Update August 2022
What is your read on the Taiwanese escalation caused by Pelosi's visit, and what action should we be taking?
President Xi was offered a "win:win" scenario by this visit - either the US climbed down and cancelled the visit, demonstrating Xi's power, or the visit went ahead (for 18 hours), giving Xi an opportunity to ramp up military action (firing 5 ballistic missiles into Japanese waters) and implement a successful blockade of Taiwan without any military pushback from Taiwan or its allies. So a successful 10 days from China's perspective.
China has clearly decided it no longer needs to win over the local Taiwanese to reunification, and is demonstrating its long term commitment to taking Taiwan back by force. The timeframe has probably accelerated and may be towards the end of the next ten years (early 2030s is my best guess) rather than by 2049, as previously thought, which is the 100 year anniversary of modern China's founding by Mao, and of enormous symbolic significance.
The 2020 Taiwan Assurance Act seems to offer little stability, and without dialogue it is hard to envisage a thawing of positions, only a hardening. Clinton's 1998 declaration of support for Taiwan's "3 no's" in its China policy (No Ruling out of reunification, No declaration of independence, and No use of force) needs restating.
From a sourcing perspective, we must use the Ukraine war to "imagine the unimaginable" and further accelerate our diversification plans with "friend-shoring" at the forefront of everyone's plans.
What is happenening to freight rates?
Impending recession in US makes it unlucky that the traditional Q3 Q4 surge in rates will take place this year. We continue to see further softening of demand, with China to LA now below $6,000 per container, and even China to NY or Boston below $10,000.
It is worth noting that whilst West Coast ports are once again under less pressure and showing cheaper rates, where goods have been switched in bulk, especially to Savannah, we are seeing increasing prices and delays so are best avoided.
The union problems in California with port workers, train drivers and truckers (AB5) have yet to be resolved.
What is happening in Asian factories?
Of the 60 vendors we are using across China and S E Asia, the average reduction in order for 2023 (v 2022) Q1 and Q2 is 20-30% for US customers, and 50% reduction for EU. This is clearly having a massive impact on their hunger and flexibility, and will lead to a consolidation of factories in the next year. Both over-stocks and nervousness about demand next year are feeling this pull back.
In the short term we recommend ensuring the financial viability of those vendors you rely on. Boots on the ground is the only way to protect your interests and avoid unpleasant supposes. Weekly visits to witness the arrival of raw materials, packaging and adequacy of labor to meet production plans remains your best ally.
Update May 2022
What is Going On in Shanghai with the Shutdown?
"Zero Covid" strategy isn't working against Omicron, but Beijing leadership can't change tack
Why not? Although China's vaccination rate is very high, they are only using the "old technology" Sinovac serum, rather than the much more effective mRNA from Pfizer and Moderna (although Fosun Pharmaceuticals has a partnership and capability to manufacture the Pfizer version) so its population is less protected v the West
And China's hospitals are much less sophisticated than in the West, and so officials grew extremely concerned that the lack of intensive care facilities would condemn the elderly and infirm to an early death
Statista has published data showing US has 35 Critical Care beds per 100,000 inhabitants. China has only 3.6. And 35% or 500m of China's population still live in rural locations with limited healthcare
Plus as my Shanghai staff reminded me, the traditional Confucian respect for the elderly in China prevents them adopting the Western "living with Covid" solution which is perceived as being willing to sacrifice fragile members of society in favour of restoring economic output
What Should You be Doing about It from a Supply Chain Perspective?
Look after your staff, who may now be entering their 8th week working from home, and with no clear end in sight!
- Set up WeChat groups to keep everyone connected
- Emphasise your company cares about your employees, and provide support both psychologically and with food/money if needed. Be sensitive in understanding the pressure they are under
- "Boots on the Ground" still remains a valid this for having in-country operations in Asia to safeguard your supply chain, ensuring as factories and ports resume work you are getting more than your fair share of those capacities
- Retain their focus on tracking price negotiations for 2023, order placement, and current shipments. We have been delighted by the success our team has had in switching shipments from Shanghai to Ningbo port to avoid delays
- Diversification is always a solid strategy, but China's ability to flex and find solutions has been hard won over decades. Strive for balancing risks rather than wholesale relocation. Our production in Vietnam, for example, has suffered far worse than our Chinese production due to Covid hammering there workforce
What are the latest Trends I need to know about?
Freight costs have been coming down fast in recent weeks, no doubt caused by the impending recession in EU and US, the impact of inflation slowing down retailers' expectations, and the long drawn out war in Ukraine.
We are now paying under $10,000 port to port (China to LA) and approach $15,000 China to Warehouse in Boston, a huge drop from 2 months ago
We do NOT expect further siginificant reductions, partly due to oil climbing to $110/barrel, and partly due to the manipulative way the carriers are sustaining demand by "void sailings" which removes capacity
The weakening of the RMB (over 6.7 to USD at the time of writing) by 5% since 1st April is extremely helpful for those of us negotiating prices using USD, and likely to remain at these levels.
(Perceived wisdom by economists is that there is a likelihood that all countries will try and strengthen their currencies to dampen the inflationary impact of more expensive imports being purchased, but China has taken a huge beating in terms of GDP due to it's draconian lockdown policy, and there is no end in sight, so we are assuming that Beijing may keep the RMB relatively weak. And the recent global drop in share prices further emphasises the rush to the safety of the USD)
Update April 2022
Covid continues to disrupt supply chain in both Shanghai & Guandong
Factory expansion plans in both China, Vietnam and Cambodia are massive for 2023, expect to see further consolidation of smaller players into larger companies
Although China port operations have been manageable despite shut-downs in China, the looming Longshoremen Union negotiations are heading to a climax in LA Port and we anticipate continued delays for 2022
Factory prices are stabilising, despite labor and raw material increases, as the impending EU recession gathers pace and retailers learn that passing on price increases is becoming less and less acceptable
Some categories in Outdoor are benefitting from "tariff exemption reduction" in US from October 2021 till December 2022:
March 23, 2022
WASHINGTON – The Office of the United States Trade Representative today announced its determination to reinstate certain previously granted and extended product exclusions in the China Section 301 Investigation. The determination reinstates 352 of the 549 eligible exclusions. The reinstated product exclusions will apply as of October 12, 2021, and extend through December 31, 2022.
Webinar Summary - 15th December 2021 - Supply Pain to Supply Chain........
(for Association for Corporate Growth, Michigan, USA)
What hasn’t gone wrong this year?
Covid disrupted production, still worker shortages despite wages +20%, remains the principle threat to factories
Trump Tariffs remain in place, US relations with China have deteriorated (Beijing Olympics boycotted by US diplomatic attendees)
Freight costs quadrupled (if containers were available)
Power was disrupted in China, now restored but prices +30% since October
Raw materials surged wildly
Origination Challenges in China
China Energy shortages (Guangdong v Zhejiang). Self-inflicted by Beijing government, & Winter is Coming……government raised +30% October
Raw Material price surges and contract terminations (PVC surged from 12rmb/kilo to 17, now back to 13. But oil is $70/barrel today, v $46 LY so the trend is up).
Covid resurgence new, biggest threat with lockdowns pervasive, due to President Xi’s re-election countdown to 3rd term in 2023 (having removed term limits)
Chinese Labor costs +25% due to shortages and ageing population
Freight costs to US from China quadrupled, blank sailings now accounting for 20% of routes December-Feb 2022
Everyone pulling forward production
The rush back from SE Asia to China, sellers’ market, capacity shortage is the key determinant of pricing, but with Factory PPI at 13% end October 21 we don’t see stability in the near term
Destination Challenges in LA
Nov 1st new $100 a day surcharge in LA/Long Beach after 9th day = shortage of warehousing
VAX Mandate – no exemption for truckers, American Truck Association says 80k drivers will be lost
AB5 – reclassifying owner operators as employees
CARB (California Air Resources Board) requires all trucks entering ports to be no older than 2011
15,000 member Longshore & Warehouse Union” contract v Pacific Maritime Assoc. expires July 1st, 2022, key issue automation
And our team navigated these stormy waters and are still delivering 99% on-time in full. HOW? By BOOTS ON THE GROUND, weekly factory visit to eyeball. And demand priority. How to move from “supply pain” back to “supply chain”? I want to share with you my 3 actionable items you can takeaway from this webinar and implement immediately, using the Three Letter Abbreviation B.E.D.
Become a better customer
change attitude. From buyers market to sellers market. Hard!
buggeration factor 10% causes at least loading in costings
Forecast 100 days out freight needs
Present goods as requested
Be present in Asia. Absentees emailing in orders get least priority. Boots on the ground
Weekly order tracking will improve predictability IF you are interrogating raw material, labor, packaging capacity in person only measure that counts is On Time In Full
assume each link in the supply chain before shipment costs 10%
Buying agencies, trading companies, factories who subcontract are all ripe for deletion. (Disintermediation)
Diversify for resilience
country of origin, currency, service providers, 3 quotes for every product
Treat your company’s sourcing as a strategic weapon that differentiates you from your competition and more than pays for itself in terms of improved gross margin, lower returns and increased customer satisfaction.
Update October 2021
Can it get any worse?
Yes! Unfortunately the news this weekend has pushed the chip shortages and freight shortages & costs into the background - China is suffering a severe power shortage since late September. Tesla’s factory is shut for 5 days, Apple’s main subcon Foxconn is shuttered similarly, and the problem is now so severe nationwide that even residential homes, schools, hospitals and traffic lights are being given only limited rationing of power.
What’s the cause? Complicated, but includes:
- Environmental, trying to suppress “dirty coal” burning power generation to meet Beijing's aggressive (unrealistic?) “green” targets
- Surging factory production, usage +10% above last year
- Global warming requiring more air-con usage - currently still 34c (93f) in Guandong this week, well above normal for Autumn
- Trade war between China and Australia, China terminating Australian coal imports to punish Australia’s anti-Beijing political stance harming their stockpiles
PVC is also surging in price. We negotiated at 12rmb/kilo back in May 2021. It had climbed to 14 over the last few weeks, Today it spiked to 15rmb, and because of stock shortages some traders are even quoting 19rmb/kilo. (A year ago it was at 9rmb).
So I’m not seeing any improvement likely until at least Easter 2022. The best advice seems to be to aggressively push customer price increases, because shortages will worsen, and pricing power lies with those supplying rather than those buying.
Sorry to be the bearer of such news, but I wanted to share with you the latest problems we are facing so you can plan for the worst and hope for the best.
Update August 2021
Supply Chain woes worsen..............
-goods coming from China suffer longer delivery times to USA (up from an average of 45 days to 75 days at present from Shanghai to East Coast USA)
-up to 25% of containers in US are being used as temporary warehousing, tying up capacity and accelerating shortages
- 200,000 ship crew seamen need rotation on container ships, and may be considering strike action
- new California based court decision on “AB5” legislation confirmed classifying independent drivers as employees, increasing dramatically the cost of employment for logistic companies
- longshoremen’s union contract needing to be renegotiated mid 2022, and their determination to resist planned automation
-new Chinese East coast typhoon season has just started, spanning August to December, and is forecast to be more severe and therefore more disruptive than in previous years
So today’s USD23,500 a container looks unlikely to be the top of the market. And remember, even if you pay this rate, it doesn’t guarantee on time delivery due to bottlenecks in US capacity of drivers, chassis, and train capacity!
What action should you be considering?
-diversify vendors, countries, routes and service providers. Note the 5 major ship operators (as of July 2021) control 65% of all movements are :
- APM Maersk 17%
- MSC 17%
- CMA CGM 12%
- Cosco 12%
- Hapag-Lloyd 7%
-become easier to deal with, a preferred customer (all forwarders track profitability per customer, and when capacity tightens they will drop least favoured customers). Eliminate waste, especially long load times and using containers as emergency warehouses, tying up spare containers and exacerbating the current shortages.
-reconsider the 1980’s onwards trend towards “Just in Time” lean supply chains. Buffering can ease bottlenecks, and Maerk’s CEO (the world’s biggest container shipper with 20% market share) was recently quoted as saying “Just in Time” has been killed off by low interest rates, having been valid in the 2 decades when there was a high cost of money and therefore inventory, but it is now over.
Conclusion -whether it’s by diversifying your supplier network, growing your buffer stock inventory, reshaping your operating model or establishing a smarter, data-led technology forecasting capability, companies must increasingly accept that the first step to boosting resiliency involves spending money, not saving it.
Update July 2021
Inflationary pressures are continuing to build - everyone who sources from Asia is faced with containers from China to USA about to go up to $25,000 per 40'. This is inevitably forcing price increases on to consumers.
Chinese factories are no longer prepared to absorb raw material increases of between 30% (packaging) and 50% higher (plastic) than last year, and the US dollar remains 10% below last year's exchange rate with the RMB.
Some western customers are delaying shipments or cancelling them because they are no longer profitable, and so there will inevitably be a restoration of common sense as demand and supply for freight balances out - but our forecast is not until after Chinese New Year in the first week of February 2022.
Whatever you read about in the Press, inflation is going to be a significant factor for the year ahead, and only those businesses that can adapt to major cost price and freight increases will thrive.
Update May 2021
A 40' container from China to US is now above USD16,000. If you can find one. At Xmas it was below $5000.........
Plastic is now above 13 RMB per kilo - last year it was below 9 RMB........
The USD is now around 11% weaker than a year ago.................................
China factory capacity is full - it is a sellers' market......................................
How are our clients faring in these turbulent times? Thriving, by navigating this new, unfamiliar landscape where :
Just in Time no longer works (we have switched over to Vendor Managed Inventories)
Retail Price Inflation is the new reality in US. Bullying factories to accept "old" prices is a recipe for being let down
Pricing Power through brand strength makes customers more appealing to factories
Working with factories who can better control their raw materials through investment in vertical processes is key
Relinquishing low end products to focus on higher margin opportunities will accelerate
Update February 2021
Why Sourcing Expert Steve Feniger Says ‘Intermediaries Are Out'
by Kate Nishimura, Sourcing Journal, 5th February 2021
Sourcing expert Steve Feniger, a veteran executive of clothing company Warnaco Group and sourcing agency Linmark, believes that the era of the buying agency has passed. Instead, modern brands and retailers are rolling up their sleeves and taking a hands-on approach to sourcing in the interest of protecting margins, enhancing efficiency and promoting transparency in their supply chains, he said.
“I think the biggest challenge for buying agencies is that they’re just not aligned with their customers,” Feniger said. As manifold challenges continue to pummel the apparel sourcing sector, from strained trade relations to factory ethics concerns and a global pandemic, brands are becoming increasingly wary of third parties managing their relationships with overseas manufacturers.
Feniger’s personal experience taught him that sourcing agencies’ interests can actually be diametrically opposed to those of their clients. These groups have little incentive to present customers with low-priced manufacturing deals because doing so would cut into their commissions, he said.
According to Feniger, sourcing agents can earn between 5 and 7 percent of the value of a deal they’ve brokered between a brand and a manufacturer. And while their customers are undoubtedly gunning for the best value, buying agencies sometimes seek to increase their earning advantage by not pushing for the lowest price. “We’re talking $10 for a pair of jeans instead of $9,” Feniger said. “If the customer is willing to pay that, then that will earn [the agency] that little bit of extra money—and as you can imagine, when you’re doing a billion dollars in shipments, 1 percent extra can make an awful lot of difference.”
Buying agencies also have a history of brokering deals that upcharge clients for services they may not need from manufacturers—from design to insurance and sampling—driving up the value of their contracts, and ultimately, the agency’s commission, he said.
The downsides aren’t just margin-related, Feniger added—though cutting out the middleman does have its benefits to a brand’s bottom line. In today’s modern sourcing landscape, he believes that brands should maintain their own relationships with “a roster of factories” that are specifically aligned to their production needs—and committed to protecting their designs. “If you look at some of the larger buying agencies, they might be working with brands that are very similar to each other, so there could be some potential leakage of IP,” he said, not just across brands, but across factories.
In lieu of dealing with middlemen, Feniger said brands should work to establish direct partnerships with their suppliers—a prospect he insisted is much less intimidating than it might have been in years past. While brands once leaned on buying agents to help them navigate the customs, cultures and dialects of overseas sourcing locales, many second-generation manufacturing execs have studied in the West and are well-versed in English and other languages, he said, making the need for a translator less pressing.
“The factories have become more sophisticated,” Feniger added. “They market better, they do their own product development and design, and they interface with the buying offices much better.” And as the fashion industry moves toward an atypical buying calendar where quick turns and reorders are frequent and high MOQs have fallen out of favor, it’s all the more imperative that companies and their suppliers be aligned and in direct communication for the sake of efficiency, he said.
Feniger’s current venture, 55Consulting, helps brands install seasoned sourcing operatives internally who can interface with manufacturers and sourcing offices across Asia. “Typically, when we’re starting up, I just provide the umbrella coverage,” he said, “and then make sure we get a general manager who understands the nuances” of sourcing throughout these regions, including fluctuations in trade relationships, differences in expertise and capacity, and Covid’s impact on local workforces. Dedicated sourcing offices are set up in Hong Kong or Shanghai, depending on the location of the factories a client decides to work with, he said.
The issue of social compliance has come into sharper focus in recent years as concerns about human rights abuses and poor working conditions proliferate across sourcing locales, underscoring another reason for brands to bring sourcing in-house. “The first principle of traceability starts with needing to know which factories are making your goods,” Feniger said. While the concept seems simple, “very little is made where it’s purported to be made,” he added.
“People will take an order and show you a gleaming factory, but in reality, it may be being made down the road in a shack,” he said. The apparel manufacturing sector has become notorious for practices like subcontracting, where work is shared between factories on an unauthorized basis, perhaps in an effort to skirt labor laws.
The only way for a brand to ensure that its factories are compliant, according to Feniger, is to have “boots on the ground” to monitor performance after a contract has been signed. Quality control agents managed by a sourcing office act as a brand’s eyes and ears at the factory level. “If you’re going to make 10,000 shirts and it requires 2,000 sewing machines and approximately 2,500 workers, they will want to know, ‘Where are those workers?’”
By contrast, sourcing agencies may not have the bandwidth or the motivation to engage with factories to ensure that best practices—and laws—are followed. While Feniger said that labor laws in China, for example, are “beautifully proscribed” with “world-class protections” for workers that limit work hours and mandate overtime pay, “how well the law is implemented is a different question.” Workers and factory owners can sometimes be complicit in circumventing the rules in the interest of making more money quickly, he said, and facilities that operate this way need to be rooted out by someone with a vested interest in protecting a brand’s integrity as well as the health of a factory’s workforce.
A sourcing office acts as “the guardian of a brand’s name,” he said. “Its job is to make sure they’re following both letter of the law and the spirit of the law.” That’s especially important in the world of 21st-century sourcing, as shoppers become more values-driven and willing to vote with their dollars. The concept of the ethical, transparent supply chain has now morphed, for consumers, “from a ‘nice-to-have’ to a ‘need-to-have,’” he said.
Update October 2020
Despite downturn in Western demand, China's share of global exports has been surging. This is due to:
- "first back to work" in China as tackling the virus and restarting factories was given national priority, as other S.E. Asian countries struggled (frequently due to delays caused by Chinese components).
- China's dominance of "in demand" virus-boosted products such as PPE and "working from home" electrical, electronic and home lifestyle items such as exercise equipment, most of which remains sold out on Amazon. A snapshot of European demand, down 20% in total for Q2, shows how China has pulled away and outperformed all other export partners as broad consumer trends favour their supply base, allowing the Beijing government to spend less than most economies on protecting a weakening economy and seeing jobs evaporate.
Last but not least, the continued weakening of the USD versus most currencies has also caused the RMB to appreciate, and there is little to suggest this trend won't see the return of 1 USD : 6.2 RMB, and perceptible cost price increases for US businesses importing from China. After the November 2020 election we hope to get a more stable picture of the year ahead.
Update July 2020
There has been a surge of interest from Western brands seeking verifiable Asian sources that won't let them down, and are legitimate factories rather than middlemen posing as suppliers.
This is particularly true in the area of PPE (Personal Protective Equipment). Initial demand caused by panic buying has given way to a more strategic approach to building stockpiles for future pandemics, led by Taiwan, that has turned out to be one of the best organised and prepared countries in the world.
In parallel, we are seeing that the Western retailers and distributors with solid orders are aggressively leveraging their buying power, as most customers scale back their plans. Prices ex factory are falling, and once again we remind our clients that component costs (labour, raw materials, packaging, factory running costs etc) are less significant than Supply and Demand.
Update May 2020
RESILIENCE - the capacity to recover quickly from difficulties; toughness.
After Chinese factories recovered from a shortage of workers post Chinese New Year (as the post virus lockdown ended), exporters now face a shortage of orders. Exports are almost 20% of China's GDP, but priority is focused on kick starting domestic consumption.
Separately, those western retailers who over-diversified to other parts of Asia (Bangladesh, Cambodia, Vietnam etc) have been heavily punished. Most offshore production is overly dependent on components that can only be sourced from China - and when China shut down, these factories shuttered too, and are much slower to recover.
So a key lesson learnt from the pandemic is the importance of supply chain RESILIENCE. Previous emphasis on low cost and seeing cashflow optimised by adopting "Just In Time" techniques has proven to be short sighted.
Will retailers (and consumers) be willing to pay more for security of supply? This will become a necessity for the forceable future...
What action do you need to take to balance EFFICIENCY v ROBUSTNESS of Supply? The first step is to elevate the financial security of your vendors. Only the fittest will survive, and we are already seeing wholesale sector consolidation, with many weaker vendors trying to sell up or close down. It is naturally important to have "feet on the ground" to establish who will stick around and be able to process your orders.
Update March 2020
Since the onset of the ravaging coronavirus disease forced the PRC government to extend the Chinese New Year to 18th February, and impose draconian 14 day quarantine rules for returning migrant workers to prevent a massive outbreak, the threat to my clients' supply chains has been very real. They are involved in seasonal products for Western retailers which have a limited shelf life, and any significant delay would result in wholesale cancellations and possible factory financial ruin.
With every incentive to achieve existing delivery schedules to prevent this, I have coordinated the approach of my team and my clients to work closely with each of the 40 factories we are using in China to secure onetime delivery. As at 1st March I am delighted to report that through luck (having no vendors in Hubei province), hard work at lobbying for priority in the factories being used, and a willingness of our QC team to travel and camp out at all key vendors, 96% of February, March and April deliveries will be made on time, and 4% will be just one week late. Over US$50m of orders have been saved.