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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.

 

 

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I met the most remarkable woman by chance at a holiday party.  Mrs. Zhao is a retired professor and researcher from UCLA. She was friendly and sociable and when I asked her what she did, she started to unravel her story for me.  Realizing that I am familiar with Chinese history and culture, she told me more than would normally be expected in polite conversation.

In the 1960s she was a Professor of Physics at Sun Yat-sen University in Guangdong, China. This was during the Cultural Revolution when Mao Zedong shut down all the universities because they were considered elitist and not revolutionary. When her university was closed, she was sent to a farm to be educated in the ways of working farmers. She plowed fields for three years as she was being “re-educated.” All day long the workers had to shout “long live Chairman Mao” as they plowed.  At night she taught the farmers to read and write.

During these years she never protested or complained, because to do so meant sure retribution including being denied meals, beatings and the infamous “struggle sessions” where people were forced to confess their “crimes” against the revolution. This was a difficult time in China, particularly for the well educated people and those in traditional arts. These people were viewed as proponents of the “old ways” and counterrevolutionaries. She told me that her colleagues were beaten and starved for disagreeing with the communist party bosses.  Many people died in prison or from beatings after struggle sessions, if they did not confess.

When the University reopened, farmers were sent there together with the previous students. No matter their educational level or experience, everyone sat in classrooms together to learn from Mao’s Little Red Book.  No other books were available for any subject because the books had all been burned by the Red Guard.

In 1982, a former colleague invited her to come to America to continue her research in microwave physics. She came to UCLA, where she continued her research and teaching for 25 years.

I know other people who lived through the Cultural Revolution and they will say that the period of struggle and change was worth it for China to emerge as the power house it is today.  They will say that Mao was 70% right and 30% wrong, and that he brought China through a metamorphosis and into its industrial age.  But Mrs. Zhao’s story and the way she told it to me touched a very emotional chord.

While China came out of the Great Famine and Cultural Revolution stronger, the effects are still apparent today. People in China are reluctant to talk about the government and its policies. China’s education system is rigid and structured around a fixed curriculum.  Students are not taught or encouraged to think critically. A back-door culture has developed where things get done behind the scenes or through the “back door” and where priorities are set according to who you know and what influence you have. As a result, creativity and innovation have suffered over the past 30 or 40 years, which has resulted in a copy-cat business environment.  Only now, with talented engineers, scientists and business people being trained in China’s top universities and in America and Europe, the historical and exceptional creativity and inventiveness of the Chinese is being renewed. The Chinese have a long history of invention and now it is blooming again.

There are lessons we must learn from history in China, America and other countries.  We must do all possible to protect our education systems for all Americans at all levels.  We must not allow the elites or political parties in power to dismiss or reduce funding to our schools.  We must defend the objectivity and teaching of the sciences.  We must be vigilant in maintaining high standards for STEM education. We must support and defend teachers and researchers.  These people are building our future through our children and grandchildren.

Makers

I spent the past week at the University of Birmingham in England with a group of 16 Operations and Economics Professors from across Europe. This was the EC “Makers Conference.” I was there to lecture and to represent the Reshoring Institute (www.ReshoringInstitute.org ). This group of universities is working together to provide research and assistance to companies that are reshoring manufacturing and building production capability in Europe. Some of the biggest buzz of the week was around the idea of Industry 4.0 (the Internet of Things) and Servitization.

The term “Industrie 4.0” comes from a project in the high-tech strategy group of the German government, which promotes connection via the Internet. It is the fourth industrial revolution in manufacturing.

  1. The first industrial revolution was the mechanization of production using water and steam power
  2. The second industrial revolution introduced mass production with the help of electric power
  3. The third industrial revolution was the digital revolution and the use of electronics and IT to further automate production
  4. The fourth industrial revolution is the Internet of Things

Industry 4.0, the Fourth Industrial Revolution, is all about connecting machinery to the Internet. Industry 4.0 creates the “smart factory” where machinery and processes are monitored over the Internet and then communicate and cooperate with each other. Just imagine up to 50 billion machines connected in some way over the Internet.

This of course, has significant ramifications for Reshoring. The more automation is introduced into manufacturing, the more efficient labor becomes. This shifts the economics of manufacturing to allow for the total cost of ownership/production to be competitive in the US. This supports reshoring of production or producing in local markets for the local consumers. The overall cost to produce and deliver goods declines.

Makers

Hoverboards are very popular holiday gifts this year, but the stories about the boards that explode are all over the news.  Many retailers including Amazon.com and Target stopped selling them, and several commercial airlines banned them aboard their aircraft.

So what happened in the manufacture of these items to make them so dangerous? In the reported incidents, the lithium ion batteries in the hoverboards caught fire while charging or just riding them. The reasons for the combustion process is well-known when a battery is defective. The problems with these batteries were identified in laptops and cell phones a few years ago.  What isn’t so transparent are the sourcing and manufacturing processes for the boards being produced in China.

Hoverboards are new, exciting and popular products and this combination creates a frenzy of manufacturing opportunity for Chinese manufacturers. Because of the popularity and the potential for high volumes and high profits, knock-off brands proliferate very fast in the extremely competitive changed to avoid patent infringement laws. The raw  materials sourcing for knock-offs may come from completely different suppliers. Cheaper knock-off products means cutting corners in the factory to keep production costs low.

US safety standards are not all in place yet for these new products. US Customs may be allowing imports to enter the US based on safety standards for similar products, following the current requirements for imports. Some manufacturers may have obtained UL certificates on certain component parts, but not for the hoverboard as a whole. Raw materials such as the actual batteries may be knock-offs, too. You cannot trust the  well-known top brands either. The high demand is likely to cause sourcing from multiple Chinese factories with limited experience and untested component suppliers. No Chinese agency is overseeing the quality of exports from China.

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Montgomery County Fire and Rescue

It’s common to evaluate potential supplier and supply chain partner’s financial position before placing an order or signing a contract. In fact, most purchasing departments these days, require obtaining supplier key financial data as a standard part of the procurement process. This financial data is then evaluated by the company finance or accounting department and the risk associated with the supplier or supply chain partner is determined. If the supplier is a publically traded US company, that’s easy to do as these companies must comply with SEC rules on financial reporting. But you should be leery of accepting information provided by Chinese suppliers at face value.

China’s largest banks typically only lend to the largest corporations, leaving small and medium sized suppliers to obtain loans from friends and relatives or from a “shadow bank.” Shadow banks are private lending companies that are not regulated by the Chinese government. These shadow banks lend money at a much higher rate of interest, squeezing the small suppliers’ already-thin profit margins. So if you are buying from a Chinese supplier, you should ask and verify where their working capital comes from. You just might find that some suppliers cannot make their loan payments and will simply shut their doors and disappear, leaving you scrambling to find another manufacturer. Finding working capital in China is risky business.

Enter: The Bank of Foxconn. Foxconn, the world’s largest contract manufacturer and maker of iPhones, iPads and many brands of laptops, has ventured into the lending world. To protect its suppliers from the pitfalls of shadow banking in China, Foxconn is now making business loans. That makes Foxconn the banker for the world’s electronics supply chain. And Foxconn isn’t the only company to provide banking services in China. Baidu (the “Google” of China), Alibaba (the “Amazon” of China) and Tencent ( WeChat and mobile games) all have lending banks, too. Lending to small and medium businesses provides higher returns to Foxconn than they can make on their contract manufacturing business. It also provides an opportunity for suppliers to borrow at a lower rate than from shadow banks. Foxconn reportedly has obtained licenses from Chinese local governments to provide loans, factoring, financial guarantees and equipment leasing.Foxconn

When evaluating suppliers, be sure to ask where their funding comes from, and don’t be surprised if the answer is the Bank of Foxconn.