In response to my articles, I often get feedback from interesting individuals and organizations. This fall I heard from Eamon McKinney, a trade consultant with a rich background in Chinese manufacturing and supply chain.
For over 40 years, McKinney has worked with non-Chinese companies in establishing joint ventures with Chinese partners, as well as setting up Chinese supply chains. In recent years, however, he has been preaching that U.S.-sited manufacturers should work to disengage themselves from supply chains located in China.
Why? Because markets worldwide have become more unpredictable. In other words, demand has been more difficult to accurately forecast. This puts China—and other overseas sources—at a big disadvantage when it comes to flexibly responding to variations in demand forecasts for the U.S. market.
This aligns with a lot of what I have been saying about the need for OEMs to re-evaluate their source selection so that they can better align supplier Build-To-Demand capability to the ups-and-downs of market demand.
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Here are some observations Mr. McKinney has about the Chinese economy, which should give pause to companies with either a presence there or that rely on suppliers located in China.
- The Chinese government sets the country’s economic policy—its five year plan—and monitors firms to ensure they adhere to it. The current plan—set in place prior to COVID-19—includes a goal to become less economically dependent on trade with the United States.
- The Chinese government sets its economic policy for the long run. For instance, in Africa, China has offered long-term financing for the building of infrastructure, positioning itself to gain long-term contracts for the management and maintenance of that infrastructure. This ties the economies of those emerging markets very tightly with that of China. China can operate in this manner because its companies do not face the kind of boardwalk-like type pressure U.S. manufacturers face to deliver positive quarterly results.
- China doesn’t focus its economic strategy on increasing its share of current markets. Rather, it focuses on growing markets—and through this, increasing their presence in them.
- There was a pre-COVID-19 order fulfillment issue for U.S. purchasers of parts sourced in China. For instance, changing schedules of overseas suppliers—i.e., adjusting them to market demand that varied from what was forecast—can take months due to firm commitment contractual clauses and transportation time. This has led to increased OEM internal costs and loss of sales.
- The trade relationship between China and the U.S. has been irretrievably changed/damaged due to our country’s tariffs on their goods. At the same time (as previously pointed out), China is looking to reduce its dependence on the U.S. purchases. For example, over time, there is little doubt that China will look to re-source agricultural products currently bought from the U.S. to other countries, which will have a significant negative affect on our country’s agricultural industry. In spite of this, China’s trade surplus with the United States continues an upward trend (see statement from China Exports Surge by Forecast-Beating 21.1% in November: “China's trade surplus with the U.S.—a major point of conflict in their bruising trade war—expanded 52% to $37.4 billion last month.)
- At the same time, there are certain products that the U.S. is dependent on China for—such as rare earth minerals, medical devices and drugs, and electronic parts and components—and will probably remain so for at least for the near term.
- Instead of addressing the root cause of supply chain non-performance, some U.S.-based OEMs are relying on old solutions such as increasing warehouse space so they can hold more purchased “safety stock” material.
- The forecast error/supplier flexibility issue is bigger than just for reshoring. Implementing the required step-function increases in Order Fulfillment flexibility still is not a priority for many U.S.-based OEMs. This will require a major change to OEM sourcing criteria.
A new 21st-century business model is needed.
Paul Ericksen is IndustryWeek’s supply chain advisor. He has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers.
