What I Learned in Supply Chain This Week

Insight – The China Conundrum: Should we stay, or should we go?

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Insights: What I Learned In Supply Chain This Week Series
The China Conundrum: Should we stay, or should we go?
Tags: China, First Mile, International Supply Chain, Global Trade, Trade Wars
Dallas-based startup empowers businesses to optimize international trade.

I have been doing a lot of research related to ending trade with China.

My conclusion: It is complicated.

Economic vs. National Interests.

Modern supply chains are global and interconnected. Unwinding them will take time and treasure.

Consider Tesla.

Tesla could not manufacture Model 3's in California for two months, but they were producing and selling them in China. Tesla sold 10,160 Model 3's in China in March, despite the auto market in China being down over 40% (Tesla China Sales).

Or Apple.

China is Apple’s 3rd largest consumer market after the US and Europe. Samsung — their largest competitor and the largest cellphone manufacturer for most of 2019 — produces all their phones in Asia. Huawei does as well, and they currently have a 15% share of global phone sales (Global Cellphone Market Share).

Or General Motors.

China is their #1 market. GM sold more than 3 million vehicles in China in 2019.

Or Nike, where China is their 2nd largest market.

Would it be better if they moved all their operations back to the US if doing so means they are not able to compete in the 2nd largest market in the world?

We live in a world where everything is interconnected. If you pull out of global markets, there are consequences in sales, costs, and profits.

On the other side of the economic interests are vital national interests.

Reasons why we should decouple from China.


  • Political – They pose a threat to the US politically and militarily. China is a superpower in its own right with the largest population, 2nd largest economy, and the 3rd most powerful military.

  • Strategic – They now make some of the products vital to our national interest (i.e. military parts, pharmaceuticals, and PPE).

  • Fair Play - Since joining the World Trade Organization (WTO) in 2001, there have been accusations that China is not playing by the rules the WTO designed to protect free trade, such as intellectual property and market access (Cato Institute).

  • Technology – Concerns that they are developing technology that can be used for nefarious purposes.

  • Just in Case – Supply chain fragility may create the need to move to a just-in-case inventory scenario. Most companies are punished for excess inventory due to the cost. Moving production closer to home would make it less necessary to carry excess inventory.

Why we should not decouple from China.


In his great book The Wealth of Nations, Adam Smith said, “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy...What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.”



  • US competitiveness – By Apple moving assembly to the US, Samsung and Huawei would have a significant cost and turf advantage, limiting Apple's competitiveness globally. Apple profits provide some of the best jobs in the world — both in pay and benefits. Apple also spends $4.2B of profit on R&D each year. As we move from 4G to 5G, it is critical that we can compete on technology against Chinese companies like Huawei. If US companies like Apple have higher costs and lower sales, will their innovation be hampered?

  • Company competitiveness – Will consumers pay higher prices, shareholders accept lower margins, or environmentalists and the government relax standards? Related, it is not easy to find suppliers that can make products reliably, and along with that challenge, the reliable tier one and two suppliers that supply to them. The solution to all three of those challenges is automation, however that comes at the expense of jobs.

  • Sales – Without the ability to sell in the world’s second largest market, will other countries win the sales race? For example, Brazil soybean shipments to China have exploded at the expense of US soybeans. Russia is now supplying them with natural gas. China is a huge market for US farmers, producers, and high tech manufacturers. Restricted access will hurt their sales and, in turn, will shift advantage to other countries. Lori Ann LaRocca's book Containers Don't Lie tells the story of what happens with "X" when you alter "Y." For example, if we restrict a product from coming here, China restricts one of ours from going there.
  • Free Trade – Over the last 50 years free trade has largely been credited with increasing competitiveness leading to lower costs which benefits the consumer, producers, and the economy (Free Trade Benefits).

Why we should continue to pursue a measured strategic approach.


The best solution in my opinion is not a trade war, cold war or worse. Rather a strategic policy that helps determine how we deal with global trade generally and specifically with those who don't compete fairly. It does not have to be all or nothing.

Can we agree to trade our cotton for their shirts, or their toys for our beef? At the same time can we also decide that in the future, we will set out to make the best PPE and pharmaceuticals in the world and sell them to China?

We need to think in longer increments, as it takes time to implement or unwind decisions which are made in haste, and the economic consequences are enormous.

America’s biggest strengths are Democracy, Technology, and High-End Manufacturing (like Aerospace or Automotive). We “graduated” from low-end manufacturing long ago, and it would seem illogical to return there. Prior to the pandemic, we had 3.4% unemployment, and an increasingly high standard of living across the board.

What I believe we want in this country are the best jobs, the highest pay, and the lowest impact to people and the environment. Would pulling low end manufacturing into the United States accomplish any of those goals?

On the other hand, are any of those things more valuable than our national security?

Are there any alternatives to an escalation that could possibly lead to cold war? Is there a strategic framework that provides both?

I would love to hear your thoughts!

Here are some additional articles I researched on this subject that are worth a read:
ABOUT THE SERIES

Each week, Mercado CEO Rob Garrison pens his latest learnings from the supply chain industry as part of a series run for his LinkedIn followers. Each article aims to share a little insight into what's going on that week and to help foster discussion amongst industry professionals across levels, geographies, and companies.

You can connect with Rob on Linkedin by following this link.
GT Nexus founder and supply chain industry veteran, John Urban, has joined the Mercado board of directors.

I have been doing a lot of research related to ending trade with China.

My conclusion: It is complicated.

Economic vs. National Interests.

Modern supply chains are global and interconnected. Unwinding them will take time and treasure.

Consider Tesla.

Tesla could not manufacture Model 3's in California for two months, but they were producing and selling them in China. Tesla sold 10,160 Model 3's in China in March, despite the auto market in China being down over 40% (Tesla China Sales).

Or Apple.

China is Apple’s 3rd largest consumer market after the US and Europe. Samsung — their largest competitor and the largest cellphone manufacturer for most of 2019 — produces all their phones in Asia. Huawei does as well, and they currently have a 15% share of global phone sales (Global Cellphone Market Share).

Or General Motors.

China is their #1 market. GM sold more than 3 million vehicles in China in 2019.

Or Nike, where China is their 2nd largest market.

Would it be better if they moved all their operations back to the US if doing so means they are not able to compete in the 2nd largest market in the world?

We live in a world where everything is interconnected. If you pull out of global markets, there are consequences in sales, costs, and profits.

On the other side of the economic interests are vital national interests.

Reasons why we should decouple from China.


  • Political – They pose a threat to the US politically and militarily. China is a superpower in its own right with the largest population, 2nd largest economy, and the 3rd most powerful military.

  • Strategic – They now make some of the products vital to our national interest (i.e. military parts, pharmaceuticals, and PPE).

  • Fair Play - Since joining the World Trade Organization (WTO) in 2001, there have been accusations that China is not playing by the rules the WTO designed to protect free trade, such as intellectual property and market access (Cato Institute).

  • Technology – Concerns that they are developing technology that can be used for nefarious purposes.

  • Just in Case – Supply chain fragility may create the need to move to a just-in-case inventory scenario. Most companies are punished for excess inventory due to the cost. Moving production closer to home would make it less necessary to carry excess inventory.

Why we should not decouple from China.


In his great book The Wealth of Nations, Adam Smith said, “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy...What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.”



  • US competitiveness – By Apple moving assembly to the US, Samsung and Huawei would have a significant cost and turf advantage, limiting Apple's competitiveness globally. Apple profits provide some of the best jobs in the world — both in pay and benefits. Apple also spends $4.2B of profit on R&D each year. As we move from 4G to 5G, it is critical that we can compete on technology against Chinese companies like Huawei. If US companies like Apple have higher costs and lower sales, will their innovation be hampered?

  • Company competitiveness – Will consumers pay higher prices, shareholders accept lower margins, or environmentalists and the government relax standards? Related, it is not easy to find suppliers that can make products reliably, and along with that challenge, the reliable tier one and two suppliers that supply to them. The solution to all three of those challenges is automation, however that comes at the expense of jobs.

  • Sales – Without the ability to sell in the world’s second largest market, will other countries win the sales race? For example, Brazil soybean shipments to China have exploded at the expense of US soybeans. Russia is now supplying them with natural gas. China is a huge market for US farmers, producers, and high tech manufacturers. Restricted access will hurt their sales and, in turn, will shift advantage to other countries. Lori Ann LaRocca's book Containers Don't Lie tells the story of what happens with "X" when you alter "Y." For example, if we restrict a product from coming here, China restricts one of ours from going there.
  • Free Trade – Over the last 50 years free trade has largely been credited with increasing competitiveness leading to lower costs which benefits the consumer, producers, and the economy (Free Trade Benefits).

Why we should continue to pursue a measured strategic approach.


The best solution in my opinion is not a trade war, cold war or worse. Rather a strategic policy that helps determine how we deal with global trade generally and specifically with those who don't compete fairly. It does not have to be all or nothing.

Can we agree to trade our cotton for their shirts, or their toys for our beef? At the same time can we also decide that in the future, we will set out to make the best PPE and pharmaceuticals in the world and sell them to China?

We need to think in longer increments, as it takes time to implement or unwind decisions which are made in haste, and the economic consequences are enormous.

America’s biggest strengths are Democracy, Technology, and High-End Manufacturing (like Aerospace or Automotive). We “graduated” from low-end manufacturing long ago, and it would seem illogical to return there. Prior to the pandemic, we had 3.4% unemployment, and an increasingly high standard of living across the board.

What I believe we want in this country are the best jobs, the highest pay, and the lowest impact to people and the environment. Would pulling low end manufacturing into the United States accomplish any of those goals?

On the other hand, are any of those things more valuable than our national security?

Are there any alternatives to an escalation that could possibly lead to cold war? Is there a strategic framework that provides both?

I would love to hear your thoughts!

Here are some additional articles I researched on this subject that are worth a read:
ABOUT THE SERIES

Each week, Mercado CEO Rob Garrison pens his latest learnings from the supply chain industry as part of a series run for his LinkedIn followers. Each article aims to share a little insight into what's going on that week and to help foster discussion amongst industry professionals across levels, geographies, and companies.

You can connect with Rob on Linkedin by following this link.
                       

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Thank you for using Mercado. Our goal is to empower businesses to better navigate the complex world of importing. We know data security is of paramount importance, so we place high standards on ensuring it is safely and respectfully secured. We are committed to following and continuously evolving best practices to support this principle. Your data is yours, and we guard it closely. We do not sell any of your information, and we will always be fully transparent on how we collect and use your data. That's a promise.
Copyright © Mercado Labs
Made with    by studionine.agency
                       

Terms of Service   |   Privacy Policy
From us to you...

Thank you for using Mercado. Our goal is to empower businesses to better navigate the complex world of importing. We know data security is of paramount importance, so we place high standards on ensuring it is safely and respectfully secured. We are committed to following and continuously evolving best practices to support this principle. Your data is yours, and we guard it closely. We do not sell any of your information, and we will always be fully transparent on how we collect and use your data. That's a promise.
Copyright © Mercado Labs
Made with    by studionine.agency
                       

Terms of Service   |   Privacy Policy
From us to you...

Thank you for using Mercado. Our goal is to empower businesses to better navigate the complex world of importing. We know data security is of paramount importance, so we place high standards on ensuring it is safely and respectfully secured. We are committed to following and continuously evolving best practices to support this principle. Your data is yours, and we guard it closely. We do not sell any of your information, and we will always be fully transparent on how we collect and use your data. That's a promise.
Copyright © Mercado Labs
Made with    by studionine.agency
                       

Terms of Service   |   Privacy Policy
From us to you...

Thank you for using Mercado. Our goal is to empower businesses to better navigate the complex world of importing. We know data security is of paramount importance, so we place high standards on ensuring it is safely and respectfully secured. We are committed to following and continuously evolving best practices to support this principle. Your data is yours, and we guard it closely. We do not sell any of your information, and we will always be fully transparent on how we collect and use your data. That's a promise.
Copyright © Mercado Labs
Made with    by studionine.agency