Michael Hetzel, "Global Manufacturing and Trade Issues"


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Michael Hetzel, "Global Manufacturing and Trade Issues"

  1. 1. Global Manufacturing: Myth, Reality & Strategic Options StateLine World Trade Association November 19, 2009 Michael L. Hetzel, VP / Americas Pro QC International www.proqc.com [email_address] © 2009 M.L. Hetzel
  2. 2. “ We can’t compete from the U.S.” © 2009 M.L. Hetzel
  3. 3. Who says? © 2009 M.L. Hetzel
  4. 4. Don’t Trust Your Business to Media <ul><li>Very little accurate, objective and complete information coming from media – even trade media </li></ul><ul><li>Lack of context is nearly universal </li></ul><ul><li>Manufacturing head counts trumpeted, actual output ignored </li></ul><ul><li>Plant closings highlighted, plant openings ignored – “If it bleeds it leads” </li></ul><ul><li>Politicization of global trade issues resulting from political polarization and the breakdown of political integrity </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  5. 5. Do Your Own Research <ul><li>Don’t believe me - or anyone else </li></ul><ul><li>All competitive and market information must be customized and dynamic – there are no canned or static solutions </li></ul><ul><li>Go direct to data sources – statistics can distort </li></ul><ul><li>Always account for the context of information and data </li></ul><ul><li>Research global conditions even if a market is domestic only – don’t miss opportunities or threats </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  6. 6. Common Myths vs. Reality <ul><li>China’s Growth and Size: </li></ul><ul><li>Media trumpets “10% Growth” but not China’s actual GDP…. </li></ul><ul><li>… .which in 2008 was estimated at US$3.327T ($3.249T 2007) Source: CIA World Factbook </li></ul><ul><li>U.S. GDP for 2008 was US$14.44T ($13.79T 2007) Source: CIA World Factbook </li></ul><ul><li>China’s reported growth rate has been challenged ( Lester Thurow, NYT, 8/19/07 ) </li></ul><ul><li>PPP not valid for international comparisons other than quality of life, marketing and foreign aid evaluations </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  7. 7. Common Myths vs. Reality <ul><li>Myth: U.S. manufacturing output is dropping long term </li></ul><ul><li>Reality: U.S. industrial output for 2008, during the recession, was US$2.77T ($2.84T 2007, $2.69T 2006) Source: CIA World Factbook </li></ul><ul><li>Myth: China is the “Factory Floor to the World” </li></ul><ul><li>Reality: China’s industrial output for 2008 was US$2.1T ($1.6T 2007, $1.21T 2006), well below U.S. output Source: CIA World Factbook </li></ul><ul><li>India’s GDP – 2008 estimate = $1.207T Source: CIA World Factbook </li></ul><ul><li>Vietnam’s GDP – 2008 estimate = $89.83B Source: CIA World Factbook </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  8. 8. Other Myths vs. Reality <ul><li>Myth: China is the cause of our Current Account Deficit (the “Trade Deficit”) </li></ul><ul><li>Reality: We have a deficit with 13 of our top 15 trading partners Source: U.S. Census Bureau </li></ul><ul><li>Myth: Declining U.S. manufacturing employment equates to reduced output </li></ul><ul><li>Reality: U.S. output was at the all time high in 2006 Source: Federal Reserve Bank </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  9. 9. So What? <ul><li>Not knowing GDP data creates a false representation of the competitive challenges and supply chain risks and opportunities – the “Current Reality” </li></ul><ul><li>Accepting overstated growth data also creates a false representation of the situation for both marketing and supply chain planning </li></ul><ul><li>A flawed vision of the current reality leads to flawed policies and strategies for governments and companies, and causes fatalism among individuals </li></ul><ul><li>Fatalism in business is usually fatal to the company – distribute knowledge throughout the organization </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  10. 10. Amplified Costs & Risks of International Procurement <ul><li>Supply chain length & costs; logistics, inventories, queues – accurately identify Total Cost of Procurement </li></ul><ul><li>Quality related risks and replacement product delivery delays </li></ul><ul><li>Social and environmental compliance issues </li></ul><ul><li>Logistical risks and market tolerance for delays </li></ul><ul><li>Rising fuel costs </li></ul><ul><li>Carbon footprint increased by logistics </li></ul><ul><li>Political risks </li></ul><ul><li>Currency risks </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  11. 11. Marketing Implications of Supply Chain Architecture <ul><li>Marketing into the source country </li></ul><ul><li>Marketing into other countries near the source country – Third Market Strategies </li></ul><ul><li>Advantages of FTAs between market and source countries - The FTA Matrix </li></ul><ul><li>Benefits of distributed supply chains to meet content requirements across several source and market countries – i.e. NAFTA </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  12. 12. Strategic Overshoot © <ul><li>The tendency to decide to operate in another country, often China these days, before careful analysis of the actual business and market conditions rationalizes the decision </li></ul><ul><li>The real solution is often much closer to home </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  13. 13. China is Changing Fast Costs are Increasing <ul><li>Raw material cost inflation and shortages – in China and also elsewhere due to global demand </li></ul><ul><li>Energy costs and shortages </li></ul><ul><li>Pressure to improve environmental management </li></ul><ul><li>Currency appreciation </li></ul><ul><li>Labor law changes, labor shortages, strikes and riots, wage inflation </li></ul><ul><li>Changes in VAT rebate rules as government redirects capacity and resource consumption from exports to internal markets in select categories </li></ul><ul><li>Redistribution of cost advantages from the south of China to other areas – intentional and unintentional </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  14. 14. Chinese Factory Shakeout <ul><li>More than 100,000 factories have closed in the last year alone – expect many more to close </li></ul><ul><li>Factories are being forced to move up the product value chain as well as outsource from other countries – align supply chain architecture with local and regional market segments in any case </li></ul><ul><li>Surviving factories will be better but more expensive - same conditions that affect U.S. factories </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  15. 15. Other Concerns with China <ul><li>Port congestion – inbound and outbound - both in China and the U.S. </li></ul><ul><li>Inland logistics limitations with lower cost areas of China – inbound and outbound </li></ul><ul><li>Tax law changes – recent and future </li></ul><ul><li>Tariff regulations and changes </li></ul><ul><li>Currency controls – new export value “parking” regulation </li></ul><ul><li>Intellectual Property protection </li></ul><ul><li>Demographics – workforce, market, per capita GDP, PPP </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  16. 16. Quality Drift and Related Risks are Increasing – Not Just in China <ul><li>Quality Drift is the reduction in product quality along with the increased risk of materials substitutions (i.e. lead paint and low grade metals) and shipment delays. This is currently driven in large part by the refusal of Western buyers to allow suppliers to pass along cost increases and amplified by cost cutting during the recession </li></ul><ul><li>Many buyers also fail to consider the complete supply chain matrix – and fail to qualify inputs that are also subject to quality drift before they become imbedded in their products </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  17. 17. Supply Chain Options: Culture & Language <ul><li>Regions in China </li></ul><ul><li>Greater Asia – Vietnam, India, Thailand, Malaysia, Others </li></ul><ul><li>Central & Eastern Europe </li></ul><ul><li>Latin America – Mexico, Brazil, Others </li></ul><ul><li>Regions in the U.S. </li></ul><ul><li>Other Countries – Russia, Middle East </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  18. 18. Supply Chain Options: Time Zones <ul><li>Communications </li></ul><ul><li>Travel </li></ul><ul><li>Dateline Effect </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  19. 19. Supply Chain Options: India <ul><li>Low cost labor </li></ul><ul><li>Very large emerging market </li></ul><ul><li>Weak supply chain </li></ul><ul><li>Poor infrastructure – roads, rail, power </li></ul><ul><li>Corrupt and inept bureaucracy </li></ul><ul><li>Arcane and burdensome tax rules </li></ul><ul><li>Much like China was 30 years ago - but without the efficiencies of a totalitarian regime going forward </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  20. 20. Supply Chain Options: Vietnam <ul><li>Low cost labor </li></ul><ul><li>Midsize emerging market </li></ul><ul><li>Weak, early stage supply chain </li></ul><ul><li>Poor infrastructure </li></ul><ul><li>Small country with limited resources </li></ul><ul><li>Very high inflation </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  21. 21. Supply Chain Options: Eastern & Central Europe <ul><li>Low cost labor </li></ul><ul><li>Gateway to the EU market </li></ul><ul><li>Regional logistics </li></ul><ul><li>Substantial production cost inflationary pressures in some countries </li></ul><ul><li>Pockets of both excellent and poor infrastructure </li></ul><ul><li>Romania, Hungary, Czech Republic, Others </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  22. 22. Supply Chain Options: Mexico <ul><li>Interior states offer low cost labor </li></ul><ul><li>Large emerging market </li></ul><ul><li>NAFTA gateway to U.S. market </li></ul><ul><li>Gateway to Latin American markets </li></ul><ul><li>Regional logistics – no ocean freight </li></ul><ul><li>FTAs with many countries </li></ul><ul><li>Availability of Shelters </li></ul><ul><li>Higher cost than Asia for some SKUs </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  23. 23. Supply Chain Options: USA <ul><li>Proximity to U.S. market – no customs, tariffs or national frontiers (and port delays) to cross – reduced inventories and delivery queues </li></ul><ul><li>Local control of the supply chain, no language, cultural, legal or regulatory translations needed </li></ul><ul><li>BUT competitive suppliers (based on total cost of procurement) are difficult, sometimes impossible, to find </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  24. 24. Supply Chain Options: Other <ul><li>Many countries have niche strengths but aren’t developing a general manufacturing base – many countries should be initially researched and the potentially viable subgroup monitored long term </li></ul><ul><li>Comparative advantage generally survives beyond the short term, special advantages of emerging production capabilities, growth oriented trade policies and initial growth rates of emerging economies, and should be well defined and monitored </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  25. 25. Supply Chain Architecture: Proximity to Markets <ul><li>The large companies are already redesigning their supply chains </li></ul><ul><li>Long term trend will be proximity to regional markets </li></ul><ul><li>Design dynamic and adaptive supply chains, integrated with marketing objectives – then conduct continuous research and evolve with global conditions </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  26. 26. Supply Chain Options: Controlling Old & New Locations <ul><li>Country and regional condition evaluations </li></ul><ul><li>Evaluation, selection and qualification of suppliers and their supply chains – include switching costs in all evaluations </li></ul><ul><li>Managing quality in a distributed supply chain – Internal resources and 3PQ </li></ul><ul><li>Social Accountability – Assessment, ongoing compliance and defensibility - SA8000 / ISO26000 / ISO14001 </li></ul><ul><li>Working directly with the factories </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  27. 27. Four Fundamental Changes Needed Going Forward <ul><li>Attitude </li></ul><ul><li>Marketing </li></ul><ul><li>Collaboration </li></ul><ul><li>Products & Processes </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  28. 28. One Approach to the Process: Reintegration of Manufacturing <ul><li>Continuous research process for all relevant issues across all countries of current engagement as well as for countries of potential engagement – generate and continuously update near and far term profiles for 6 month, 1 year, 5 year and 10 year horizons </li></ul><ul><li>Joint marketing, sales, purchasing and quality committee setting parameters for all marketing, sales, sourcing and quality functions </li></ul><ul><li>New country task forces – all functions represented plus finance and legal </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  29. 29. The Time for Next U.S. Entrepreneurial Wave is Now <ul><li>Current shortage of U.S. suppliers is preventing the return of production for some product categories </li></ul><ul><li>New distribution of U.S. manufacturing clusters are emerging – map it out now </li></ul><ul><li>Educational system must change and restore the option of pursuing manufacturing careers </li></ul><ul><li>Tax policies at all levels of government can and should emulate early cycle industrialization </li></ul><ul><li>Must stop “Retail Manufacturing” quotes from killing opportunities </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  30. 30. The U.S. Doesn’t Import Too Much… <ul><li>… We Export Too Little </li></ul><ul><li>© 2009 M.L. Hetzel </li></ul>
  31. 31. Global Manufacturing: Myth, Reality & Strategic Options StateLine World Trade Association November 19, 2009 Michael L. Hetzel, VP / Americas Pro QC International www.proqc.com [email_address] © 2009 M.L. Hetzel