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Our work helping companies reshore manufacturing has increased significantly since the beginning of the trade wars, and now the pandemic. Reshoring is a hot topic in business, discussed in C-level staff meetings and Board meetings throughout America.

Reshoring often involves leaving China on a quest for finding another low-cost country or in re-patriating manufacturing to America. But extracting business from China, whether it is your wholly-owned foreign subsidiary (WOFE), a contract manufacturer, or a supplier, isn’t as easy as you might think.  There are a whole host of Chinese regulations, fees, and risks to consider.

I have written about this before, but lately, there seem to be a lot of companies making the same mistakes when trying to extract themselves from China. 

Your Supply Base

If you are manufacturing in China, your supply base for raw materials and parts is most likely also in China.  It is important to consider that when you are reshoring manufacturing, you will need to encourage your suppliers to reshore, too. The other alternative is to rebuild your supply base in the U.S. We coach our clients that this process can take 12-18 months.  Until then, you will have to import production parts and may have to pay the 301 China penalty tariffs on these imports.

IP Theft In Other Countries

If you are looking to run away from IP theft problems in China, beware of what you are running toward. IP theft isn’t an isolated problem just in China. Many countries throughout the world have weak IP laws that won’t protect you. Counterfeit products come from countries throughout Asia, the Middle East, and more recently Africa. And if you haven’t registered your own Trademark in China, take note. Many Chinese companies will register your trademark and then use it after you leave the country, and there isn’t much you can do about it.

The manufacturing IP, tools, and molds you leave behind will likely be used to continue the manufacturing of your products when you leave. It’s going to be very difficult, if not impossible, to retrieve your tools and molds from a Chinese manufacturing site, even if you think they rightfully belong to you. Don’t think that just because you have shut down the production of your product, that the Chinese factory is simply going to “forget” how to make your product. They will probably continue to produce it and sell it in domestic and international markets – perhaps even competing with you.

Labor Contracts and Permits to Leave

You may also be required to file for a permit from the Chinese government to close your manufacturing operations. This could take several months and also require you to pay out all of your Chinese employees’ contracts before you go. This is likely to be a much more costly and lengthier process than you had anticipated. Sure, you could turn off the lights, lock the doors, get on a plane, and simply abandon your Chinese operations. But don’t expect to ever come back to China. You are likely to not be granted a visa or you might be detained when trying to visit China in the future.

The Chinese Government

The Chinese government may be reluctant to allow you to leave depending on the value they place on your technology.  If the Chinese government believes you are making products with a desirable technology or critical infrastructure items, they will try all possible tactics to keep you in China. They may not allow the export of your equipment, delay your exit permit, retain your computer systems, and refuse to release drawings and other IP.

The U.S. current unfavorable relationship with China doesn’t help. Retaliatory tactics by the Chinese may be deployed as a demonstration of strength in the Trade Wars, even though your company is not involved in the trade negotiations.

Identify All Risks

Before you leave China, be sure you have identified all of the risks of a new location as well as those of leaving your current manufacturing site.  Better yet, consider opening a second factory in a new location, without closing the old one, known as “China Plus One Strategy.” Be sure to get advice from a global supply chain consultant or a law firm with offices in the U.S., China, and your new location.

About the Author

Ms. Coates is the Executive Director of the Reshoring Institute and the President of Blue Silk Consulting, a Global Supply Chain consulting firm. She is a best-selling author of: 42 Rules for Sourcing and Manufacturing in China and Legal Blacksmith – How to Avoid and Defend Supply Chain Disputes  Ms. Coates lives in Silicon Valley and has worked with over 80 clients worldwide. She is also an Expert Witness for legal cases involving global supply chain matters.  She is passionate about Reshoring.

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China has the “Made in China 2025” industrial policy aimed at supporting the development of advanced manufacturing technologies.  Germany’s industrial policy aims for comparative advantage in the production of high-quality, internationally competitive manufactured goods. Japan’s industrial policy was devised after WWII to promote industrial development by cooperating closely with private firms.  Mexico’s industrial policy objective is to liberalize the industrial sector to increase industrial productivity and competitiveness.

American Industrial Policy?  Nothing, Nada, Nichts, Rien

America doesn’t have an industrial policy nor any national industrial goals.  We’ve been operating under the belief that the free marketplace would drive the need and approach for what to produce in America. It’s been all about supply and demand and free enterprise. But the global pandemic has been a wake-up call and once again raised the discussion about national industrial policy. Shouldn’t the U.S. government choose particular industries for targeted support?  Isn’t it in the national interest to support critical industries such as medical supplies and devices, telecom, rare earth elements, semiconductors, and steel?

There is strong criticism, particularly from conservatives, that an American industrial policy is an attempt to move toward socialism – that the U.S. government picking winners and losers disrupts the free market.  But based on what we have learned from the Coronavirus response, doesn’t it make sense for the U.S. government to take action to protect our vulnerabilities just as we do with farm subsidies?

The opinions on American industrial policy are changing.  The pandemic has uncovered our vulnerabilities to produce essential goods such as PPE and pharmaceuticals. But the pandemic plus the on-going Trade War with China has also exposed our vulnerabilities in defense equipment, telecom equipment, rare earth elements, and other industrial products.  We are exposed. We need U.S. government support to drive the development and production of these products in America.

What should be included in a national industrial policy?

A national industrial policy should include:

  • A well-defined and justified list of products to be supported – a “preferred list” of products. The criteria for being included on this list would have to be related to American essential, critical, and strategic products. An objective review and qualification process (non-political) would have to be established to make the selection fair and appropriate.
  • Price controls. Companies benefitting from a national industrial policy should sell their products at a cost-plus specific, regulated margin to protect against profiteering. An objective audit and oversight function must be put in place.
  • Tax breaks.  The U.S. government should provide tax incentives for companies producing products on the qualified list.
  • Low-cost loans. The U.S. government should provide low-interest or no-interest loans and grants to develop new technologies and products on the qualified list.
  • Land grants.  The U.S. government should provide temporary land grants and property grants to companies producing essential goods, with an ultimate payback period in the future.
  • Subsidies. The U.S. government should provide subsidies for the development and production of essential goods for key future technologies.
  • Training Credits. Companies should receive training tax credits for training or retraining employees for new required skills and new technologies.
  • Buy American. Current “Buy American” regulations should be enhanced and enforced so that local, state, and federal governments are required to always make a good-faith attempt to buy goods made in the U.S. before buying foreign goods.

 These kinds of policies will ring the alarm bells for some who believe in a completely free-market economy for America, with no interference from the government. But aren’t we already subsidizing farmers in this way? Americans’ health and safety are at stake and now is the time to consider a national industrial policy to support the needs of our citizens.

About the Author

Ms. Coates is the Executive Director of the Reshoring Institute and the President of Blue Silk Consulting, a Global Supply Chain consulting firm. She is a best-selling author of: 42 Rules for Sourcing and Manufacturing in China and Legal Blacksmith – How to Avoid and Defend Supply Chain Disputes  Ms. Coates lives in Silicon Valley and has worked with over 80 clients worldwide. She is also an Expert Witness for legal cases involving global supply chain matters.  She is passionate about Reshoring.

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There are persistent critical shortages of PPE supplies all across America and the shortages are becoming worse as the Covid19 virus spikes again in so many states.  Although toilet paper seems to be appearing again on grocery shelves, disinfectant wipes are still out of stock everywhere – after seven months of shortages (my pet peeve these days).  It’s just unbelievable that simple products cannot be adequately produced, fill the supply chains, and be available to consumers, even with the huge spike in demand. As a supply chain professional and consumer, I am confounded – how difficult can it be? Production of these products just isn’t that complex.  Surely this is an indication of broken supply chain processes and inflexibility of producers.

Laptop Shortages

I was surprised to learn from a colleague working in the computer industry, that there is also a huge shortage of laptop computers. Keeping up with demand has been a real struggle for months.  A lot of the additional demand is coming from people who are now working from home, and from school districts attempting to buy low-end laptops for students who would not otherwise have access to internet learning.  Laptop shortages are slightly more understandable as computers are more complex, highly-engineered, and component parts are globally sourced.  But even here, it is astonishing that after seven months, supply cannot keep up with demand.

Covid19 hit China first and caused disruptions in factories all across China in the first few months of 2020. The last big shipments of laptops were shipped towards the end of February as computer manufacturers used up their on-hand parts inventories are could not source any more parts from shut-down factories across China. Electronic parts factories ground to a halt as the Chinese government tried to control the spread of the virus. Factories started reopening on a limited scale in April. Meanwhile, increasing demand, especially in the U.S., created enormous backlogs that are still unfulfilled.

Wake-up Call – We Must Do Better

These shortages, whether for simple or complex products should be a wake-up call for supply chain professionals.  We haven’t done our jobs effectively.  We haven’t adequately planned for “black swan” events or big swings in demand whether negative or positive.  We are failing or customers.

Now is the time to fix things.  Now is the time to imagine and plan for disruptions, identify risks, and have executable alternatives should disaster strike again.  It’s time to get serious and consider:

  • Supplier risk – is the supplier sole-source and there are no others? Or could we develop a second source?  Is the supplier financially viable and what are the warning signs when things are about to go bad? What other risks can be identified with suppliers (large and small) that make our supply chains vulnerable?  Is there software available that can help us?
  • Capacity risk – are you capable of scaling up should demand spike? Could you scale back, cut costs, and still survive when demand unexpectedly takes a nosedive? What is your Plan A and Plan B and Plan C for downsizing or upsizing? Could you use contract manufacturers to address positive or negative variability in demand?
  • Disaster risk – what is the risk of a natural disaster such as a fire, flood, hurricane, or earthquake?  Some of these things are predictable based on weather forecasts.  But what about a pandemic?  Simply because a disaster is unpredictable, doesn’t mean you should ignore planning for it. What is your Plan A or Plan B or Plan C for “black swan” events?
  • Political risk – politicians can cause all kinds ofhavoc and risk, and elections typically signal changes in industrial policies.  Be sure you identify and include the political risk of every country where you source or operate. Consider alternate global manufacturing locations, including the US, to ramp up or ramp down as needed.

Last, be sure you are updating your plans annually.  Talk to other companies in your industry about their disaster planning.  Look for best practices and good ideas from other companies and incorporate these into your own plan. We must do better to prepare for the next disaster because it will surely come.

About the Author

Ms. Coates is the Executive Director of the Reshoring Institute and the President of Blue Silk Consulting, a Global Supply Chain consulting firm. She is a best-selling author of: 42 Rules for Sourcing and Manufacturing in China and Legal Blacksmith – How to Avoid and Defend Supply Chain Disputes  Ms. Coates lives in Silicon Valley and has worked with over 80 clients worldwide. She is also an Expert Witness for legal cases involving global supply chain matters.  She is passionate about Reshoring.

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Hong Kong has always been one of my favorite cities on earth, with its wonderful airport, gorgeous views of Victoria Harbour, the Star Ferry to Kowloon, and the bustling business environment. The energy level in the city is truly remarkable.

If you are doing business in Asia, you are probably using Hong Kong as the airport to make flight connections, manage cargo consolidations, an efficient seaport, and for global financial operations.  Since WWII, Hong Kong has been an established city for international business and financial headquarters.

As a former British Crown Colony, Hong Kong operates under traditional British common law and retains this system even as a Special Administrative Zone of China. Hong Kong has long been known worldwide as a welcoming and very stable democracy – the gateway to Asia. But things are changing rapidly.

On May 28, 2020 China’s primary legislative body, the National People’s Congress (NPC), passed a new law that will allow Beijing to tighten its authoritative hold over Hong Kong. This national security law has bypassed Hong Kong’s own democratic legislative procedures, and is likely to have serious and lasting political and economic repercussions worldwide. In fact, over the past year, protests and riots in Hong Kong that damaged subway stations, many buildings, and resulted in many injuries and arrests were in response to Beijing’s intervention in Hong Kong affairs. This new legislation goes even further and permits Chinese security services to operate in Hong Kong for the first time.  Many Hong Kongers fear that the People’s Liberation Army could be deployed onto the streets should protests resume, just as they were in Tiananmen Square in 1989.

Hong Kongers are fierce protectors of their democracy, their rule of law, and their lifestyle, so China’s intrusion into the city’s operations has met with heavy resistance. With the passage of this new law,  Hong Kong will be subject to the same standards and definitions of criminal behavior currently operating inside mainland China under communist rule.

President Trump has announced that the new Chinese national security law will require the United States to remove Hong Kong’s special economic status granted under American law. This special status has supported democratic free Hong Kong for years with trade and economic treatment similar to America’s closest allies. It is unclear why Trump would favor Xi Jinping’s government instead of our long and friendly relationship with Hong Kong, particularly in light of Trump’s very adversarial trade war with China. The relationship between China and the US is currently tenuous and confusing.

In response to the new regulations, new waves of protest by Hong Kongers have again become violent.  Residents are threatened by new laws that could obstruct the freedom they have enjoyed over the past 25 years as China observed the “one country, two systems” approach to governance. The first sign of this change was the refusal of permits for Hong Kongers to commemorate the June 4 Tiananmen Square memorial. Defying the refusal of permits, Hong Kongers gathered anyway to remember the massacre.

Britain has signaled its willingness to take immigrants from Hong Kong with a path to British citizenship, in response to the new Chinese law. Hong Kong was a British Crown Colony for 156 years and the ties between the UK and Hong Kong run deep. But it is unlikely that many Hong Kongers will move from their home.

It is likely that supply chain operations will again be disrupted at the Hong Kong airport and seaport. Last year’s protests shut down the airport off-and-on for weeks.  Some cargo consolidations moved to the Guangzhou Baiyun International (Canton) airport. International banking may also be affected including Letters of Credit and deposits to international bank accounts.

The risks of doing business in Hong Kong should be closely monitored. Stay tuned, and pay close attention to this difficult situation.

About the Author

Ms. Coates is the Executive Director of the Reshoring Institute and the President of Blue Silk Consulting, a Global Supply Chain consulting firm. She is a best-selling author of: 42 Rules for Sourcing and Manufacturing in China and Legal Blacksmith – How to Avoid and Defend Supply Chain Disputes  Ms. Coates lives in Silicon Valley and has worked with over 80 clients worldwide. She is also an Expert Witness for legal cases involving global supply chain matters.  She is passionate about Reshoring.

                     

Science_Wuhandebbunking-1201285261America is starting to awaken to the threat of the coronavirus pandemic in humans. For global supply chains, the worst is yet to come. We are already experiencing shortages of consumer goods as Americans stock up on supplies. This is just the beginning.

Inventory Is Running Out

Most industrial companies have 30-60 days of parts and raw materials either on hand, in-transit, or obtainable on short notice. After these supplies run out, we will start to see shortages of finished products as well as parts needed to produce other goods. Shortages will start to become more evident toward the end of March and beginning of April. Production in some non-Chinese factories will have to be put on hold for lack of parts. Partially finished products will remain in suspension until all parts are available to build finished products.

Many companies, especially small and medium-sized businesses do not have well-developed alternate suppliers outside of China, and finding new suppliers, qualifying them, and scheduling production is no easy task. For complicated parts, this can take 12-18 months, and it is not an inexpensive process. In some cases, currently, there are no capable suppliers anywhere in the world outside of China.  Brand new suppliers will have to be identified and then developed. Some companies are pressing their engineers to redesign parts that can be sourced in the U.S., or at least outside of China. Other companies are giving 3D printing a serious try for the first time.

Extended Factory Closures

Savvy businesses that have been sourcing products from China, know that they must build inventory just before Chinese New Year when most Chinese factories shut down. This year, Chinese New Year was immediately followed by the forced lockdown of Wuhan, China and most of Hubei province. Factories were closed throughout the region and that resulted in almost immediate shortages in the automotive and metals industries. Then the Chinese government, in an effort to control the virus, shut down factories in other areas for an additional two weeks. After the long break of Chinese New Year plus the forced extended factory closures, many Chinese migrant factory workers were reluctant to return to work.

To make matters worse, migrant workers traveling from infected areas were required to be quarantined for 14 days. When some of the factories finally reopened, workers weren’t available, so production has been limping along. Many of these re-opened factories are only operating at 20-25% of normal. My sources tell me that about 50% of the factories in China are still closed and will remain so for some time.

If your company is trying to get production squeezed out of a partially-functioning factory, a potential strategy is to offer a monetary incentive. Paying a production premium of 15-20% may be enough to prioritize your production to the front of the queue. Offering more business in the future as an incentive probably won’t work, as Chinese manufacturers are aware that most of their American customers have plans to source elsewhere, outside of China. They won’t believe your promises of future business. But monetary incentives are almost always successful. Beware though, we are hearing stories that some factories may request additional up-front funds from you, then disappear or simply shut down the factory and walk away with your money.

Increasing Cost                                       

The rising cost of air and ocean freight out of China is another consideration. Airfreight rates have soared with the cancellation of American, Delta, and United flights and the loss of their belly cargo space. Demand has also increased as U.S. companies scramble to get products out of China.

The slowing of factory production has resulted in cancellations of container ship sailings from China, which in turn has caused an imbalance in containers moving between the U.S. and China. Sea-Intelligence reported last week that a total of 77 container-ship sailings had been blanked (canceled) due to coronavirus — 48 trans-Pacific and 29 Asia-Europe. Surcharges for rebalancing empty containers are beginning to emerge.

When markets begin to eventually recover, it will be some time before operations return to normal and the workers return to their port jobs.

Make Your Supply Chains Resilient

Some companies started planning alternate supply chain strategies when the trade wars didn’t end as expected. Other companies decided to wait it out and maintained their Chinese suppliers. The coronavirus has been a double-whammy clearly demonstrating the need for alternate strategic supply chain planning now and in the future.

We have been working with clients to identify new locations for factories (including the US) and finding new suppliers in other low-cost nations. Mexico has become a viable cost alternative to China. Even if you chose to continue to manufacture and source in China to serve your Asian customers, developing alternate plans and developing alternate suppliers are good ideas to mitigate risk.

 

About the Author

Ms. Coates is the Executive Director of the Reshoring Institute and the President of Blue Silk Consulting, a Global Supply Chain consulting firm. She is a best-selling author of: 42 Rules for Sourcing and Manufacturing in China and Legal Blacksmith – How to Avoid and Defend Supply Chain Disputes  Ms. Coates lives in Silicon Valley and has worked with over 80 clients worldwide. She is also an Expert Witness for legal cases involving global supply chain matters.  She is passionate about Reshoring.

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Manufacturers are beginning to panic.

Two weeks ago, I wrote about the Coronavirus with, at that point 100 deaths, and the beginning of shipping and logistics issues with all products coming out of China. Since then, the crisis has geometrically progressed and nearly 1000 people have died, and 40,000 infected people are being treated. The infection has spread worldwide, to include Silicon Valley where I live.

No vaccine is currently available.

In parallel with the spread of the virus, Chinese New Year celebrations across the globe were banned or subdued as governments recommended against public gatherings. Chinese factory closures for the holiday were extended until today, Feb 10 or longer, depending on the perceived threat.  Airlines including American, United, and Delta have suspended flights. Restrictions on ship dockings are rising.

Supply Chains within Supply Chains within Supply Chains

Panic is beginning to rise in global supply chains. Suddenly, all supply chains seem vulnerable because so many Chinese supply chains within supply chains within supply chains rely on each other for parts and raw materials.  That tiny valve that is inside a motor that you are sourcing for your US-made product is made in China. So are the rare earth elements you require to manufacture magnets and electronics…and on and on. Purchasing departments declaring that they have alternate non-Chinese suppliers may be naïve in thinking that their domestic suppliers don’t rely on parts from China and that shortages are imminent.

With no parts being received from China, a Hyundai manufacturing plant in Korea had to suspend operations.  This is one of the first to declare an interruption in manufacturing and we are likely to see many more over the coming weeks. In an effort to deploy Lean Manufacturing techniques, manufacturer’s inventories are thin and many parts arrive just-in-time. The automotive sector is particularly vulnerable because Wuhan and Hubei province are the auto parts and auto production region of China.

Closures of factories and suspension of cargo movements

Several of my clients are busy trying to figure out how to get shipments out of China. Airlines and air cargo operations that have been on a restricted holiday schedule, are now completely suspended. Many of the factories and logistics warehouses are on extended leave, not only in Wuhan, but also in Guangzhou, Shenzhen, and Shanghai. Hong Kong, with recent protest problems of its own, is also restricting incoming people and shipments from China and outbound flight operations. Some factories are being ordered to stay shut.  Workers are afraid to go back to work even if their factory is open.

Some companies are trying to source parts to stock up on inventory, to try to outlast this critical virus period. This, in turn, will eventually cause shortages of all kinds as companies pay premium prices and hoard parts.

Even if some parts start to trickle out of China, enhanced screening for the virus at seaports, airports, and all China border crossings are likely to cause long delays. How long before all the factories come back to life and global logistics are running smoothly is anybody’s guess.

Plan B and Plan C

I am hoping that this round of risk in your global supply chain, is yet another incentive to have your alternate plans developed and ready to go. If you are ready to execute your Plan B and your competitors are not, you have a competitive advantage.  If they are ready and you are not, your company loses.

It’s time to worry and plan for disasters like the Coronavirus, trade wars, and global warming. They will all affect your supply chains. If you are already working on alternate plans, review them again and add detail and then give them a test.  Make sure all your alternate plans will work.

We have been helping companies with their global tariff strategies because of the trade war and the resultant economic emergency. The Coronavirus is causing a different kind of economic crisis that is even more urgent.

We are being told not to panic because this virus so far, has resulted in far fewer deaths than the flu. But it is time for businesses to raise the threat level for their supply chains and take action now.

 

About the Author

Rosemary Coates

Ms. Coates is the Executive Director of the Reshoring Institute and the President of Blue Silk Consulting, a Global Supply Chain consulting firm. She is a best-selling author of: 42 Rules for Sourcing and Manufacturing in China and Legal Blacksmith – How to Avoid and Defend Supply Chain Disputes. Ms. Coates lives in Silicon Valley and has worked with over 80 clients worldwide. She is also an Expert Witness for legal cases involving global supply chain matters. She is passionate about Reshoring.

 

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So, you agreed to take an intern from a local university this summer to help with the student’s supply chain and general business education.  But what do you do with them all day long for a few weeks?

The purpose of a student internship is to provide an experiential learning environment and hopefully for the intern to earn some extra cash in the process. To have a successful internship for the student, and at the same time provide benefit to your company, investment by both parties is required.

At the Reshoring Institute, we have hired 17 interns over the past few years from universities all across the U.S.  We have learned a thing or two about what makes a great internship and what makes ours so famously popular.

Create a Structure

First, it is so important to plan for and create a structure for the time the intern will be with you.  Students are used to assignments, explicit directions, outlines, frameworks, and time frames to complete their work.  Start with a structured approach that feels familiar to the intern but consider leaving some tasks and time frames open with some room for creativity.  At the Reshoring Institute, we use an on-line project management tool with assigned milestones and tasks. While we give our interns plenty of leeway to complete their research as their school schedule permits, we also have a weekly 30-minute structured conference call with each of them, to track their progress and together solve any issues. We try to create balance between discipline and freedom.

Provide Feedback

An internship is a learning experience and that means there are probably things your interns do well and some things they can do better. Don’t be afraid to provide a performance review several times during the internship to provide guidance and coaching.  Keep in mind, that these young adults may never have been exposed to a professional working environment and they may not understand business culture.  Even small things, like regularly checking their business email account and responding (at least once per day) are important standards to teach.  We have also coached students about dressing professionally, typically “business casual,” and sometimes about good manners in the workplace including improving their listening skills. We provide guidelines to our interns as soon as they are hired. They need to know our expectations and understand our high standards.

Writing Assignments

One of the most surprising things we discovered is the university student’s lack of basic writing skills. As a result of this discovery, we provide writing guidelines, spend time editing our interns’ work, and provide feedback.  We make sure our interns know that emails and other written work including spreadsheets, PowerPoint, and other documents represent their professionalism and should be well-constructed and error-free.  While these things might seem rather basic, we were surprised to find even graduate students rarely check their work.  We now have a policy that anything they write must be peer-reviewed before they submit it to us.

 

Give them Meaningful Work and Lots of Experiences

A university internship should be more than just a summer job; it should provide meaningful, insightful work that can help a student prepare for a profession in supply chain management. The internship should be designed with as much learning for the student as possible. This means a content-rich experience working on projects that lead to valuable results. The student is at your company to expand his or her knowledge, not to just answer the phone or work the front desk.  Take the student on plant tours, invite them to staff meetings, teach them to solve business problems, and expose them to how business decisions are made.

Often an intern returns to your company for a full-time job after graduation. Encourage the student to learn as much as possible. They may become your staff members of the future.

 

 

 

About the Author

Ms. Coates is the Executive Director of the Reshoring Institute and the President of Blue Silk Consulting, a Global Supply Chain consulting firm. She is a best-selling author of: 42 Rules for Sourcing and Manufacturing in China and Legal Blacksmith – How to Avoid and Defend Supply Chain Disputes  Ms. Coates lives in Silicon Valley and has worked with over 80 clients worldwide. She is also an Expert Witness for legal cases involving global supply chain matters.  She is passionate about Reshoring.

 

Once again, Trump has sounded the dog whistle of protectionist trade measures against China, with an Executive Order to find products to tax. It’s very likely that the tariff tax will be on imported technology products starting sometime in the next 60 days. In addition, Trump has asked for restrictions on Direct Foreign Investment by Chinese firms in the U.S.  Once again, it is unclear if the administration has any depth of understanding regarding what this will mean for American industry and American consumers.

Our global supply chains are an interwoven tapestry of parts, worldwide manufacturing, and global markets that cannot be easily unwound on a whim or to please a political base. Over the past 25 years, Americans in particular, have benefitted from inexpensive consumer goods, industrial products, and parts coming from China. China has benefitted too, lifting 120 million people out of poverty into the Chinese middle class and making China the second largest economy in the world.

But now, inciting a trade war seems to be the Trump Administration’s preferred strategy. Unfortunately, Wall Street doesn’t like it, American manufacturers don’t like it, and China has announced it will strike back. We saw this coming as I wrote about in my March 5, 2018 SCMR blog.

China has announced a $3 billion list of U.S. goods for possible retaliation in a tariff dispute with Trump. China released a statement on March 23 that said it is “not afraid of and will not recoil from a trade war. China is capable of facing any challenge and that if a trade war were initiated by the U.S., it would fight to the end to defend its own legitimate interest with all necessary measures.”  On Monday, China said that it will impose a 25 percent tariff on products including U.S. pork and aluminum scrap and 15 percent tariffs on products including sparkling wine, steel pipe, cars and foods including soybeans, grapes, apples, and walnuts.

Trade wars are not straightforward. In fact, China is likely to bite back where it really hurts America – in agricultural products. It is American farmers who will be damaged in return for Trump’s imposed U.S. tariffs on high tech products. The U.S.  proposed tariff list covers 1,300 items, including high-definition video monitors, electromagnets used in MRI machines, aerospace products, and other machinery. We have awakened the Trade War beast.

According to data from Bloomberg, U.S. stocks are on track to have their worst April start since 1929, at the beginning of the Great Depression. Wall Street isn’t pleased. Trump’s signing of the memorandum on the tariff plan triggered a market sell-off and a very rocky March.

And what about all those silk shirts and ties, and dresses and shoes with a Donald Trump or Ivanka Trump label coming from sweat shops in China? They are likely to be excluded from the list of new tariffs.  Should they be included later, the price of these goods will of course, increase for U.S. consumers.

“It is just unbelievable. It will do no good to the United States,” said a vice president of a leading Chinese TV set manufacturer. “The United States lacks a complete industrial supply chain for TV sets,” he said. TVs are not currently manufactured in the U.S., with the exception of some assembly operations for products sold at Walmart. These sets are assembled from imported parts. The impact to U.S. consumers will be significant.

Yep, no good will come of it. At the Reshoring Institute, we support the rebuilding of manufacturing in America through innovation, automation and localization. Trade wars are not a good way forward.

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Is This Another Smoot-Hawley?

There are economists who say that NAFTA has caused the loss of countless jobs to the lower-cost environments in Mexico, and that these jobs will come back in a post-NAFTA trade environment. They argue that instead of doing nothing, the US should take every opportunity to raise all import tariffs, eliminate trade agreements, and close the borders to immigrants and trade. This, some say, will make America competitive, even though there is no gain in productivity or cost reduction in American manufacturing.

What they may be forgetting is that the US has gone down this pathway before with the Smoot-Hawley Tariff Act of 1930, which raised tariffs on about nine hundred products Historians blame Smoot-Hawley for triggering the Great Depression of the 1930s. They point out that Smoot-Hawley caused sharp increases in consumer prices, which led to consumers buying fewer products, which in turn led to low demand, lay-offs, high unemployment, and ultimately, the stock market crash.

For sure, NAFTA has its problems. The import/export paperwork required to track goods moving across the borders and the associated record-keeping can be onerous. Special rules for truckers from Mexico have taken a toll on American truckers, and the effects don’t end there. But overall, most economists think NAFTA has had a net positive effect on the US economy.

Trade Wars

Another concern is the likelihood of a trade war with Mexico and other countries. If tariffs are raised on imports to the United States, or if the proposed Border Adjustment Tax is imposed, our trading-partner countries are likely to raise tariffs on imports coming into their countries. Take fruits and vegetables for example. More than six billion pounds of fruits and vegetables were imported from Mexico in 2015-2016. Mexico provides 70% of fresh fruits and vegetables consumed in the United States. Corn and soybeans from American farms move the other direction into Mexico. If a tariff is placed on fruits and vegetables from Mexico, and Mexico retaliates with a tariff of their own, American consumers will suffer from higher prices, and American farmers will find it harder to compete for business in Mexico.

Mexico and the United States trade much more than food products. In fact, industrial products are the largest sector for imports from Mexico. Manufacturing operations vary from Electronics Manufacturing Services (EMS), Contract Manufacturing (CMs), Original Equipment Manufacturing (OEMs), and Maquiladoras.

What’s Next?

A radical change to tariffs on Mexican imports and a renegotiation of NAFTA or outright withdrawal from the treaty could cause much turbulence in the US economy. It could disrupt cross-border supply chains and transform import and export patterns with Mexico. It is unlikely to improve heartland and rustbelt manufacturing jobs that Trump has promised his voters he would bring back. In fact, the United States and Mexico have such tightly interconnected economies that increased tariffs and trade barriers would likely end up causing more job losses all along the US-Mexico border.

And the turbulence doesn’t stop there. Americans will likely end up paying more for everything coming from Mexico or manufactured in higher-cost American factories.  Buckle your seatbelts.

 

I participated in the Women’s March on Washington last Saturday, January 21, 2017. I met my daughter and granddaughter from West Virginia and my grandniece from New Jersey, in Baltimore, the night before the march. This was an experience of a lifetime for all of us.

I left San Jose early Friday morning in route to Washington/Baltimore with a change of planes at DFW. As I was waiting to board at the gate at DFW, groups of women in pink hats started arriving and the mood and energy level changed. Aboard the plane to BWI, my entire row, the row across and the two rows behind me were people going to the Women’s March. Some women were accompanied by husbands, boyfriends and other men supporting the march. Many people (including men) were in pink knitted hats. Some people were giving out pink yarn bracelets. The excitement was mounting. People were energetic and chatty. Everyone had been to the Women’s March web site for information.

It used to be that demonstrations were spread by word of mouth. Take the Chinese students demonstration in Tiananmen Square in 1989, for example. A friend of mine was studying at Beijing University at the time. He heard from a friend who heard from a friend that students were gathering in the Square. There was no internet, cell phones or newspapers to encourage people to go. It was just people telling people. This is the way it was in the 60s and 70s, too. Just people telling people.

This time, word spread over the internet, on Facebook, Instagram, Snapchat and text messaging. The Women’s March had a web site established to sign up so they could get a head count and capture your information for future communications and donations.

Logos were designed and proliferated on banners, signs and t-shirts selling for upwards of $30 by some Chinese vendors. The buildup in the press and on-line was amazing and powerful.

On the morning of the march, we went to the BWI train station for the first MARC train to DC at 7am. I had purchased tickets the night before and thank goodness, because when we arrived at the train station, a little before 6am, there were already several hundred people waiting to buy tickets. We waited on the crowded platform, chatting with other groups from Florida, Texas, Kentucky and California. At 7am, the train came, but plowed right through the station without stopping. An announcer said that although there were only two stops before us, and there were five extra passenger cars on the train, the train was already full. He said that based on estimates, we would probably not get a train before noon. Disappointed, but not discouraged, we took an Uber into Washington instead, arriving in the city about 9am.

The Women’s March and Rally were supposed to start at 10am. It was quite obvious by 9am, that there were going to be way more people than had been anticipated. The official count was 500,000+ and several unofficial counts said 1.2 million. I’m going with a million – it certainly felt that way. There were people in pink hats everywhere, in every direction, on every street and in every driveway. People were sitting on ledges and leaning against buildings. We tried to move toward a jumbotron or the main platform but could not get anywhere close. We were shoulder to shoulder with no room to move in any direction.

At 10am the rally started, including speeches and performances from America Ferrara, Katie Perry, Madonna, Gloria Steinem, Amy Schumer, Alicia Keys, Michael Moore, Ashley Judd, Patricia Arquette, Gloria Allred, Angela Davis, Kamala Harris, Scarlett Johansson and others. We could hear, but could not see the speakers and performers.

After about two hours of speeches, the organizers announced that there were just too many people to march together and recommended the people in our area march forward down Independence Avenue, which we did. We were encouraged to leave our signs at the Trump Hotel or in front of the White House. It had been many hours since we left the hotel in the early morning, so we also waited in long lines for port-a-potties. We brought granola bars, nuts and water with us, thank goodness, because there was no way to get anywhere near to any restaurants.

We marched a couple of miles down Independence Ave. and toward the Capitol and chanted slogans with thousands of others. My favorite chant was “Show us what democracy looks like,” and the reply: “THIS IS WHAT DEMOCRACY LOOKS LIKE.”

At about 4 pm, we headed to the Metro to try to at least get away from the city. Again, it was jammed and after a few trains passed through the station, we managed to squeeze into a Bethesda train. This reminded me of trains in Japan, where you get pushed together by train officials until they can close the doors. We were all smashed together.

Officials who had organized the marches later reported 673 marches had taken place worldwide, with marches occurring on all seven continents, including Antarctica. In Washington D.C. alone, the protests were reported to be the largest political demonstrations since the anti–Vietnam War protests in the 60’s and 70’s, with both protests drawing similar numbers. The Women’s March crowds were peaceful, and no arrests were made in Washington, D.C. I heard on the news on Saturday night that officials also said this was one of the cleanest events ever. Apparently women tend to clean up after themselves.

This was the kind of event you remember you entire life. I am so glad I could go with my family, especially my 12-year-old granddaughter. There were many lessons to learn about our democracy.