Michael Hetzel, "Global Manufacturing and Trade Issues"

Global Manufacturing: Global Manufacturing: Myth, Reality Myth, Reality & &

Strategic OptionsStrategic Options

StateLine World Trade AssociationStateLine World Trade AssociationNovember 19, 2009November 19, 2009

Michael L. Hetzel, VP / AmericasMichael L. Hetzel, VP / AmericasPro QC InternationalPro QC International

[email protected]@proqc.com

© 2009 M.L. Hetzel© 2009 M.L. Hetzel

““We can’t compete from the U.S.”We can’t compete from the U.S.”


Who says?Who says?


Don’t Trust Your Business to MediaDon’t Trust Your Business to Media

• Very little accurate, objective and complete information Very little accurate, objective and complete information coming from media – even trade mediacoming from media – even trade media

• Lack of context is nearly universalLack of context is nearly universal• Manufacturing head counts trumpeted, actual output Manufacturing head counts trumpeted, actual output

ignoredignored• Plant closings highlighted, plant openings ignored – Plant closings highlighted, plant openings ignored –

“If it bleeds it leads”“If it bleeds it leads”• Politicization of global trade issues resulting from political Politicization of global trade issues resulting from political

polarization and the breakdown of political integritypolarization and the breakdown of political integrity


Do Your Own ResearchDo Your Own Research

• Don’t believe me - or anyone elseDon’t believe me - or anyone else• All competitive and market information must be All competitive and market information must be

customized and dynamic – there are no canned or static customized and dynamic – there are no canned or static solutionssolutions

• Go direct to data sources – statistics can distortGo direct to data sources – statistics can distort• Always account for the Always account for the contextcontext of information and data of information and data• Research global conditions even if a market is domestic Research global conditions even if a market is domestic

only – don’t miss opportunities or threatsonly – don’t miss opportunities or threats


Common Myths vs. RealityCommon Myths vs. Reality

China’s Growth and Size:China’s Growth and Size:• Media trumpets “10% Growth” but not China’s actual Media trumpets “10% Growth” but not China’s actual

GDP….GDP….• …….which in 2008 was estimated at US$3.327T ($3.249T .which in 2008 was estimated at US$3.327T ($3.249T

2007) 2007) Source: CIA World FactbookSource: CIA World Factbook

• U.S. GDP for 2008 was US$14.44T ($13.79T 2007) U.S. GDP for 2008 was US$14.44T ($13.79T 2007) Source:Source: CIA World FactbookCIA World Factbook

• China’s reported growth rate has been challenged China’s reported growth rate has been challenged ((Lester Thurow, NYT, 8/19/07Lester Thurow, NYT, 8/19/07))

• PPP not valid for international comparisons other than PPP not valid for international comparisons other than quality of life, quality of life, marketingmarketing and foreign aid evaluations and foreign aid evaluations


Common Myths vs. RealityCommon Myths vs. Reality

• Myth: U.S. manufacturing output is dropping long termMyth: U.S. manufacturing output is dropping long term• Reality: U.S. industrial output for 2008, during the Reality: U.S. industrial output for 2008, during the

recession, was US$2.77T ($2.84T 2007, $2.69T 2006) recession, was US$2.77T ($2.84T 2007, $2.69T 2006) Source: CIA World FactbookSource: CIA World Factbook

• Myth: China is the “Factory Floor to the World”Myth: China is the “Factory Floor to the World”• Reality: China’s industrial output for 2008 was US$2.1T Reality: China’s industrial output for 2008 was US$2.1T

($1.6T 2007, $1.21T 2006), well below U.S. output($1.6T 2007, $1.21T 2006), well below U.S. output Source: CIA World FactbookSource: CIA World Factbook

• India’s GDP – 2008 estimate = $1.207T India’s GDP – 2008 estimate = $1.207T Source: CIA World FactbookSource: CIA World Factbook

• Vietnam’s GDP – 2008 estimate = $89.83B Vietnam’s GDP – 2008 estimate = $89.83B Source: CIA World FactbookSource: CIA World Factbook


Other Myths vs. RealityOther Myths vs. Reality

• Myth: China is the cause of our Current Account Deficit Myth: China is the cause of our Current Account Deficit (the “Trade Deficit”)(the “Trade Deficit”)

• Reality: We have a deficit with 13 of our top 15 trading Reality: We have a deficit with 13 of our top 15 trading partners partners Source: U.S. Census BureauSource: U.S. Census Bureau

• Myth: Declining U.S. manufacturing employment Myth: Declining U.S. manufacturing employment equates to reduced outputequates to reduced output

• Reality: U.S. output was at the all time high in 2006 Reality: U.S. output was at the all time high in 2006 Source: Federal Reserve BankSource: Federal Reserve Bank


So What?So What?

• Not knowing GDP data creates a false representation of Not knowing GDP data creates a false representation of the competitive challenges and supply chain risks and the competitive challenges and supply chain risks and opportunities – the “Current Reality”opportunities – the “Current Reality”

• Accepting overstated growth data also creates a false Accepting overstated growth data also creates a false representation of the situation for both marketing and representation of the situation for both marketing and supply chain planningsupply chain planning

• A flawed vision of the current reality leads to flawed A flawed vision of the current reality leads to flawed policies and strategies for governments and companies, policies and strategies for governments and companies, and causes fatalism among individualsand causes fatalism among individuals

• Fatalism in business is usually fatal to the company – Fatalism in business is usually fatal to the company – distribute knowledge throughout the organizationdistribute knowledge throughout the organization


Amplified Costs & Risks Amplified Costs & Risks of International Procurementof International Procurement

• Supply chain length & costs; logistics, inventories, Supply chain length & costs; logistics, inventories, queues – accurately identify Total Cost of Procurementqueues – accurately identify Total Cost of Procurement

• Quality related risks and replacement product delivery Quality related risks and replacement product delivery delaysdelays

• Social and environmental compliance issuesSocial and environmental compliance issues• Logistical risks and market tolerance for delaysLogistical risks and market tolerance for delays• Rising fuel costsRising fuel costs• Carbon footprint increased by logisticsCarbon footprint increased by logistics• Political risksPolitical risks• Currency risksCurrency risks


Marketing Implications of Marketing Implications of Supply Chain ArchitectureSupply Chain Architecture

• Marketing into the source countryMarketing into the source country

• Marketing into other countries near the source country – Marketing into other countries near the source country – Third Market StrategiesThird Market Strategies

• Advantages of FTAs between market and source Advantages of FTAs between market and source countries - The FTA Matrixcountries - The FTA Matrix

• Benefits of distributed supply chains to meet content Benefits of distributed supply chains to meet content requirements across several source and market countries requirements across several source and market countries – i.e. NAFTA– i.e. NAFTA

© 2009 M.L. Hetzel © 2009 M.L. Hetzel

Strategic OvershootStrategic Overshoot©©

The tendency to decide to operate in another country, The tendency to decide to operate in another country, often China these days, before careful analysis of the often China these days, before careful analysis of the actual business and market conditions rationalizes the actual business and market conditions rationalizes the

decisiondecision

The real solution is often much closer to homeThe real solution is often much closer to home


China is Changing FastChina is Changing FastCosts are IncreasingCosts are Increasing

• Raw material cost inflation and shortages – in China and Raw material cost inflation and shortages – in China and also elsewhere due to global demandalso elsewhere due to global demand

• Energy costs and shortagesEnergy costs and shortages• Pressure to improve environmental managementPressure to improve environmental management• Currency appreciationCurrency appreciation• Labor law changes, labor shortages, strikes and riots, Labor law changes, labor shortages, strikes and riots,

wage inflationwage inflation• Changes in VAT rebate rules as government redirects Changes in VAT rebate rules as government redirects

capacity and resource consumption from exports to capacity and resource consumption from exports to internal markets in internal markets in selectselect categories categories

• Redistribution of cost advantages from the south of Redistribution of cost advantages from the south of China to other areas – intentional and unintentionalChina to other areas – intentional and unintentional


Chinese Factory ShakeoutChinese Factory Shakeout

• More than 100,000 factories have closed in the last More than 100,000 factories have closed in the last year alone – expect many more to closeyear alone – expect many more to close

• Factories are being forced to move up the product Factories are being forced to move up the product value chain as well as outsource from other countries value chain as well as outsource from other countries – align supply chain architecture with local and – align supply chain architecture with local and regional market segments in any caseregional market segments in any case

• Surviving factories will be better but more expensive - Surviving factories will be better but more expensive - same conditions that affect U.S. factoriessame conditions that affect U.S. factories


Other Concerns with ChinaOther Concerns with China

• Port congestion – inbound and outbound - both in China Port congestion – inbound and outbound - both in China and the U.S.and the U.S.

• Inland logistics limitations with lower cost areas of Inland logistics limitations with lower cost areas of China – inbound and outboundChina – inbound and outbound

• Tax law changes – recent and futureTax law changes – recent and future• Tariff regulations and changesTariff regulations and changes• Currency controls – new export value “parking” regulationCurrency controls – new export value “parking” regulation• Intellectual Property protectionIntellectual Property protection• Demographics – workforce, market, per capita GDP, PPPDemographics – workforce, market, per capita GDP, PPP


Quality Drift and Related Risks Quality Drift and Related Risks are Increasing – Not Just in Chinaare Increasing – Not Just in China

Quality Drift is the reduction in product quality along with Quality Drift is the reduction in product quality along with the increased risk of materials substitutions (i.e. lead paint the increased risk of materials substitutions (i.e. lead paint

and low grade metals) and shipment delays. This is and low grade metals) and shipment delays. This is currently driven in large part by the refusal of Western currently driven in large part by the refusal of Western

buyers to allow suppliers to pass along cost increases and buyers to allow suppliers to pass along cost increases and amplified by cost cutting during the recessionamplified by cost cutting during the recession

Many buyers also fail to consider the complete supply chain Many buyers also fail to consider the complete supply chain matrix – and fail to qualify inputs that are also subject to matrix – and fail to qualify inputs that are also subject to

quality drift before they become imbedded in their productsquality drift before they become imbedded in their products


Supply Chain Options: Supply Chain Options: Culture & LanguageCulture & Language

• Regions in ChinaRegions in China• Greater Asia – Vietnam, India, Thailand, Greater Asia – Vietnam, India, Thailand,

Malaysia, OthersMalaysia, Others• Central & Eastern EuropeCentral & Eastern Europe• Latin America – Mexico, Brazil, OthersLatin America – Mexico, Brazil, Others• Regions in the U.S.Regions in the U.S.• Other Countries – Russia, Middle EastOther Countries – Russia, Middle East


Supply Chain Options: Supply Chain Options: Time ZonesTime Zones

• CommunicationsCommunications• TravelTravel• Dateline EffectDateline Effect


Supply Chain Options: IndiaSupply Chain Options: India

• Low cost laborLow cost labor• Very large emerging marketVery large emerging market• Weak supply chainWeak supply chain• Poor infrastructure – roads, rail, powerPoor infrastructure – roads, rail, power• Corrupt and inept bureaucracyCorrupt and inept bureaucracy• Arcane and burdensome tax rulesArcane and burdensome tax rules• Much like China was 30 years ago - but without the Much like China was 30 years ago - but without the

efficiencies of a totalitarian regime going forwardefficiencies of a totalitarian regime going forward© 2009 M.L. Hetzel© 2009 M.L. Hetzel

Supply Chain Options: VietnamSupply Chain Options: Vietnam

• Low cost laborLow cost labor

• Midsize emerging marketMidsize emerging market

• Weak, early stage supply chainWeak, early stage supply chain

• Poor infrastructurePoor infrastructure

• Small country with limited resourcesSmall country with limited resources

• Very high inflationVery high inflation


Supply Chain Options: Supply Chain Options: Eastern & Central EuropeEastern & Central Europe

• Low cost laborLow cost labor• Gateway to the EU marketGateway to the EU market• Regional logisticsRegional logistics• Substantial production cost inflationary pressures in Substantial production cost inflationary pressures in

some countriessome countries• Pockets of both excellent and poor infrastructurePockets of both excellent and poor infrastructure• Romania, Hungary, Czech Republic, OthersRomania, Hungary, Czech Republic, Others


Supply Chain Options: MexicoSupply Chain Options: Mexico

• Interior states offer low cost laborInterior states offer low cost labor• Large emerging marketLarge emerging market• NAFTA gateway to U.S. marketNAFTA gateway to U.S. market• Gateway to Latin American marketsGateway to Latin American markets• Regional logistics – no ocean freightRegional logistics – no ocean freight• FTAs with many countriesFTAs with many countries• Availability of SheltersAvailability of Shelters• Higher cost than Asia for some SKUsHigher cost than Asia for some SKUs


Supply Chain Options: USASupply Chain Options: USA

• Proximity to U.S. market – no customs, tariffs or Proximity to U.S. market – no customs, tariffs or national frontiers (and port delays) to cross – reduced national frontiers (and port delays) to cross – reduced inventories and delivery queuesinventories and delivery queues

• Local control of the supply chain, no language, Local control of the supply chain, no language, cultural, legal or regulatory translations neededcultural, legal or regulatory translations needed

• BUT competitive suppliers (based on total cost of BUT competitive suppliers (based on total cost of procurement) are difficult, sometimes impossible, to procurement) are difficult, sometimes impossible, to findfind


Supply Chain Options: OtherSupply Chain Options: Other

• Many countries have niche strengths but aren’t Many countries have niche strengths but aren’t developing a general manufacturing base – many developing a general manufacturing base – many countries should be initially researched and the countries should be initially researched and the potentially viable subgroup monitored long termpotentially viable subgroup monitored long term

• Comparative advantage generally survives beyond Comparative advantage generally survives beyond the short term, special advantages of emerging the short term, special advantages of emerging production capabilities, growth oriented trade policies production capabilities, growth oriented trade policies and initial growth rates of emerging economies, and and initial growth rates of emerging economies, and should be well defined and monitoredshould be well defined and monitored


Supply Chain Architecture: Supply Chain Architecture: Proximity to Markets Proximity to Markets

• The large companies are already redesigning their The large companies are already redesigning their supply chainssupply chains

• Long term trend will be proximity to regional marketsLong term trend will be proximity to regional markets• Design Design dynamicdynamic and adaptive supply chains, and adaptive supply chains,

integrated with marketing objectives – then conduct integrated with marketing objectives – then conduct continuous research and evolve with global continuous research and evolve with global conditionsconditions


Supply Chain Options: Supply Chain Options: Controlling Old & New Locations Controlling Old & New Locations

• Country and regional condition evaluationsCountry and regional condition evaluations• Evaluation, selection and qualification of suppliers Evaluation, selection and qualification of suppliers

and their supply chains – include switching costs in and their supply chains – include switching costs in all evaluationsall evaluations

• Managing quality in a distributed supply chain – Managing quality in a distributed supply chain – Internal resources and 3PQInternal resources and 3PQ

• Social Accountability – Assessment, ongoing Social Accountability – Assessment, ongoing compliance and defensibility - compliance and defensibility - SA8000 / ISO26000 / ISO14001SA8000 / ISO26000 / ISO14001

• Working directly with the factoriesWorking directly with the factories


Four Fundamental Changes Four Fundamental Changes Needed Going ForwardNeeded Going Forward

1.1. AttitudeAttitude2.2. MarketingMarketing3.3. CollaborationCollaboration4.4. Products & ProcessesProducts & Processes


One Approach to the Process: One Approach to the Process: Reintegration of ManufacturingReintegration of Manufacturing

1.1. Continuous research process for all relevant issues Continuous research process for all relevant issues across all countries of current engagement as well as for across all countries of current engagement as well as for countries of potential engagement – generate and countries of potential engagement – generate and continuously update near and far term profiles for 6 continuously update near and far term profiles for 6 month, 1 year, 5 year and 10 year horizonsmonth, 1 year, 5 year and 10 year horizons

2.2. Joint marketing, sales, purchasing and quality committee Joint marketing, sales, purchasing and quality committee setting parameters for all marketing, sales, sourcing and setting parameters for all marketing, sales, sourcing and quality functionsquality functions

3.3. New country task forces – all functions represented plus New country task forces – all functions represented plus finance and legalfinance and legal


The Time for Next U.S. The Time for Next U.S. Entrepreneurial Wave is Entrepreneurial Wave is NowNow

• Current shortage of U.S. suppliers is preventing the Current shortage of U.S. suppliers is preventing the return of production for some product categoriesreturn of production for some product categories

• New distribution of U.S. manufacturing clusters are New distribution of U.S. manufacturing clusters are emerging – map it out nowemerging – map it out now

• Educational system must change and restore the Educational system must change and restore the option of pursuing manufacturing careersoption of pursuing manufacturing careers

• Tax policies at all levels of government can and Tax policies at all levels of government can and should emulate early cycle industrializationshould emulate early cycle industrialization

• Must stop “Retail Manufacturing” quotes from killing Must stop “Retail Manufacturing” quotes from killing opportunitiesopportunities


The U.S. Doesn’t Import Too The U.S. Doesn’t Import Too Much…Much…

……We Export Too LittleWe Export Too Little


Global Manufacturing: Global Manufacturing: Myth, Reality Myth, Reality & &

Strategic OptionsStrategic Options

StateLine World Trade AssociationStateLine World Trade AssociationNovember 19, 2009November 19, 2009

Michael L. Hetzel, VP / AmericasMichael L. Hetzel, VP / AmericasPro QC InternationalPro QC International

[email protected]@proqc.com


Michael Hetzel, "Global Manufacturing and Trade Issues"

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Transcript of Michael Hetzel, "Global Manufacturing and Trade Issues"