Foreign Exchange Strategy or Economic Reality?
China devalued its currency last Tuesday, which will have big implications on the supply chains of many companies. It’s not too difficult to understand that when a currency like the Yuan is devalued, goods produced in China become less expensive for buyers in other countries, while imports become very expensive for Chinese buyers. It will encourage in-country consumption as Chinese consumers buy the less expensive domestic product over high cost imports. China’s economy has been struggling and its exports declined over 8% in July extending a declining trend. Those companies that have been moving to low cost country sourcing in places like South Africa, Viet Nam and Turkey may now find themselves at a completive disadvantage, while those companies remaining in China will benefit from the lower cost and increased exports.
The real supply chain losers are companies that export to China. This has impacted world commodity markets as commodity prices on oil and copper tumbled to a six month low. One devaluation will likely not be felt long term, however, a series of devaluations could effectively restructure the supply chains in the future. While we don’t know the true reason for the devaluation, the result in China could be a knee-jerk reaction to return to China manufacturing if the trend continues.
Astute supply management practitioners will always have a risk management strategy for currency. If you don’t, it is essential that you evaluate all global supply chains and develop scenarios and options. Don’t get caught by surprise, develop your Forex strategy now or you may need to reengineer the supply chain later.
Is China re-shoring? Maybe.
The Chinese version of the ISM PMI® has ticked up from negative to positive territory, according to reports such as this one on Bloomberg.com.
A preliminary June Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 50.8, up from 49.4 in May. An index above 50 signifies expectations of growth, and Chinese leaders are giving themselves credit for stimulating the economy without resorting to drastic measures.
A survey of analysts by Reuters came to a similar conclusion about the growth of the Chinese economy. More reporting of a stronger Chinese economy comes from the South China Morning Post.
We do a significant amount of work in China and the business environment there is unique, but it has matured since the days when U.S. automakers, for instance, were almost demanding that suppliers source from there. Large Chinese companies are not just focused on exports, but meeting growing domestic demand. They are adapting more sophisticated sourcing strategies of their own, and even investing in manufacturing plants in the United States, as described in this article in The Detroit News.
The strength of China’s economy and the rapid change in sophisticated sourcing is evident in increasing demand for development programs, certification programs and alignment with key universities in China.
The maturation of Chinese companies does tend to reduce their cost-competitiveness, but it also introduces elements of stability that mitigate some risks from sourcing at a great distance. Economic indicators that show slow, steady growth are also good signs of stability.
The Motorola X, AKA Moto X smartphone is the first mobile device designed under the Google-owned version of Motorola Mobility, and it’s expected to be available to consumers in the next few weeks. The phone is going to be assembled in Ft. Worth, Texas, and that has supply chain significance because it will be a 2,200-employee case of re-shoring.
In a podcast interview with Chris Versace, Mark Randall, Motorola Mobility’s senior vice president of Supply Chain and Operations says the sourcing decision was essentially driven by a marketing decision, not cost. In the hyper-competitive smartphone market, Randall said Motorola wanted to give consumers the ability to customize their phones as they ordered online and still receive them within a few days. He said the only way they could reasonably do that was to build them in the U.S. for American purchasers.
By choosing various color combinations for buttons and the case, as well as memory, Randall said there could be as many as 2,000 variations of the phone.
Motorola’s decision to re-shore is interesting for several reasons. First, it shows how tightly integrated sourcing and sales can be. It’s an example of mass-produced combined with made-to-order. Second, it raises great questions about managing the supply of the various colored buttons and cases to meet an aggressive order-to-delivery timeline.
Third, the cost differential between assembly in the U.S. and assembly offshore had to be small because the premium Motorola can charge for offering customization cannot be that large. The smartphone market is too competitive.
And finally, this is a “build regionally” decision, not a “build in the U.S.A.” decision. To offer the same speed from order to delivery to consumers in Asia or South America, Motorola will assemble Moto Xs in China and Brazil.
Posted in China, News Analysis
Tagged China, cost containment, global business, Google, Logistics, manufacturing, Moto x, Motorola, procurement, purchasing, smartphones, sourcing, supply chain, supply management
According to the official statistics, the U.S. had a $295 billion trade deficit with China last year. That sounds pretty horrible, but here are a few related thoughts to chew on. Economist magazine estimated the total cost to Apple of creating an iPad was about $275. Since it’s assembled in China and sold by the millions here, it may account for as much as $4 billion of that trade deficit. But Economist said, “wait a minute” because the design, engineering, and marketing costs are all based in the U.S., and major components such as chips, displays and memory are made in Japan and Korea. The actual value added by the final Chinese manufacturing is closer to $10, not $275. That’s a huge difference.
Because Apple has U.S. suppliers and a U.S. distribution system, Economist estimates about half of the value of each iPad stays here, generating about $4.1 B in U.S. economic activity from an estimated 15 million units sold.
A similar analysis comes from three authors of an article in the Journal of International Commerce and Economics. They looked at the supply chain for iPods (remember those?) and estimated the product was generating just under 14,000 U.S.-based jobs in design, engineering, management, distribution and retail. The product was also generating about 27,000 overseas jobs, so no big surprise there. However, when the researchers looked at the value of the work, they estimated that about $750 million in earnings were going to U.S.-based workers, and less than half — about $320 million were going abroad.
In short, sourcing from China is sometimes a good business decision — and when it is, you don’t need to apologize for it.
Here’s an interesting analysis of sourcing from China from an interesting point of view — the real estate investors who own manufacturing facilities across the United States.
National Real Estate Investor – Made in America Again
The authors refer to a study by AlixPartners that projected the gap in manufacturing costs between the two countries will essentially close in another three years — based on wage inflation, exchange rates and freight costs. That same study also pointed out that between 2005 and 2008 the cost gap had shrunk from 22% to 5.5% between the two countries.
The speed at which China is “catching up” is also catching many analysts by surprise, but it also points out that the China “equation” is not really an equation. An equation represents a balance, whereas the situation in China is very dynamic. Sourcing from China has never been simple; it has always required careful analysis of costs and risks, and one of those risks has always been the fluidity of the situation. Right now, for instance, the Communist Party has been shaken by the purge of a senior official and potential criminal charges against his wife even as it is poised to make a huge transition of power to new leaders. It’s impossible to predict what impact that will have as it plays out.
At the same time, as we consult with companies operating in China we are finding many of their employees are excellent students of supply management. They are enthusiastically embracing best practices, and it’s clear they are not just focusing on exports to other countries, but creating supply chains to serve China’s own huge and growing appetite for consumer and business products. Will this drive new efficiencies and innovations that U.S. companies will want to purchase? Or will it fuel demand that will put upwards pressure on prices?
China is so big, and changing so fast that the answer is most likely, “yes.” To both.
Posted in China, News Analysis, Risk Mitigation
Tagged China, cost containment, developing economies, global business, Logistics, manufacturing, procurement, purchasing, risk management, sourcing, supply management
We have all heard that it’s halftime in America — and that we are going to come roaring out of the locker room for the rest of the game. That may be true, but here’s a heads up — business leaders in other parts of the world are giving themselves the same pep talk and expecting similar results.
I’m saying that because I’ve seen it first hand in training sessions for Chinese supply management professionals. We are working with employees of several billion-dollar global companies — some based in China and others that have Chinese operations. They are generally Chinese nationals, have good English skills, and are excellent students. They are attentive, ask questions, and apply what they have learned after our seminars.
I don’t want to sound like I’m stereotyping, but anyone who has ever visited the Beijing Pearl Market has seen how haggling over prices and quality is deeply embedded in Chinese culture. However, no one should look at the lively interactions between buyers and sellers there and think that Chinese procurement in general is focused just on transactions.
The organizations we are working with want to know best practices in supply management. They want to use the best tools and the latest strategies for bringing value from their supplier base. Because Chinese companies have operated in a protected domestic environment, their knowledge of global markets may have gaps, but the participants in our seminars are eager to fill them as quickly as possible.
This post is not supposed to be a warning. In a global economy Chinese companies may be your partners as well as your competitors. But it is an observation that they are not not expecting to do well only because they have access to cheap labor and a protective government. They are sharpening their skills in every area of business — and supply management is a high priority.
The original meaning of the term “China Syndrome” described how the fuel in a nuclear reactor might overheat and melt down, creating a disaster by burning through the reactor’s layers of protection. A new meaning for China Syndrome might describe how an overheating, or possible meltdown of the Chinese economy could create disastrous volatility in commodity demand and prices.
The Wall Street Journal has a good capsule summary of three scenarios over the next decade. Here’s the link, if you have access:
As China Goes, So Go Commodities – The Wall Street Journal
Under any scenario except a complete collapse of China’s hard charging economic growth, there is almost certain price pressures on energy sources as well as certain grains over the next ten years, and continuing pressure on construction materials as long as China keeps building infrastructure at an astonishing pace.
Over the long-term, successful supply chain strategies will not only need strategies for containing costs, but a continuing focus on innovations that provide alternatives to traditional materials, reduce waste or use recycled products.
Posted in China, News Analysis
Tagged China, commodity prices, developing economies, global business, manufacturing, procurement, purchasing, sourcing, supply management, supply managment
In the two years since we launched the ISM-ADR School for Supply Management, we have seen remarkable demand for professional development from global companies doing business in Asia.
I’m very pleased to announce that we will be significantly expanding our presence there with a new partnership we have created with Procurement and Sourcing Institute of Asia and TransProcure Corporation (PASIA/TransProcure), both based in Manila, Philippines. Like ISM and ADR, these two organizations recognized the value of collaboration and have been working together for some time. Creating a new consortium of four organizations will ensure that any company operating in Asia will have access to consistent, high quality professional development resources. We are excited to be helping improve the skills of supply managers in this fast-growing region of the world.
Read the full release on Business Wire.