall whether his title is Executive Vice President or President but it’s one of the two.
He told me several very interesting things. First, manufacturers have something like three months of parts inventory before they will need to idle plants because they don’t have the components they need to keep producing. In other words their supply chains are breaking down.
Second, many of those supply chains run through China and, well, they are presently not receiving what they have ordered from their Chinese suppliers. He broke out laughing when I suggested that what we’re hearing from the Chinese government may not be the 100% truth. The next few weeks should be telling. If the container ships aren’t re-supplying manufacturers here, the issues in China may be much, much worse than we have been led to believe. That is what the Japanese, for example, believe.
Third, he tells me that the prevailing wisdom in the SCM/WMS community is that JIT has been tested and found wanting, that supply chains, particularly supply chains that run through China, are presently seen as being far too long, and that many companies are entertaining the notion of localized production/localized supply chains of the sort that 3M has been using for some time. I’m a bit skeptical that a lot of production will return to the U. S. but I think that some will as well as to Canada, Mexico, and Central American countries.
In the same conversation I heard, from another colleague, that India’s recent “stay at home” directive is straining software development schedules. India does not have the infrastructure we have here and working from home there is a drastically different affair than it is here. Power failures are common and unpredictable. Internet bandwidth is strained. The laptops Indian developers are using may be underpowered for the sort of development that they’re trying to undertake. Tens of thousands of development projects may be affected.
Stay tuned.
At least for medical equipment — it will be localized around the globe.
What would be an improvement is both localized production AND agreements to distribute supplies to where it is needed in a crisis (like an outbreak in Europe, US sends our production there, and vice versa).
But the trust needed to distribute goods in a crisis is lacking — maybe even destroyed for decades by this crisis.
Since its anecdotal.
All of our companies are US based. One has international operations.
One has significant China exposure, supply and demand.
That one is actually doing quite well after a China slowdown. China is back up and shipping.
Our experience may not be typical as we have been America first for 25 years.
There is also an issue with the dollar shortage:
“Unlike many central banks, China’s doesn’t have a swap line with the U.S. Federal Reserve. So how far will the central bank go? There are other pressure points. The dollar shortage will hit trade credit, crucial for China Inc.’s exports and underlying businesses. In periods of dollar strength and shortage, this leads to outflows as overseas financing to buy Chinese goods dries up. As Rhodium Group’s Logan Wright says, “In the 2008 crisis, this was very severe as trade-credit liabilities were paid down and credit lines were cut.†This time, he says, a dollar shortage in this type of credit would probably lead to “a sharper-than-expected decline in China’s exports†over the next few months. At some point, the credit risk becomes entrenched in balance sheets and coming back is hard. The longer these dislocations last, the worse they get.”
https://www.washingtonpost.com/business/the-dollar-squeeze-is-coming-for-chinainc/2020/03/24/4b2cdbc0-6e23-11ea-a156-0048b62cdb51_story.html
So even if we go back to work now we won’t be able to work very long because we run out of stuff from China?
” I’m a bit skeptical that a lot of production will return to the U. S. but I think that some will as well as to Canada, Mexico, and Central American countries.”
Me too. Look, China has issues. Our relationship with them has issues, but even if we fix all that I don’t see it materially making things better for Americans by very much. Will we be better off if our supply chains are spread over three (arbitrary number) countries rather than one. My guess is that Widget A is mostly made in one country, Widget B in another and Widget C in the third. It will be a bit less disruptive, maybe, but if we face a world pandemic again? Dont think so, and we wont see many of those jobs come back.
Steve
How can we know if supply disruptions from China are virus related or calculated? As a person with COPD, I’ve become aware that Mucinex AND it’s generics are only available from China. Do I think that will change? It should, but I no longer believe our administrative state acts in our interest. The CCP has known this for a long time and we are in trouble.
I’m more inclined to believe their will be a repatriation of manufacturuing capacity in the US. If we don’t, it’s our own fault.
The business I cited previously sources castings from China. One of those “icky†businesses chased away by the environmentalists. It’s within our control to deal with that through our regulations, or, as Dave has pointed out for years, preclude sourcing from a country without commensurate regulations.
If the US consumer just buys on price producers will be forced to low cost environments. That’s on us.
We can fight subsidized and restricted foreign trade practices. I know a president who advocates that. I know retired presidents who didn’t, and a candidate who doesn’t. That’s on us.
It’s hard for me to believe we can’t develop a list of strategic items that we don’t allow to be sourced from our enemies. Remember, China abrogated contracts and turned boats on the Pacific around during this crisis. If we don’t address that, it’s on us.
And so it goes. As we have seen, from party central in New Orleans or Ft Lauderdale, to a NYC health official telling NYrs in March (March!) to go out and live your life normally – nothing to worry about – Americans aren’t good at civic discipline. But it’s on us.
I think there will be some, yes, but I suspect that the first move will be to shorten supply chains to two or three days rather than two weeks and bring them nearer to hand. Because of lower wage rates there, that means Mexico is likely to get some of the benefit from that process.
From PD Shaw: “a sharper-than-expected decline in China’s exportsâ€
Which means, of course, that Apple, Walmart, Hewlett Packard, and many other businesses will have no product to sell. The quote seemed to imply only China would suffer.
Switching production out of China may be feasible in the long run, say the two to three years needed to build the factories and train the workers and managers, but it does the American worker no good at all. We are still in the same place, and still vulnerable to supply chain failures due to any sort of crisis.
The only viable solution is to force, by import bans and heavy fines, American companies to repatriate all their manufacturing to the US. This also will take two to three years, and it will increase prices significantly. The price increase is an insurance policy against this sort of shutdown happening again.
For those who think we are strong and China is weak, right now, today, we are in the same position vs. China as Japan was vs. us in 1940. We have a small industrial sector that produces only a narrow range of goods. Even Russia’ industrial sector is much more diversified than our, and China’s is huge compared to ours. In any conflict, we have paper money and empty shelves, China (and Russia) has factories, workers, products. China (but not Russia) needs market, but they still have 1 billion people waiting to be lifted out of poverty, 1 billion people who could be customers of China’s factories.
China still needs trade to import resources, but I like their chances much better than ours.
PS. I grew up in Methuen, one of the old mill towns along the Merrimack. In the 50’s all those towns went belly up, and they still are, Lawrence is one of the poorest cities in America. In the 50’s the factories moved to the South to avoid unions. And that worked out OK for Southerners until the Wall Street financiers sold the factories to China.
” As we have seen, from party central in New Orleans or Ft Lauderdale, to a NYC health official telling NYrs in March (March!) to go out and live your life normally – nothing to worry about – Americans aren’t good at civic discipline. ”
And we had Trump saying it is under control, his minions saying we had it locked down and under control. There is plenty of blame to around, but only one person at the top. He has undercut and continues to undercut efforts.
“We can fight subsidized and restricted foreign trade practices.”
We have a lot more control, or should, over what we do rather than what other countries do. We are just going to play whack-a-mole jumping from country to country if we keep trying to alter the behavior of other countries. We should change our own policies and practices so that countries benefit from staying here. Have our own policies laid out that companies can leave the US to produce elsewhere only it benefits the company and also the US. Let’s start with critical supplies we need for defense and essential services.
Steve
Guarneri:
You maintain that the customer is king. I’m not so sure. A small example. Ten years ago a washing machine by Electrolux had an access door lower front to access, remove and empty the “coin trap” above the water drain pump. Customers were advised to empty it once a month. Today, there is not only no access door, but after a three hour disassembly, I find there is no “coin trap” at all. An unprotected, inaccessible pump.
Meaning every small item left in a pocket could very well cause a $300 repair bill. Customers don’t know this when they purchase the shiny new chrome “plastic” electronic display decorated unit.
Customers are chumps, too ignorant to be kings.
Grey
They know price.
Bob
The Wall Street financiers didn’t move factories to China. Large corporate did. Aided by government policy. It makes for good bar room talk. But if you want to effect change you need to focus.
Dave
I wouldn’t quarrel with the notion that we are back to Mexico. The pros and cons of that could fill quite a few blogposts.
Guarneri:
I get that but relying on an ignorant consumer led us to the incendiary Ford Pinto for a seven dollar production cost savings. And I also realize that gas tank mount was only one of hundreds of cost saving decisions made by ford for that model.
So, the free market leaves us with what for controls?
Class action lawsuits? Caveat emptor?
Well, shit.
Re: India and software dev
Before I retired six months ago, I remotely led a software development team based in Bangalore. It’s not just working at home that is the issue. Even at the office bandwidth was seriously constrained. Ironically, the last few weeks is the first time I’ve used Zoom with video on.
A well-prepared office has backup power and alternatives for Internet connectivity that aren’t possible when working from home. In other words the risks can be mitigated.
However, mitigating risks takes money. A prudent manager takes those costs into account when making strategic decisions. Prudent managers are hard to find. The greater likelihood is that only the nominal savings without considerations like risk mitigation or productivity being taken into account. And that’s why Boeing off-shored their software development.