How do I get my manufacturing out of China?

How do I get my manufacturing out of China?

The answer is easy and you might be surprised to know China is probably expecting it.

Earlier this year, Chinese President Xi Jinping made a head of state visit to Ms. Park Geun-hye the president of the Republic of Korea.  It was a bold move because let’s be honest, China and South Korea haven’t exactly been BFFs for quite sometime now.  This little thing called the Korean Conflict made things about as uncomfortable as running into your ex at a party with their new spouse.

From this visit, there was a lot of buzz in the media about regional security pacts, but from where I stand, the focus of their time together was largely economic.  Mr Xi is an intelligent man and recognizes the huge trade potential with his local Korean counterpart.  Clearley he has been reading this blog because he has a pretty strong understanding of the benefits to local sourcing.  It is also possible this is in response shifting tides 8,000 miles across the pacific where US imports from China are slowing relative to domestic growth.  China is clearly aware their competitive advantage in labor cost is slipping.  If they didn't find it to be such a great concern, they wouldn't have taken legislative action last year to fix minimum wage growth to 13% per year for the next three years because for the the past five it was hovering somewhere around 19%.  What better way to recover some of that competitive advantage than to increase trade with regional partners where shipping costs become less of an issue?  In their final sessions together during the visit, both leaders said they are working to hash out a free trade agreement by the end of the year.  So don’t feel bad, China is fully anticipating your departure.

Despite the major economic changes over the past half decade, China still has momentum in the manufacturing sector, namely companies that are capable of turn-key production and more robust supply chain infrastructure.  But those things are changing too.  It used to be difficult to take a complicated product to a manufacturer in North America and ask them to return to you a fully functioning product in commercial or retail packaging, ready to ship to a customer.  And it used to be that you could find some great local machine shops, a highly competent plastic molder and an electronics company all in town.  But you would have to source components from each of them and still order motors from China just so that you could assemble your widget at some separate facility.  That is all changing.  Manufacturers in North America are diversifying their capabilities and forming alliances with other complementary capabilities to provide more turn key services.  Your Local Connection has found numerous suppliers in and around Denver and Norther Colorado who are accepting projects outside their traditional scope to accommodate the needs of their customers.  One such company is Wytan in Golden, who until recently produced only printed circuit boards.  Over the course of the last year, they have invested heavily in tools and equipment to offer a more broad spectrum of electronics assembly.  The other challenge is identifying higher tier suppliers.  It used to be that if you needed cheap motors, you would have to look to China.  Growth in major sectors such as narrow body aviation, new and clean tech have driven costs down for these types of previously un-sourcable component parts.

Lastly, it isn't as expensive as you might think.  If you already have tools developed in China, your capital costs are sunk.  You may fight some reluctance from your suppliers, but it is possible to move capital assets that are already yours.  Often times the savings you will achieve by lowering your order quantities and reducing working capital turns easily offset the cost of the move.

So making the move is far from impossible.  It will require some effort, but it’s certainly feasible to make it happen.

There is Nothing Small about the Impact Supply Chain can have on Small Businesses

Effective supply chain management is important for all business sizes, but it especially essential for small businesses and start-ups.  Supply chain challenges are so significant that they are often the cause that puts start-ups out of business.  I would like to address three main areas where the impact of supply chains can make or break a start-up.

1. Excessive inventory & tied up cash flow
2. On-time customer delivery
3. Product Quality

Excessive Inventory—Cash flow is one of the largest challenges for start-ups.  You can have the greatest product in the world, but if you do not have money for capital infrastructure, if you do not have funds to pay your employees, and if you do not have the money to purchase supplies and component parts, you do not have the ability to deliver product to your customers.  In past posts I mentioned how inventory has a direct impact on a company’s bottom line.  Proper supply chain and inventory management can ensure your precious cash resources are available to add value to your business, not collect dust sitting unused on your shelves.  Let me demonstrate:

$1 Inventory Removed = $1 to your bottom line

At 10% Sales Margin it takes $10 in sales to have the same Impact as $1 of Inventory Removed

          $1 Sales $1 Sales

          $1 Sales $1 Sales

          $1 Sales $1 Sales   =   $1 to your bottom line

          $1 Sales $1 Sales

                 $1 Sales
          $1 Sales Margin

Obsolescence, over-ordering, and lacking management systems are usually the culprits causing excessive inventory (each worth of their own blog post).

On-Time Delivery—Let me begin this section by saying I blame Amazon.  I can go on-line, select my product, make a few clicks, and voila: two days later, my shiny new, life changing purchase shows up on my front door.  For good or bad, these very short lead time expectations extend from consumer to corporate purchasing practices.  Selecting the right vendor, supplier, or contract manufacturer can mean the difference between fulfilling an order and losing a potential customer.  Appropriately applying supplier performance optimization tools can reduce the possibility of a supplier outage.

Product Quality—Companies often do not consider if their supplier has ability to deliver product that is within specification limits.  Significant due diligence and robust analysis techniques are the first steps to understanding a supplier's quality capabilities.  Another common misnomer is that once a supplier is qualified, the quality of the product they supply is fixed and never changing.  The reality of any supplier situation is that things change: tools wear out, audit processes fall apart and employees change.  Repeatability is a big buzz word in the quality world.  It is very difficult to maintain repeatability within your own internal processes, but even more difficult to do so outside your organization.  Supplier performance monitoring tools and supplier development programs are the best way to ensure your suppliers continue to provide high quality parts over time.

I hope this blog entry provides some surface level exposure on the impact suppliers can have on small businesses.  In each section, I alluded to various supply chain management tools.  If you would like further information on any of the tools or management techniques I listed, please feel free to contact me (ryan.miller@yourlocalconnection.net or 720-295-8726).

Photo Credit: Samantha Miller

Fun Fact: Logistics driven costs account for 9.22% of the US GDP (source: Economonitor)

Once Upon a Time in Mexico

Once Upon a Time in Mexico is one of my favorite movies.  It features Antonio Banderas as the hero, Salma Hayek as the self-confident love interest and Johnny Depp as a quirky CIA agent.  Together they team up to fight drug trafficking, corruption, and save the Mexican President from a coup and assignation.  The movie does not end without casualties and paints a Hollywood version of a very violent political environment where all economic and political activity is controlled by drug lords.  This is the image most of us have of the border with Mexico—police corruption, excessive violence and a really big fence.  What you probably did not realize is the current state of affairs along the border with Mexico is actually quite different from what was depicted in Once Upon a Time in Mexico.  After all, the movie takes place “once upon a time ago.”

Several years ago, boarder towns like Juarez, Tijuana and Mexicali were places to be feared—especially for American travelers.  Violence and instability for travelers often does not encourage business investment in such a region either.  Why then is there a sudden resurgence in high tech manufacturing along the border with Mexico?

Before I discuss anything else, I want to address the issue of organized crime.  Mexico still has far to go to quell violence, but there are a few micro trends that point in the right direction.  Starting after his election in 2006, President Felipe Calderon began a policy to deploy increasing force by way of the Mexican Army to the border Regions.  They disrupted corruption in the local police force which created some friction in the drug trafficking process. (http://www.cfr.org/mexico/mexicos-drug-war/p13689)    Some of his initiative may be paying off.  For example, USA Today reports, “Mexico's homicide rate dropped from 24 in 100,000 people in 2011 to 22 in 100,000 in 2012, suggesting greater security efforts made by the nation's government.” (http://www.usatoday.com/story/news/world/2013/07/31/mexico-murder-rate/2606229/)

From a national stand Point, Homicides showed erratic behavior without a real trend in one direction or another. 

Source Data: Secretaria De Globernation

The following 2013 data extracted from the Secretaria De Globernation in Mexico shows a few trends.  Mexican states along the border region all show homicide declines throughout the year with the exception of Sonora and Baja California which roughly flat-lined throughout 2013.  If you look at Mexico City however, homicides climbed throughout the year, skewing the national results from 2013.

I am trying to demonstrate with data what I know intuitively and what I hear continuously from my counterparts in Mexico: crime is still a problem, but the situation on the border is getting better with the support of the Mexican Army even though the national numbers do not show significant change.  Current President Enrique Pena Nieto (elected Dec ’12) has plans to implement a national paramilitary national police force ("Gendarmerie") to further the work the military began.  Since his election over a year ago, he has yet to implement this force.

Now that I addressed the elephant in the room—the crime problem, I want to talk about the other reasons why Mexico is great supply source and manufacturing location.
    1.) NAFTA
    2.) Skilled Labor/Manufacturing Infrastructure
    3.) Efficient Communication
    4.) Improved on time deliver/lead times
*Low labor costs were intentionally omitted as a benefit.  I will explain that more at the end of the blog.

NAFTA—The North American Free Trade Agreement (and the Central America Free Trade Agreement [CAFTA]) provide a huge cost advantage for parts sourced in North America.  Under provisions of NAFTA tariffs between the US and Mexico are nearly non-existent, especially for manufactured goods.  Import tariffs from countries outside North America average about 4% depending on the product, but can range upwards of 10% for certain goods and commodities.  (Source: United States International Trade Commission)

Skilled Labor Force—There is enough to be said about the highly skilled labor force to write a doctoral dissertation.  For now, I will leave it with an anecdotal statement and possibly come back later for a full blog post on this topic alone.  Mexico has a wealth of highly skilled laborers from engineers, to machine operators, to assembly experts and the list goes on and on.

Communication between sites in Mexico and the US is quite simple.  There is more cultural commonality with Mexican counterparts than those in Asia.  Furthermore, 36.7% of those living in the US speak Spanish in the home (Source: http://www.pewresearch.org/fact-tank/2013/08/13/spanish-is-the-most-spoken-non-english-language-in-u-s-homes-even-among-non-hispanics/)  In my experience nearly all management staff speak fluent English.  I often tell my clients during morning meetings that if we needed to get to Reynosa or Mexico City or even Guadalajara, we could be there by close of business today.  That is not the case with Ningbo, Suzhou, Shanghai, or anywhere else in Asia.  Finally we share time zones with Mexico.  There is general alignment between hours of operation in both countries.  The majority of my teleconferences were in the middle of the night.

Proximity is also critical to why Mexico is such great sourcing location.  Trucks can reach nearly everywhere in the contiguous 48 states within 3 days from leaving a plant in the border region.  It is often 45 days from dock door in Asia to dock door in the US.  The benefits are huge in the areas of lead time, inventory cost, and quality.

I promised I would address the labor rate issue.  Bloomberg Business week says manufacturing costs are 6% lower in Mexico now than China.  Labor rates play a part of this cost, but the bigger driving factor creating this value is technical prowess and fantastic productivity.  Perhaps minimum wage could be another blog post in and of itself.

I could continue on about the merits of sourcing in Mexico, but I will stop with this initial exposure blog.  As a supplement to what I wrote, I highly recommend this article from Bloomberg Businessweek: http://www.businessweek.com/articles/2013-09-09/the-new-mexico.  In fact, theirs such a compelling argument, if I read their story before I started writing this blog entry, I may have just posted their link and called it a day!

Setting the Stage

By Ryan Miller

In this blog entry, I want to paint a picture of economic events as they pertain to manufacturing in Asia.  I would like to begin with the story of Chinese labor rates.  Those of us in the Western Hemisphere receive a constant barrage from the media talking about the “emerging Chinese middle-class.”  So I wanted to understand this concept a little further.  How does the rising middle-class impact the cost to manufacture overseas?  I started my research with the US Bureau of Labor Statistics.  From their home page, click International Labor Comparisons, click China.  Up pops a table of Chinese manufacturing labor data from 2002 to 2009.  After a little data crunching, I realized that during this period China experienced 17% labor inflation per annum.  Wow, that’s a huge number or roughly 300% growth from ’02 to ’09!

Hourly Compensation per Employee

Year	Labor in USD	Delta	%change
2002	$0.60	--	--
2003	$0.68	$0.08	13%
2004	$0.74	$0.06	9%
2005	$0.83	$0.09	12%
2006	$0.95	$0.12	14%
2007	$1.21	$0.26	27%
2008	$1.59	$0.38	31%
2009	$1.74	$0.15	9%
Average	--	$0.16	17%

But wait, where is the data for 2010 through today?  I called the bureau of labor statistics.  Their data stops at 2009 and due to sequestration, the office that manages these statistics is no longer in existence.  My next step was to reach out to a business friendly think tank in Washington DC.  They did not have info when I called but said they would look into it.  If I hear anything back I will update this blog.  From what I gather, this information is somewhat difficult to come by for obvious reasons.  Nobody wants to air their dirty laundry, especially not the second largest economy in the world.

According to an article written by The Economist, “the [labor wage for the] average Chinese factory worker rose by 10% a year between 2000 and 2005 and speeded up to 19% a year between 2005 and 2010, according to BCG. The Chinese government has set a target for annual increases in the minimum wage of 13% until 2015.”  You can read the article yourself here: http://www.economist.com/news/special-report/21569570-growing-number-american-companies-are-moving-their-manufacturing-back-united  Evidently they have a direct line to Beijing to garner such facts.

All this to say, wages in China are on the rise.  I did a little further research.  Countries across the rest of Asia average approximately a 9% labor wage increase (source: International Labour Organisation [10 year avg]).

Now I want to shift my focus to the domestic.  We all know the United States has a massive trade deficit.  I think the latest number I heard was just shy of $18-trillion.  (The great part about writing a blog is that you can say things like “I think” or “I’m pretty sure.”)  While this deficit is not going away any time soon, I want to look at micro trends in imports and exports.

Source: US Department of Commerce Bureau of Economic Analysis

From 2005 to 2013 there was no doubt a huge trade deficit in goods.  What I want to point out however is that while imports grew $15,804,000,000, exports grew even more per quarter by $19,266,000,000.

Now I want to look very closely at the last two years.












Source: US Department of Commerce Bureau of Economic Analysis

You will notice that imported goods dipped by $2,702,700,000 per quarter while exports grew by $5,677,500,000.  Exports actually decreased slightly.  In summary, US manufacturing is showing growth to exported markets.

There is clearly a change of trajectory here.  Adjusted for economic conditions, that trajectory changed even more dramatically in the last two years.  I am not implying causation saying that rising labor costs are the cause of export growth and growth to the manufacturing sector in North America… but I kind of am.

Labor costs are only a small piece of total cost of ownership.  Deciding where to manufacture a product should be based on many more factors.  In fact, to make a decision solely based on labor rates would be foolish.  In my opinion, the greatest savings can be achieved when manufacturing and supply chains are located as close to their markets as possible, but total cost of ownership can be the meat behind my statement.

All good blog posts should have a nice picture.  Unfortunately I did not have a good picture associated with my topic.  So instead I will leave you with a shot of Lenawee Mountain at Arapahoe Basin from March 8th.

Email me at ryan.miller@yourlocalconnection.net

Welcome to Market Flow--The Online Blog for Your Local Connection

By Ryan C Miller

Welcome to the first installment of the Your Local Connection Blog.  The idea behind this blog is to provide market insight into local-shoring activates (i.e. moving manufacturing closer to customer markets).  I should take this opportunity to make a few clarifications and develop a few definitions before I go any further.  I will often use terms like re-shoring, near-shoring or on-shoring.  I typically use re-shoring to refer to moving a manufacturing operation from overseas to the United States.  Near-shoring, on-shoring and local-shoring talk more about moving a manufacturing operation closer to its market.  As an example, that may mean moving production from the US to China because the market for the product is in China.

On a recurring basis, I will select a relevant topic and provide insight and supporting documentation for current market trends.  Future topics may include: “why Mexico is a great alternative to Asia for US markets,” “recent shifts in US import vs export numbers,” or “the politics of transportation.”  I am also open to suggestions.  If you have an idea or topic you would like to discuss, please feel free to send me an email and provide feedback.  I would like this to be a dialogue and open discussion forum, so please feel welcome to provide comments.

The end goal for this blog is to provide information to improve operational efficiency and achieve greater cost savings.  I look forward to this opportunity to exchange information and dialogue about these very relevant topics to for the manufacturing world.

Email me at ryan.miller@yourlocalconnection.net