The Digital Supply Chain podcast

Moving Manufacturing Out Of China - A Chat With The Reshoring Institute's Rosemary Coates

September 24, 2021 Tom Raftery / Rosemary Coates Season 1 Episode 163
The Digital Supply Chain podcast
Moving Manufacturing Out Of China - A Chat With The Reshoring Institute's Rosemary Coates
Show Notes Transcript

One of the things the pandemic has highlighted (and continues to highlight) is the fragility of extended supply chains. Consequently, there is increased chatter around near-shoring, and home-shoring some manufacturing.

To talk about some of these issues I invited Rosemary Coates to come on the podcast. Rosemary is a supply chain veteran as well as Founder and Executive Director of the Reshoring Institute, so no better person to give insights on this highly complex topic.

We had a truly fascinating conversation about manufacturing, China, and the complexities involved in moving manufacturing operations out of China. And, as is often the case, I learned loads, I hope you do too...

If you have any comments/suggestions or questions for the podcast - feel free to leave me a voice message over on my SpeakPipe page or just send it to me as a direct message on Twitter/LinkedIn. Audio messages will get played (unless you specifically ask me not to).

If you want to learn more about how to juggle sustainability and efficiency mandates while recovering from pandemic-induced disruptions, meeting growth targets, and preparing for an uncertain future, check out our Oxford Economics research report here.

And if you want to know more about any of SAP's Digital Supply Chain solutions, head on over to www.sap.com/digitalsupplychain, and if you liked this show, please don't forget to rate and/or review it. It makes a big difference to help new people discover it. Thanks.

And remember, stay healthy, stay safe, stay sane! 

Rosemary Coates:

So in order to make the case for bringing manufacturing back you have to make the economic case as well so you know, helping companies to determine can they actually profitably manufacture in the US?

Tom 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, rosemary, rosemary, would you like to introduce yourself?

Rosemary Coates:

Hi, everyone. I'm Rosemary coats. I'm the executive director of the reshoring Institute, and also the president of blue silk consulting. And in both cases, we do global supply chain management and global manufacturing strategy.

Tom Raftery:

Okay, and it was me you're brand new to supply chain right.

Rosemary Coates:

40 years ago? No, I have my undergraduate degrees in logistics management. So I started there. And I have an MBA in finance. So I've been in supply chain management my entire career. So yeah, about 40 years.

Tom Raftery:

Okay. You mentioned blue silk consulting and the reshoring. Institute. Can you tell me a little bit about those? Yeah, so

Rosemary Coates:

blue sail consulting is my consulting firm, I was a management consultant with some of the biggest firms in the world for a number of years. And I was a partner in a couple of firms. And in about 2008 or so I decided that I really wanted to focus on China, because everyone that was in global supply chain management was moving to China, or at least sourcing or having goods pass through China. And I was very interested in that and had done some work in Asia. And so I left the big consulting world and started my own firm and really focused on China for about 15 years. And then while I had focused for about 15 years, I guess, since I started in 2008, or 2009, hasn't been that long on my own. But I wrote a book about sourcing and manufacturing in China. That was the first book that I wrote, and that became a best seller on Amazon. So I was doing lots of offshoring work for China. And then about 2012, during the presidential election, Barack Obama and Mitt Romney were both China bashing like crazy. And so I felt like, well, I can't tell anybody what I do for a living. It's just really awful, because I was helping everybody moved to China. And so, you know, some of my clients started talking about the potential for manufacturing in America, or could they possibly rebuild some manufacturing here? And so you know, we started helping with my consulting firms. A team of us started helping some clients do this kind of assessment of global manufacturing strategy. And so out of that grew the opportunity to to form the reshoring Institute, which is a nonprofit organization. And we are incubated under the University of San Diego. And we've been going strong since about 2014. And we are very busy right now, as you can imagine an awful lot of companies you're considering reshoring. And we're nonprofit, as I mentioned, so we do provide consulting services, but it's at very low cost. So we do lots of research, consulting services. We have a big university entrance program. We've had about 29 I think interns from universities all across America. Yeah. So yeah, we're going gangbusters now.

Tom Raftery:

Fantastic. And there's been, you know, in the last 18 months, or however long it is know, since the pandemic kicked off even longer. There's been a huge interest in what you term reshoring. So moving businesses that were China based back out of China, and to my untrained eye, I have to think that's because the supply chains were so heavily disrupted by the pandemic and the rolling lockdowns in different countries. So people want their manufacturing bases closer to home. That's my read on it is Is that a fair read? Do you think?

Rosemary Coates:

Yeah, I think there are some additional reasons. So certainly, there's a preference for having manufacturing as close to market as possible. And obviously you save on logistics costs, you have a faster time to market you can make engineering changes very quickly if you need to. You have You know, ability to control what happens, which, you know, is much, much more difficult to do if you are in your suppliers or in China, for example. So, you know, there are a lot of good reasons. But, you know, at the end of the day businesses are economic entities, and they make decisions based on costs and benefits. So in order to make the case for bringing manufacturing back, you have to make the economic case as well. So, you know, helping companies to determine, can they actually profitably manufacture in the US? Can they? Yes, we know, we know, we did a survey about a year ago, and asked 500 Americans, all walks of life, all regions of the country, all grade education levels from high school diplomas all the way through PhDs. And we asked a couple of simple questions. One was, Do you prefer products made in the USA? And if so, would you pay more for them? And if so, how much more? So just some really simple questions to get us some was an opinion survey. And about about 67%, I think of the respondents said, yes, they prefer products that were made in the USA. And I can tell you, there are similar surveys that have been done in Europe, the Europeans feel the same way they would prefer to buy products that are made locally in their country. So So we know that Americans prefer American made goods that are labeled made in the USA and actually manufactured here, and they're willing to pay up to 20%. More for it. So that's really important. So 10 to 20%, is the range. And so we use, we use a target 15% more, when we're evaluating whether or not you could manufacture here. So we know if you get the cost of manufacturing to within 15% of the cost, same manufacturing in Mexico or Asia, anywhere in Asia, that we can make the case for building manufacturing in the US. So it you know, you have to work at the economics, you have to typically automate your production line, you can't expect to pay American labor rates. And if you have a high touch product that includes a lot of labor. So if you can extract that labor through automation or reengineering your processes, then you can usually get the cost differential to within 10 to 15%. And the other thing I would say is right now, logistics costs are through the roof, they are just exceptionally high. I have a client that told me they're paying 17 times more for a container from Asia to Chicago than they were two years ago. And I'd say most most clients are paying six or seven times more at the moment. And that makes it impossible to do the math. I mean, the US will always win when you have those kind of logistics costs. So you know, we take all these things into consideration, logistics costs, I think, in this case, they're temporary, the spike is probably going to go away after a year or so. But in the meantime, it's easy to make the case for manufacturing here. So that's that's what we help our clients to do.

Tom Raftery:

And What challenges do companies face if they want to bring their manufacturing back to Europe or back to the US from China?

Rosemary Coates:

This is a this is a very good question. We have worked with all kinds of companies that say, Okay, now we're ready, we want to bring manufacturing back to America. And I've had to have some very difficult conversations with CFOs. To say, Well, okay, have you considered the costs of getting out of China? So the first thing to consider, and I think this is relatively important, is is China your market. So we know, for example, that China is growing at, you know, somewhere 10% or so a year, the Chinese market is, across Asia, that percentage is about 14%. So there's a significant growth rate in the middle class in Asia. And that's translated into demand and the potential for growth of those markets. There is no place else in the world, no place else in the world that you see that kind of growth. So even in very best of times two to 3% is pretty good. But this is amazing Lehigh percentage. So if you leave China, you have to think or anywhere nation really you have to think about is your customer base building there. So If, you know, if you've got more and more customers, you see the future is going to be China, then it makes sense to leave some production there. So you know the cost, you're looking at the cost perspective and how it relates to the growth of future markets for you. So that's the first step, then there are a whole bunch of other issues and costs and leaving China. So let's take for example, you have sent your tools and molds to a Chinese manufacturer to make your product, you've taught them how to make your product, your sourcing, their sourcing supplies, raw materials for that product in China, so they know who all of your sources are. And all that stuff is being delivered to their manufacturing site. So you decide, okay, now I'm gonna come back to America or Western Europe, and you try to leave and guess what all these manufacturers have learned all about your IP how to make your products, and they're not going to just go to sleep at night and wake up the next morning and start doing something else, they're going to continue to make the same product, maybe under a different brand, for example. So that's one issue, the tools, guys, and molds are never coming back. Even though I've had this conversation a number of times where the legal officer or you know, CEO is saying, well, we we own those molds and tools, and we have our name on it. And we said in the contract, they belong to us and like, so what, you know, Guess again, right, because they're never coming back. And part of the reason is, because Chinese manufacturers feel that once you have given them tools and molds, dyes and machinery, it becomes part of the their own factory becomes part of the infrastructure of their own factory. And they don't look at it as being belonging to you, you've delivered this stuff, to them, it's a gift, and it becomes integral to their operations. So that's, that's the first thing, it's a perspective. The secondly, if it's anything to do with high technology, the Chinese government is not going to allow you to export it out of the country, so that they'll just deny the export and a story, you never get that back. So we I know, I have to tell the CEOs that you're going to have to ride off that, you know, $200,000 piece of machinery, because if it's not getting out of China, that's that's one thing, then, you know, another thing that's really common that most manufacturers don't understand, is in China, as well as some other Asian countries, most of the workers are on employment contracts. So let's say you hire a machine tool operator, he comes to work in your factory in China, and he's on a two year employment contract. And you decide to pick up and relocate back to the US or to somewhere else, you're responsible for paying the full amount of that contract to that employee under the law in China. So even if he's only worked a month or two, for example, you have to pay him for the full two years. I mean, so multiply that by having a really big factory, and maybe you've got three or 400 people working there, you have to pay their salaries to the end of the contract period. And that's a, that's a huge surprise to a lot of companies. It's not like the US where you can simply say, you know, we're gonna have a layoff and you're laid off, and we'll give you two weeks severance, not angina, you have to pay the whole contract until the end. So those are a couple Another one is, very often you have to request a permit to leave China you have to pay for that permit. And that can be you know, a fairly good chunk of money 1000s of dollars very often. And then you have to wait until that permit is approved to sell and it could be 18 months before you get approval to leave. Whoa. Yeah. And, and part of that is because China is trying to hold on to manufacturing and to build the technology. So they're not they don't want to let it loose. And so they delay those those export permits, or exit permits. Now, I have clients who I have one in particular, that sort of turned off the lights and shut the door and said we're done and got on a plane and came back to the US. And he was blacklisted. He can never go back to China. And because he got blacklisted by the government for doing that and didn't he didn't pay his bills and you know, didn't pay off the the employees. So, think of it this way. If you're looking at the world and you say gee, you know, growth markets or an Asia growth market is in China. But now I can never come back. Right so that you know, you'd Don't want to do that either. So there's a lot of difficulty in terms of legal requirements and extracting yourself from China as well as a bunch of costs related to it.

Tom Raftery:

So is one possibility to do something like, go to maybe 80% capacity in China and then start a new facility, in your own lockout via Europe or America,

Rosemary Coates:

you know, exactly. And that's typically the way we coach our clients is to bring back to the US what you can sell here, or what you can fully automate. And you know, in the US, we really don't want the 23 cent an hour t shirt production back, because it doesn't pay a living wage, if it doesn't pay a living wage, and we have to supplement that with welfare. And that's not how we want to grow the economy. So what we want to have comebacker advanced skilled jobs, those that are people who can run the robots or program a machine tool, or you know, these are better paying jobs, they're more highly skilled, and they're appropriate for our economy. And because they pay a living wage, essentially middle class wage. So yeah, you know, bringing manufacturing back and reestablishing it here has to be a strategic decision, with all kinds of aspects and variables included. The most successful ones are those that re engineer their product lines that add automation to their processes, you know, that are thoughtful about this. So keeping some manufacturing in China, and then perhaps building some manufacturing another product line for products that are going to be sold in your in your local economy, either the US or Western Europe. And I'm

Tom Raftery:

sure as well, if you are relocating back some of your manufacturing, you then have to set up all of your supply chain, your tier one, tier two, tier three suppliers, and all that which, you know, might be coming from China in any case.

Rosemary Coates:

Yeah, exactly. So when we work with clients, we always tell them, it'll take you a year to 18 months to redevelop your supply chain here. Because in the US, you know, over the last 25 years, companies have gone to China to source their products, and all of the suppliers have gone there, too. So suppliers are gone. And so you have to redevelop them. And that often means, you know, a supplier that used to make a certain widget or whatever has has shut down their product line. And it takes them a while to come back up to speed to be able to manufacture that part for you. So there's a rebuilding a supply chain that usually takes 18 months. I'll give you an example. We worked with a company last year, that is a water purification company, they're called water logic. And they are European company based in the UK. And they have this incredibly modern, fantastic factory in Qingdao, China, and they were producing their products in Qingdao. Now they make the water purification equipment, like when you fill up your water bottle at the airport, the fill stations, or in your office break room, maybe there's a fill station for water, they make that kind of equipment. And their growth rate was very high in the US. So they wanted to expand their operations in the US and establish a manufacturing line or at least an assembly line in the US. So we worked with them over a year, and finally selected a location near the Dallas Fort Worth airport and they hired 200 people and they've got a factory going now in the US. But in the process, we also had to look for the potential supply base. So you had asked the question about redeveloping your supply base. So we took the top 20 parts by value and by strategic parts. So some of them were relatively low cost, but they were important strategic part. So we took the top 20 and we tried to find suppliers in the US. So we worked on this project and out of the 20 we found 16 that had capability suppliers that AI capability in the US and out of those four were cost competitive. And out of the four only two had capacity. So this is why looking at the supply base thinking I've got 20 very important parts and only two of them, I can get relatively fast. So you know, that's a kind of thing that over time you have to work on scheduling and you know, working with these suppliers to increase their production capacity, you know, be competitive and I mean these are all issues that supply base is gonna pop up in your supply base right?

Tom Raftery:

If If you were advising a company top three or four issues to think of if they want to, or if they're thinking of relocating, what were those top three, four things be?

Rosemary Coates:

I think the most important thing is to really think through this strategy or get some help. You know, I mean, we're always willing to help, of course, but, you know, get some some help for people who have done this before. Because there's lots of pitfalls. There's lots of potholes, there's lots of things you haven't thought of. And so you really need to work through all of that strategy and understand, how can you do this? What are the alternatives? What are the costs, you know, what, what, how can you get yourself out of China, if you want to? So, you know, the, the top and most important thing is not to just make a decision and say, you know, tell the engineering manager, okay, bring everything back. I mean, that's, that's not going to happen, right? So, so the planning, I think, is really essential. And you know, this isn't much different than any project that you're working on, where you would design a course of action and the steps and the tasks and execute all of those, we do the same thing. But with knowledge and experience. So the first step is to plan overall plan, then I think the next step is to decide what you're going to manufacture locally, are you, you know, they're bringing back just one product line are you going to develop a new product line, that sort of thing. So you have to go through that process as well. And with the idea in mind that you're going to automate as much as possible to extract the labor costs. So making manufacturing much more, much more engineering and automated, so that, you know, that would be the second step. And then the third step is to seriously consider your supply base redevelopment, you know, somebody said to me, the other day at you can't manufacture an automobile with three wheels, right, you have to have all the parts, you have to have all four of the wheels. So, you know, redeveloping your supply base in order to make sure you don't have shortages, or don't get a production stop is really important. And and must be thought of in advance to make sure that you're, you know that you have enough supply to continue on your operation. The other thing that I would mention is, it's really important to think about your global manufacturing footprint. So it's probably appropriate to leave at least some manufacturing in China. And that's what we tell our clients, we'd love to bring everything back to the US. But I don't think that's realistic, I think you really have to look at your global footprint. And that may mean some manufacturing in China and may mean some manufacturing in Mexico, especially central meant Mexico is very competitive in terms of labor rates to China, Eastern Europe, if you're in Europe, so the Czech Republic and Poland, and you know, some of the Eastern European nations where the environment is very open for manufacturing there. So thinking about, you know, maybe a strategy that includes manufacturing multiple locations. So what I see long term, I would say is that manufacturers have gone from, you know, in in 2010. You know, I've had clients who just said, Just Just get me to China, you know, yeah, there was not much thought to it. It's just, we got to go to China, because cheaper and our competitors are doing it just, you know, helped me set up operations in China. That was the kind of decision that was made to today where most C level executives are really looking at the global landscape, and making much more informed decisions based on not only economics, but strategy. So it's almost like, you know, me looking at it at what I've, my career. And what I've done in the past, it's almost like manufacturing executives, CEOs got a lot smarter over the last 10 or 15 years than they were at the beginning of 2000s. All of a sudden, you know, there's attention being paid to global supply chains and making these kinds of decisions. Sure.

Tom Raftery:

Sure, sure. And I think that example of not being able to make the car with three wheels could be updated in later current events to not be able to make the car with only three semi semiconductor chips.

Rosemary Coates:

Yeah, semiconductors are going to be a huge issue for the next couple years. Not it's not going to be resolved anytime soon. No, no,

Tom Raftery:

no, no, rosemary, we're coming towards the end of the podcast. Now. Is there any question that I have not asked that you wish I had or any topic we've not touched on that you think it's important for people to kind of think about,

Rosemary Coates:

I think the only thing I would add is the whole labeling issue. So in the US, you know, I already think explained about the survey what people prefer items made in the USA. And the same is true in Western Europe, that they prefer products that are made in their local country. But their labeling laws to determine if it's true that it made the items in the USA, for example. So you may say, Well, I assembled everything here, you know. So it must be made the USA, but that is not the way it's defined. So there are a few agencies that control that the Federal Trade Commission in the US, that defines how things can be labeled made in the USA or assembled in the USA, or manufactured in the USA from globally sourced parts or, you know, however you want to qualify the label that's important. And you need to pay attention to those laws, because lots of companies are being sued over their labeling of products made in the USA when they're not. When you know, it is a group of overseas suppliers. And you just put it together here that does not make it made in the USA. And then US Customs and customs around the world also have labeling laws. So they're looking for items when they're imported. And then in the US, we also have ta regulations, which are the regulations regarding selling to the US government. So labeling might you might think it's simple, but it's actually quite complicated. So I would caution everyone to be aware of that.

Tom Raftery:

Cool. Okay, rosemary, that's been really interesting. If people want to know more about yourself, or about the reshoring Institute, or any of the topics we discussed on the podcast today, where would you have me direct them.

Rosemary Coates:

So we have a huge website with all of our research has posted there we have case studies, white papers and so forth. And that's www dot reshoring. institute.org. And you can reach me at our coats are co A t s at reassuring institute.org

Tom Raftery:

Perfect, perfect I put those into the show notes as well as me so people will have easy access to them. Super rush me that's been really, really interesting. Thanks a million for coming on the podcast today.

Rosemary Coates:

Thank you. It's my pleasure.

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 slash digital supply chain or, or simply drop me an email to Tom raftery@sap.com. If you'd like to show, please don't forget to subscribe to it and your podcast application of choice to get new episodes as soon as republished. 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.