Disruption in Asia, particularly the China with the government's Zero Covid policy is playing havoc with global markets and supply chains.
To learn more about this I invited Uwe Haizmann, a partner at EAC Consulting based in Shanghai to come on the podcast to discuss the issues.
We had a fascinating conversation talking about how over two months of lockdown is affecting Chinese manufacturing, the knock-on effects of that for the rest of us, and how the world is responding.
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It's not only European companies cannot come to China, but also Chinese suppliers - when you talk to Chinese suppliers from the greater Shanghai region, for example, they say they are missing out because they can't go overseas. They're also not meeting their customers. They are not participating in any exhibitions. So that's definitely also a topic which is crucial for them that China can reopenTom Raftery:
Good morning, good afternoon, or good evening, wherever you are in the world. This is the digital supply chain podcast. The number one podcast focusing on the digitization of supply chain. And I'm your host global vice-president at SAP, Tom Raftery. Hi, everyone. Welcome to the digital supply chain podcast. My name is Tom Raftery with SAP and with me on the show today, I have my special guest Uwe. Uwe, welcome to the podcast. Would you like to introduce yourself?Uwe Haizmann:
Tom, thank you very much for having me today. I'm delighted to be part of the podcast. As you said, my name is Uwe, Uwe Heitzman. I'm partner of EAC international consulting. We are boutique consulting company focusing on Asia with a very big footprint in China and in India, we have in total a hundred consultants. I, myself, I am based out of Shanghai the last 22 years. And I'm running what we call the the area of operational excellence, helping our clients in China, with all the topics coming from supply side, supply chain architecture, disruption in supply chain and how can we act on them. So basically that's the expertise we are having in our office, with my team.Tom Raftery:
Okay. And you mentioned disruption in supply chain and being based out of Shanghai. I mean, it seems kind of like a sweet spot. This is for people who are listening, this is the middle of May that we're recording this and Uwe, China has a zero COVID policy and Shanghai has been an extremely strict lockdown now for is it nearly two months of this point?Uwe Haizmann:
It is. so basically what's happened in Shanghai was already in the middle of March. The city went into partial lockdowns and that's actually not so better known. A lot of the compounds got shut down for 48 hours, 72 hours, some a week, some two weeks. And then the city decided end of March to roll out this 4 + 4, meaning four days lockdown in Xuhui and four in Pudong. And now basically we are day 45 now. Today, there was the news the target to be open today a bit. But so far there is no real sign. So some compounds, you have the freedom to walk around a bit outside, but majority of the city and the businesses are still locked down.Tom Raftery:
Wow. And I mean, Shanghai is, it's a city of, I don't know, 25, 27 million people. And you mentioned Pudong, that's kind of the industrial zone if I remember correctly. So there's a huge amount of industry and production there. And if that's shut down, you mentioned at the start disruption in supply chain. That's got to have a huge disruption on supply chains globally. Plus there's the port of Shanghai, which is an extremely busy port or was before the lockdown. I imagine it's it a bit of a ghost town there now?Uwe Haizmann:
Again, not only in Pudong, we have a lot of production, but also in Xuhui which is the west side of the city. And when we talk about lockdown in Shanghai, That's on the news most of the time here, but in the meantime, we have approximately 50 cities in China, which are in full or partial lockdown. And when we look at the numbers, these are basically 400 million people. And there's 400 million people account for 50% of China's GDP. So it's not a lock down purely impacting Shanghai it as you said also impact the global economy. And looking a bit on the container situation or the logistics situation. You said Shanghai has a big port. It's the biggest in the world actually. At the moment they are around 400 to 450 containers ships in front of the Harbor nobody can basically get the containers off and additionally, and that's, there was no learning in the last two years. I would say we have exactly the same issue, which we had in San Francisco or LA it's not only getting the containers off the ship, but then basically also getting the truck drivers to drive them downtown or wherever they need to go. Besides having the issue on the logistic part also on production. In the last one, two weeks, the Chinese government tried to copy a bit the system, which we had in 2020 when COVID came. And you remember, maybe everybody talked about the V-shape recovery, which actually was executed perfectly. We had a very sharp decline. And then because. A lot of key industries got reopened. We had this V-shaped recovery in GDP. At the moment it's not really a V-shape. We are shutting down but only very slowly, certain companies and certain industries are reopening again. And looking a bit at some of our customers and also suppliers for some of the big automotive companies, for example, they are just allowed to go back in the last one to two weeks or after basically five weeks of lockdown. And what does it mean coming back to work? It means that the people has to be in a closed loop. So you either live in the same area or you have to sleep in manufacturing. And you have to find people who are really willing to do that as well. And talking about automotive and the latest numbers just came out. Automotive production in China in April is down 40%, year on year. Sales of automotive, year on year is down 30%. These are millions of cars. Really this will have a huge impact on the global supply chain, even if we are reopening. And at the moment, looking a bit on the targets of the government and sticking to zero COVID, they are certain, let's say targets in Shanghai that they reopen maybe in June. But it's very unclear if this really is going to happen.Tom Raftery:
Wow. And you mentioned the automotive production is down 40%. Will that affect primarily China or do the Chinese automotive manufacturers export and where to if they do?Uwe Haizmann:
At the moment, if you look at China automotive production it's still a market, which is either locally produced or we are importing some premium brands. Production down in automotive in China, it's let's call it more domestic issue. But as I said, as well, the entire supply chain and that's not only for automotive. If you look at all the suppliers in all different industries, we are all shut down. So not only in Shanghai, but the entire greater Shanghai area, if you look into north China and these are the issues where this global supply chains will be significantly impacted, basically not getting the material. whatever it is, We have clients, they are doing consumer goods. They will just not be shipped out of China. And the main difference, what I see here is also, if you compare it to 2020, when we went into lockdown into 2020, we were able to come back very quickly to ensure a supply side and then the globe shutdown. So we had the bit of a lack or demand side decreased a bit.Tom Raftery:
but now it's the other way around. We have a huge demand globally and you see it in all the inflation numbers also in the shortages. If you buy certain goods in Germany now, or in north America, you have to wait months for them to be delivered. And now we have this huge, huge demand globally, but the supply is now really impacted because out of China, the data is showing that there will be no significant export in the coming weeks and months because of all the disruption.Tom Raftery:
So, what that really says to me is that what we need to do is to diversify where we're getting our goods from. We can't just be relying on China, right?Uwe Haizmann:
Absolutely true. And that's what we have seen also in the last two years. It was really when COVID hit first, suddenly everybody realized that look guys, majority of supplying and a lot of critical components are coming out of China. Why was that? First of all, we have the economy which is extremely strong. We had the very reasonable cost position in China when you looked at labor costs. But on the other hand side, it's also a country which was able to build up in the last decades, basically quality and also capacity for certain industries, which we just don't see globally. So it was really about having affordable products, high capacities, increase in quality and also the access to the market and all of that, or maturity of that changed a bit. We don't have accessibility anymore. Why? because first of all, nobody at the moment can travel to China and nobody could travel the last two years. And looking a bit at the zero COVID, this will also not change in 2022. And there's a big question mark for 2023. So procurement departments, when you're talking about exchange with your headquarter, nobody will really be able to travel. On the other handside we have to cost topic. And that's a trend, which we realized over the last decade or so is that China is not the cheap production hub anymore. For sure we have productivity increased, but, there are a lot of studies and recently there was one study published by the Japanese investment board, comparing for example, labor costs in Vietnam. And Vietnam basically is 60% cheaper when we talk about pure labor cost. And besides all this COVID restrictions and the accessibility and travel restrictions, for sure we have all the geopolitical topics which started with Trump. The decoupling, putting all the tariffs on China. But then also under the Biden administration, we don't really see a big change in this policy. So you were absolutely right that our clients and after COVID hit the first time, they really started to diversify their supply chain. Looking into Southeast Asia, looking into India, but also partially looking into Eastern Europe. That is a trend which we are seeing. And now looking again, I have to say that in 2021, that got forgotten a bit because China came online so quick. But now we really see a lot of pressure on that. And one factor also, which kind of kick started it originally was, I mean, in March, 2021, we suddenly had the ship the Evergiven when I remember correctly stuck in the Suez And then suddenly all the people realized if logistic doesn't work, then we have a huge problem. And that's why we are really looking into diversification of suppliers. At the moment we from our client base, we see a strong push towards Southeast Asia.Tom Raftery:
Okay. And you mentioned as well, a push towards Eastern Europe. Will that be affected at all by the war in Ukraine?Uwe Haizmann:
It is. So this entire topic of onshoring or near shoring, people are looking at building up capacities again or additional supplier base being in Eastern Europe, but also in countries like Turkey or what we nowadays even see again, is north Africa. Will it be impacted by the war we are having into Ukraine? Absolutely. And a lot of the clients are putting at the moment new let's say, green field investment, and looking on putting new production facilities into Eastern Europe on hold. Let's hope that is a short term issue, and also looking a bit, what was the motivation on onshoring or near shoring definitely its being closer, being more accessible. Also when you look again on the broader topics, it was also about sustainability, reducing CO2 footprint, having the goods not shipped from Asia to Europe, where they maybe most likely be processed in manufacturing. These are also topics we are seeing. I think a very big topic again is the logistic side, because logistic is the backbone or was the backbone for our globalization. Logistic was always cheap. It was reliable. It was fast. It was plannable. There was nearly no volatility in logistics before COVID so you ship the container from China to Hamburg or to Rotterdam. You knew exactly it will take 28 days or maybe 31 days. So it was extremely plannable and all this plannability is disappeared in the volatility they are having. Nobody can plan at the moment. And that is also why most of our clients are at the moment they have various sourcing markets globally. You may be still in China. Still is the most important economy in Asia has always we'd have a hub in China. But then they are building up to or they start to build up supply chains coming out of Southeast Asia plus then maybe also Eastern Europe. So it's really about not putting all your eggs into one basket, but it's really about diversification of supply base.Tom Raftery:
Okay. And where in the Southeast Asia is starting to become popular?Uwe Haizmann:
Very good question. It depends a lot on which countries or which country you look into. We talk about Southeast Asia, but then you see, you have Vietnam, you have Malaysia, you have even Singapore. You have Indonesia with 17,000 islands. So it's extremely difficult always to say where to go in Southeast Asia, but definitely an all these countries have certain areas of expertise, where they are investing or where they are strong. So when you look, for example, in Vietnam, Vietnam was one of the countries which benefited hugely, especially when Trump came into office. Because who invested into Vietnam? It was mainly Chinese companies who used Vietnam as a first of all a low cost production hub, but then also a hub where we can maybe avoid certain tariffs, which are imposed if your products are shipped out of China. So Vietnam emerged as a huge expert and at the moment we are exporting around 340 billion US dollar out of Vietnam every year, which is strongly in manufacturing goods, consumer goods. A lot of areas also where we see, for example, in casting parts. Here definitely Vietnam is very strong. When you look in Thailand, for example, has a very strong footprint in the automotive industry, which is driven by a lot of Japanese investment. Looking into Thailand is always very strong when it comes to automotive. And Thailand suffered, I mean we know it from the pandemic. Nevertheless electronics, agricultural products, automotive parts. Here Thailand is really a very good supplier hub. And also in Thailand we exported around 270 billion US dollar, which is if you compare it to Vietnam a little bit less looking purely at the export ratio. And then a country which we really like and also a lot of our clients like is Malaysia. Malaysia is the smallest country in the region or I mean, we talk about a population of 30 million people more or less. If you compare it to Indonesia, we talk about 300 million people. and also looking at GDP per capita, Malaysia is very strong actually, and far beyond Vietnam, Thailand or Indonesia. Here we see a lot of industry, which is really high end high value electronic, semiconductor. It's a lot of precision machining there. So it's really going into a lot of areas where aerospace parts. So it's really a high end production side, which, or country, which was developed in Malaysia in the last years. And what we also see is, looking a bit on different areas like Penang or, Johor in the south of Malaysia, it's really a hot destination for investments. If you go there and you want to acquire a land, it's already very scarce. So it's not that easy anymore also to find there the right place to put an investment. So what we did from EAC actually we developed a, we call it the relocation probability index. And we are ranking the countries by the core of the industry's, availability of labor, and then also cost. And then we map it to different application industries like automotive or being in manufacturing parts or consumer goods. And it gives you a very good overview on to see where basically would be a good setup or a good destination for when you would like to source certain products out of Southeast Asia.Tom Raftery:
I assume governments supports either financial or regulatory would be an important consideration as well.Uwe Haizmann:
Absolutely. And here also the countries are on a very different level. I mean, there are a lot of indicators like, ease of doing business and all these indicators, which you can see, in general I would say that China is always a bit the head off the game. I'm taking out now for sure Singapore who is following strongly as Malaysia, but then definitely countries like Thailand, Vietnam, Cambodia, Laos, they're still lagging behind; or Indonesia when it comes of ease of doing business. They are all countries are actually very strong and this is coming back to the point I made before is logistics. When you look at logistics efficiency. All these countries are basically or, they are actually very strong when it comes to logistics efficiency. And when you talk about Southeast Asia or RC on behalf of around 300 major ports which is quite a number to look into, we have 600 huge airports and the regional accounts for 15% of global trade. So trading goods, import, export, that's really something the region is very much capable of doing. And you can also see that in the foreign direct investment which is flowing into the region, we had last year around 300 billion US dollar, which are coming to basically build up new manufacturing sites there. And it is not only driven by finding another region globally which will help us to reduce costs and finding a hub to achieve exports to the globe. But you also look in the region where we have 700 million people living and the consumption is one of the major drivers as well. So definitely they are benefiting from all the supply chain disruptions. And finding alternatives for China sourcing, for example, to balance the risk. But on the other hand side, you also have a huge population. You have a very young population, you have a very digital population. So that's factors which are also really pushing the development in Southeast Asia.Tom Raftery:
Okay. And for companies who want to mitigate the supply chain risks, I mean, we've talked about, going outside of China to other countries in Southeast Asia or near shoring, are there other strategies that companies should be thinking about?Uwe Haizmann:
The podcast is also called digitalization of supply chains. So, I see a big topic which got a bit lost again in the last two years. So when COVID first came, everybody was very, the preparation for this kind of black swans was very big in a lot of organizations. And one of the first point was always we need transparency; because basically in supply chain that was very limited transparency. I just talked to a company from the US. And the level of information they know is that our goods are coming from China and then they knew it's coming from a trading house, no transparency on who are the real manufacturers, no transparency where is raw material coming from. There was a lot of initiatives when COVID came, but I have to say that a lot of these initiatives also disappeared again because China came back so strong. That is definitely some of the challenge and topics now companies are looking again into because of the new lockdowns in Shanghai and China and also because of the war in the Ukraine. For example, when you talk about China, we had the issues from raw material plant supply coming out of Xinjiang. That's the region, which is under scrutiny because of the minority which is living here. So a lot of companies didn't even know that being at either textile or cotton or being it rare earth, which is mainly coming out of regions, like Xinjiang as well. So the companies did not really have transparency on that. Digital transformation and balancing risks for me always starts with transparency, knowing where do my goods really come from, and it doesn't only mean my manufacturer, but then also the raw material. So that's definitely a topic number one companies have to work on. And the second point, and also that's not so much a transparency topic, but it was in the past that focus was mainly too strong on costs and cost benefits. And it was less on, let's say a balanced risk that we can ensure global production in different hubs. So this cost focus at the moment is going away a bit, it's going more on reliability of the supply chain, having availability of components. And here a lot of companies are working on different scenarios which in a perfect world and some our clients do it. They do scenario planning, which is very software and tool driven which is actually an excellent starting point to really map globally. There would be maybe have a risk and also already forward looking to say, okay, what will happen now? If suddenly let's say Russia will really stop all the energy exports to the European union. Now what will happen? So they already have a kind of a risk rather to see what will be the global or the next destination where we can maybe go.Tom Raftery:
Cool. Cool cool. We are coming towards the end of the podcast now Uwe. Is there any question I haven't asked that you wish I had, or any aspect of this, we've not touched on that you think it's important for people to be aware of?Uwe Haizmann:
I think question-wise, I'm fine. I could talk about COVID and the implications on China for the next two hours. Let's, let's just hope that China finds a way that's a face saving way to get out of COVID zero, which will be a big political challenge. Because it's not so much about how to really fight the virus, but it's more about the comparison of systems. And China wants to show that the system they are implementing basically is better than what was implemented in the west. So let's hope that we find here solution there already some pot.Tom Raftery:
It's gotta be decimating their economy as well though, right? I know that a huge economy, but you talked about a 40% reduction in productivity in automotive. I mean, and that's just one industry. It's gotta be a hugely impactful on the economy there.Uwe Haizmann:
Absolutely. if you look at the PMI which was coming out of the purchase manager index for production it's down significantly. The service industry is down. We had the retail sales number actually released today for April 2022. It's down by more than 11%. So the economy and the latest forecast depending on whom you listen to the target of the government was %5.5. I guess nobody really thinks that it's achievable. So at the moment we talked something about 3, 3.5% even here a lot of question marks. On the other handside, what China always starts in the situation is coming up again with a big stimulus package saying, okay, let's build more infrastructure. Not sure if this is the right approach. And also looking a bit on the huge steps we already have in China. If the pockets are not as deep as they have been in 2008 or in 2020, that's very obvious. So let's really hope we find the political face saving kind of approach to get out of COVID. There are certain rumors also, which you can hear. I mean, first of all, people in China say that maybe we have to move away from zero COVID at the communicational, which we haven't had four weeks ago. We noticed certain pressure from China on the WHO not calling a next variant COVID, but maybe call it something differently. There is a background noises on how China can really achieve zero COVID and that will be actually a game changer if China would reopen. I mean, first of all, the value chain or the supply chains in 2022, let's hope we do that in the third or fourth quarter. And then also being able again to travel. I mean, it's not only European companies cannot come to China, but also Chinese suppliers. And when you talk to Chinese suppliers from the greater Shanghai region, for example, they say they are missing out because they can't go overseas. They're also not meeting their customers. They are not participating in any exhibitions. So that's definitely also a topic which is crucial for them that China can reopen.Tom Raftery:
Mad, mad. Uwe, that's been really interesting. If people want to know more about yourself Uwe Heizmann or about EAC or any of the topics we discussed on the podcast today, where would you have me direct them?Uwe Haizmann:
You can add me on my LinkedIn. So my name will be in the description of the podcast. So at me on LinkedIn, you will find myself, you will find EAC, and you will get all the information you need.Tom Raftery:
Superb. Uwe, that's been really interesting. Thanks a bunch for coming on the podcast today.Uwe Haizmann:
Thank you very much for having me. Bye Tom.Tom Raftery:
Okay, we've come to the end of the show. Thanks everyone for listening. If you'd like to know more about digital supply chains, head on over to sap.com/digitalsupplychain or simply drop me an email to email@example.com. If you like the show, please, don't forget to subscribe to it in your podcast application at choice to get new episodes as soon as they are published. Also, please don't forget to rate and review the podcast. It really does help new people to find the show. Thanks, catch you all next time.