Skip navigation

Last week I had an opportunity to visit the new US-Mexico commercial border crossing at Otay Mesa, CA – about 20 miles east of the San Diego/Tijuana border crossing. The Otay Mesa crossing was built for trucks and rail crossings at the border, not for people.

There is new construction everywhere on the US side of the border with enormous warehouses, including a new 2.2 million-square-foot Amazon warehouse. All this new development is also creating hundreds of new jobs on the US side, for warehouse workers, truck drivers, customs brokers, and other support businesses such as restaurants and truck stops.

From the US side, we could see the looming new black border wall, crawling like an ugly scar across the landscape. Our tour guide said he thought it was pretty useless, as several tunnels have been discovered that run from Mexico to the US, right under the wall. One was discovered recently in a storage yard for wooden pallets a few blocks from the wall. The consensus is that the wall isn’t doing much, if anything, to solve the immigration and illegal drug problem.

But as we looked across the border to the Mexico side, we discovered something surprising. Many of the companies building factories in the commercial areas are Chinese companies! Over the past few years, there has been an increase in investment in factories along the border bankrolled by the Chinese.

When the US withdrew from the Trans-Pacific Partnership in 2017, we left a void that was quickly filled by Chinese investment. Both Mexico and Canada remain in the TPP and have seen Chinese investments grow along their borders with the US.   Investment is significant in the Maquiladora zones. A maquiladora (also known as a twin plant) is a factory in Mexico, usually near the US-Mexico border, that operates under a favorable duty, or tariff-free basis.

Logistics costs are also a big factor. With trans-Pacific ocean container rates more than doubling in the past few years, plus capacity issues with steamship lines and port congestion, it makes economic sense to manufacture in Mexico. Logistics costs via truck transportation from Mexico are far less expensive.

To avoid the Trump tariffs imposed on China, many Chinese companies have invested in operations in Mexico for products being sold into the US. If enough of the value of the product originates in Mexico, goods imported into the US can take advantage of the USMCA free trade agreement (formerly NAFTA) and pay no customs duty. Simply shipping Chinese goods from Mexico into the US without being substantially transformed, does not qualify. Instead, Chinese investors own the factories, but raw materials and parts originate in Mexico. For Chinese companies that are investing in Mexico, the opportunities are enormous.

Chinese factory development and investment on the Mexican side of the border has resulted in job creation in Mexico, but also in the US, through logistics operations and support services. While this does not represent growth in U.S. manufacturing, it does represent growth in other kinds of jobs.

As trade relations with China deteriorated under the Trump administration, the Chinese have found other avenues to sell products into the lucrative US market, including via the new Otay Mesa crossing.

About the Author

Rosemary 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.

I am so impressed.  I just got my second Covid vaccine. I scheduled both the first and second appointments online with no wait and at the appointed time I drove to the nearby vaccination location in Silicon Valley. There was no line. I filled out a form, showed my insurance card, and was escorted to a vaccination station, got my shot, waited 15 minutes, posted a photo on Facebook, and left.  The whole process took less than a half-hour. It was very well organized, and stress-free. I am seeing postings from my friends all across the country who had similar experiences.

Walking back to my car after the second easy-peasy experience, I was so proud of my peers – the magnificent American supply chain professionals who made this all happen.

Let’s start with manufacturing. As companies such as Moderna, Pfizer, and Johnson & Johnson awaited approval by the FDA, behind the scenes, manufacturing professionals were gearing up production lines in volumes never before experienced.  But it wasn’t as simple as just scheduling more production time. Production lines had to be reconfigured to handle the new vaccine. Behind the scenes, planners and schedulers were determining what components they needed in what quantities, to arrive at the right time for production – not too much to clog up the line and not too little to halt production.  Purchasing people were working around the clock to place orders for enormous quantities of ingredients.

Then there were the purchasing professionals who ordered the vials, packaging, and shipping containers that were temperature-controlled to protect the precious cargo – again scheduling just the right amount of supplies at just the right time, all the while paying attention to cost factors.

When Johnson & Johnson was seeking approval for their vaccine, the Biden administration worked with J&J’s competitor, Merck, to make manufacturing facilities available to J&J – a first in this very competitive industry. Merck repurposed some of its existing facilities for rapid large-scale manufacturing of the J&J vaccine.

Once the vaccines were manufactured, they had to be transported to the distribution centers and kept at extremely low temperatures, following CDC’s strict guidelines. Once again supply chain pros stepped up to the challenge. FedEx, UPS, DHL and several airlines collaborated and practiced how they should and would handle the vaccine to flawlessly execute the plan and deliver the cold cargo to distribution points.

Meanwhile, back in Washington, talented supply chain project managers were coordinating with state and local governments to get the vaccines to healthcare facilities, stadiums, drug stores, and other distribution points. Governments and health care companies staffed up to handle the volume.

Finally, the distribution of the vaccines to the American people required sophisticated organization of buildings, parking lots, signage, shot-givers, and helpers. This coordinated distribution is also a supply chain function.

It feels like a Symphony orchestra playing Bach or Mozart. The sound is coordinated and wonderful, and the effect is emotional and uplifting. These results are completely dependent on each musician playing their part at just the right time and tempo and volume to assure a beautiful result. The supply chain of vaccine distribution is a symphony of coordinated parts with the same wonderful uplifting goal.

In the end, it is all working beautifully. I am enormously proud of my supply chain colleagues and friends.

Bravo American supply chain professionals who made this all happen. The nation is grateful. You are rock stars!

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.

https://upload.wikimedia.org/wikipedia/commons/thumb/c/ca/LinkedIn_logo_initials.png/768px-LinkedIn_logo_initials.png

                    

We’ve toiled away for years in relative obscurity and have had to explain over and over to our friends and relatives what we do for a living. We’ve been the obscure operations backbone behind the scenes that make our companies function. But the pandemic and now Biden’s Executive Order have brought the limelight to supply chain professionals and to the work that we do.  We are the movie stars of this new story.

President Biden signed an Executive Order on Feb 24, 2021, directing a broad review of supply chains for critical materials—from semiconductors to pharmaceuticals to large-scale batteries to rare-earth minerals—to support domestic production and strengthen ties with allies to address supply chain issues. The EO calls for a 100-day review and subsequent actionable report by named agencies. Here are a few highlights:

  • The United States needs resilient, diverse, and secure supply chains to ensure our economic prosperity and national security.
  • Resilient American supply chains will revitalize and rebuild domestic manufacturing capacity, maintain America’s competitive edge in research and development, and create well-paying jobs. 
  • Close cooperation on resilient supply chains with allies and partners who share our values will foster collective economic and national security, and strengthen the capacity to respond to international disasters and emergencies.

The EO goes on to call for separate year-long investigations of supply chain risk in six industry sectors: defense, public health, communications technology, energy, transportation, and food production. These supply chains also include emphasis on American manufacturing and reshoring, in a way that was not generally articulated in the past.  Previous government executives seemed to think that supply chains simply include the purchase of raw materials and finished products coming from China.  This EO demonstrates a broader understanding of supply chain complexities that include sourcing and manufacturing. It even covers reshoring manufacturing and the risk of climate change on American factories.

Supply Chain risk exposed by the pandemic includes broad ranges of industries. A global shortage of semiconductors is expected to last at least through the end of the year, causing difficulties in a range of industries. Semiconductor shortages seem to be a combination of increased demand as people bought electronics during the COVID-19 pandemic, plus limited manufacturing capacity to meet that demand and the impact of the U.S.-China trade war.

Biden stated that the solution to supply chain issues will be to increase domestic production in certain industries as well as to work with allies to prevent future shortages. As we know, Executive Orders are policy statements with few executable actions. This EO on supply chains is different. It calls out specific responsibilities and actions assigned to specific government agencies.

In the ending paragraphs, President Biden calls out reform of domestic and international trade rules. Hopefully, this will include the renewed support for the WTO and the ability to resolve disputes in a world court. There is also a lot of positive buzz about Katherine Tai, the nominee for U.S. Trade Representative.

“We all recognize that the particular problem will not be solved immediately. In the meantime, we are reaching out to our allies, semiconductor companies, and others in the supply chain, to ramp up production to help us resolve the bottlenecks now,” Biden said. “We need to stop playing catchup.”

It’s not that EOs from the previous administration on things like critical minerals didn’t state similar policies. But this time, there are specific assignments to address these issues and knowledgeable, capable people to carry out the orders.

Get ready supply chain professionals – the floodlights are on you.

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.

https://upload.wikimedia.org/wikipedia/commons/thumb/c/ca/LinkedIn_logo_initials.png/768px-LinkedIn_logo_initials.png

                    

The Biden-Harris transition website posts Biden’s policy for U.S. manufacturing and for addressing supply chain shortages due to Covid19. But can we take what is written at face value? Like all politicians’ statements, this one is high-level, sweeping verbiage with little defined detail. Of course, this is only the beginning – high-level statements made by incoming administrations are just ideas and typically lack execution and implementation detail. But at this time in American history, we are at a critical crescendo in manufacturing and global supply chains, and new policies by the incoming Biden-Harris Administration are important for us to understand.

The Biden-Harris transition website states:

“Joe Biden will work to ensure that the U.S. does not face shortages of the critical products America needs in times of crisis and to protect our national security. To combat the COVID-19 pandemic, Biden will immediately marshal all of the tools of the Federal government to secure sufficient supplies, treatments, and, as soon as possible, a vaccine to combat the pandemic. At the same time, he will implement fundamental reforms that shift production of a range of critical products back to U.S. soil, creating new jobs and protecting U.S. supply chains against national security threats.”

The president-elect also has pledged to incentivize “Made in USA” and reshoring through a 10% tax credit for companies that create U.S. jobs. This is good news for those of us working hard on initiatives to reshore manufacturing.

We have a long way to go to recover U.S. strength in manufacturing. Not only do we need incentives such as tax credits, research grants, and an industrial policy, we also need a federal government that will go beyond rhetoric and high-level policy. We need actionable plans to assist with reshoring efforts.

In the end, the decision to reshore or expand manufacturing in the U.S. is based on the economics of the firm. If manufacturing can be cost-competitive in America, then it makes sense to produce here. In a recent study conducted by the Reshoring Institute, (https://reshoringinstitute.org/made-in-usa-survey ) participants told us they prefer products Made in the USA and are willing to pay up to 20% more for them. This gives American manufacturers some leeway in the cost and pricing structures.

To make products here, even if they are slightly more expensive, manufacturers must streamline their production to extract labor costs through automation, adoption of new technologies, and reengineering of production lines. This means that manufacturers are going to need assistance to make investments in capital equipment in the form of tax breaks and low-cost loans. Local and state economic development organizations will have to come through with other incentives to make their locations attractive.

Artificial barriers such as import tariffs won’t help make American manufacturers more efficient, in the long run. Only the hard work of becoming more efficient through streamlined and automated factories will make manufacturers competitive with world markets. There’s a lot of work to be done to bring manufacturing back to America, and help for manufacturers must come from the Feds. 

Watch what they do, not what they say.

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.

Have you ever watched the Indianapolis 500?  Global supply chains are just like that.

Today’s global supply chains are incredibly complex, fast. and full of technology. Planning and execution systems are integrated across the enterprise and at different times, different functions overtake the lead in strategic importance and response. 

Take the pandemic response, for example.  At first, companies were scrambling for parts coming from Wuhan China, involving procurement and logistics.  Then manufacturing and engineering took over the pole position trying to determine what parts could be re-engineered to reduce the critical parts coming from China.  What parts could be 3D-printed or made differently?  Then HR took the lead to race towards keeping the workplace safe, and developing work-from-home policies. Then slow-downs, pit-stops and crashes occurred.  Winning strategies were deployed to try to win the race, and inevitably, there were winners and losers. 

And when the race is finally over, the planning and strategy development start all over again with new perspectives to mitigate risk in the future.

But it wans not always this way.  50 years ago there was no such term as “supply chain management.” The Purchasing Department was mostly administrative and gave hand-written purchase orders to the typing pool to type and mail. Logistics was the Shipping/Receiving dock supervisor, responsible for shipping products on whatever trucking company he deemed was best (it was always a “he”).  Manufacturing managers were relatively obscure in most organizations, acting on their own. Forecasting and planning responded to sales, but not very well due to the lack of software tools, and planning was based on orders that were taken over the phone or hand-written in the field. There was no email!

We’ve come a long way, baby!  Zoom, Zoom.

Today’s successful supply chains are integrated processes, relying on the integration and cause-and-effect functions of software. Supply Chain functions now have a place on the Executive Team. Women have risen to executive levels. Manufacturing is likely to be global, or at least dependent on globally-sourced parts. Sales and Operations Planning is a standard process. Forecasting is sophisticated enough to plan and then rapidly replan for natural disasters, weather events, market changes, and any other surprise disaster, with supporting software. Procurement can respond nimbly via email and systems communication with suppliers. Logistics can respond to support new schedules and priorities. The whole system is sensitive to political policy and leadership changes. Artificial intelligence can predict and warn of pending events, digital twins can simulate and rapidly improve manufacturing.

The Race Never Finishes

Different business functions can take the lead in the race to the finish, but the race never finishes. Supply Chain professionals are now better educated, sophisticated, and approach the work as an integration of functions and technology. The race is accelerating: all parts are integrated and ready with lightning-fast pit stops and changes in strategies depending on what the race requires. Try to keep up.

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.

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.

https://upload.wikimedia.org/wikipedia/commons/thumb/c/ca/LinkedIn_logo_initials.png/768px-LinkedIn_logo_initials.png

                    

KNN India

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.

https://upload.wikimedia.org/wikipedia/commons/thumb/c/ca/LinkedIn_logo_initials.png/768px-LinkedIn_logo_initials.png

                    

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.

https://upload.wikimedia.org/wikipedia/commons/thumb/c/ca/LinkedIn_logo_initials.png/768px-LinkedIn_logo_initials.png

                    

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.