2008 November |

The Effect of the Downturn on the Quota Conversation

Josh Green | November 26, 2008
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Two interesting articles by James Morrissey:

1) The first notes that Chinese authorities are providing assistance to struggling factories — and that this assistance is leading some to call for action against China when quotas disappear at the end of this year.

2) The second notes that the Bush Administration sees no reason to keep quotas in place for China — since China has not yet filled its 2008 quota.

Of course, the economic meltdown is behind both of these stories — it’s why China hasn’t shipped enough to fill its quota (no one’s buying!), and why Chinese authorities feel the need to provide assistance to factories (no one’s buying!).

In the weeks ahead, the Panjiva team will be researching just how bad things are for factories around the world. More soon.

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Congratulations, Larry Summers

Josh Green | November 24, 2008
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The entire Panjiva team would like to congratulate Dr. Larry Summers on the announcement that he will join the Obama administration as Director of the National Economic Council.

As most know, Dr. Summers served as Treasury Secretary under President Clinton and, more recently, was President of Harvard University.

Dr. Summers was also an early investor in Panjiva and has served as a member of Panjiva’s advisory board.  We have appreciated his support and wish him the best of luck in his new role.

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Responding to Cost Increases In China / IndustryWeek

Josh Green |
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Over at IndustryWeek, you’ll find Panjiva’s thoughts about how to respond to price increases in China.

Given all the trouble that Chinese factories are having, are price increases really still a problem?  So far, yes.  Declining demand is leading to factory closures (see previous post), NOT downward pressure on wages.

Our IndustryWeek piece evaluates three strategies for responding to cost increases:

  1. Identify the “New China” (i.e., look to new countries)
  2. China is the New China (i.e., look at new regions within China)
  3. Leverage your suppliers’ networks (i.e., authorize subcontracting)

Would welcome your thoughts, here or over at IndustryWeek.

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Who’s Looking for New Factories?

Josh Green | November 20, 2008
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Today, I was asked, “Given the state of the economy, who’s looking for new factories?” Based on what we’re seeing at Panjiva, here’s the answer (factories, take note):

Growing companies

Yes, there are companies that are growing despite the problems in the economy. These companies are looking for factories to supplement the production capacity that’s been available to them, and they are looking for factories that can help them introduce new products. These customers, though hard to find, will be the most sought-after by factories.

Entrepreneurs

There are always entrepreneurs looking to get new businesses going. Some may be wary of starting a business in the current economic environment. On the other hand, these days being an entrepreneur isn’t much riskier than being, say, a banker… So expect to see a fair number of people taking the entrepreneurial plunge. Traditionally, factories have avoided working with entrepreneurs, because entrepreneurs place smaller orders and their growth is anything but certain. However, in this environment, order-starved factories will be more willing to work with entrepreneurs.

Companies under margin pressure

As I’ve noted in previous posts, lots of companies are facing significant margin pressures, thanks to declining consumer willingness to pay and increases in the prices of their inputs — particularly when their goods are manufactured in southern China. Some companies are trying to protect their margins by moving production to new, lower cost geographies. Plenty of factories will be interested in attracting business of this kind, but they shouldn’t be surprised when these companies move again, when yet another geography offers lower prices.

So, yes, there are companies that are looking for new factories. However, there’s no doubt that factories around the world are having to cope with smaller orders and fewer inquiries from potential customers. A painful situation, to be sure. More on this in future posts.

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58%, Going on 100%?

Josh Green | November 18, 2008
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During the last year, 58% of companies suffered financial loss from supply chain disruptions.  (I came across this statistic, which comes from an Aberdeen survey, while reading an article in Industry Week.)

My bet is that the ACTUAL percentage of companies that suffered financial loss from supply chain disruptions is much higher — but only 58% had the courage to admit it.  And, frankly, the percentage is certainly going to go even higher, given the high number of factory closures now occurring around the world.

Nevertheless, I hear from some sourcing executives that they have strong relationships with their suppliers and are therefore not worried.  It makes me wonder…  Did the 58% of executives, who suffered financial loss from supply chain disruptions last year, express similar confidence prior to the disruptions?

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67,000 Factories

Josh Green | November 14, 2008
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Another article in the New York Times about factory closures in China.  According to government statistics, 67,000 Chinese factories closed in the first half of the year.  11,000 per month.  And that was BEFORE the global economic meltdown.

It’s scary enough that all of these factories are closing.  It’s even scarier that these closures are happening without any warning.

See a previous post about how you can spot risk in time to do something about it.

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Everybody’s Worried About Everybody

Josh Green | November 12, 2008
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Two interesting posts over at SpendMatters:

* One notes that Indian suppliers are refusing to take orders from American companies because they’re worried the American companies won’t be able to pay.  (This, by the way, is consistent with what we’ve been hearing from suppliers.)

* The second highlights concerns that buyers have (or should have) about the effect of the financial crisis on suppliers…  Will they survive?  Will they cut corners?

So suppliers are concerned about buyers, and buyers are concerned about suppliers…  I.e., everybody’s worried about everybody, and rightfully so.  Given this state of affairs, what steps should solid buyers take?

1) Be prepared to prove to your suppliers that you’re solid.  References from your customers and your bankers may be able to help in this regard.

2) As Jason from SpendMatters suggests, be vigilant in monitoring your suppliers.  Check out a previous Panjiva post on how to look into a supplier’s financial health.

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China To The Rescue Of The Global Economy?

Josh Green | November 9, 2008
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David Barboza reports that the Chinese government has unveiled a massive economic stimulus package.  US$586 billion will be spent in the next two years on a wide variety of infrastructure projects.  Will this effort:

A) Help Chinese authorities cope with unrest that is resulting from widespread factory closures?
B) Provide infrastructure that will make China’s manufacturing sector even stronger in the decades ahead?
C) Bolster Chinese consumer spending — including spending on imported goods, thereby providing a boost to the global economy?
D) All of the above?

I’m going with D.  This is a brilliant move, and one that suggests, among other things, that China is growing more comfortable with its role as a leader in the global economy.

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Will President Obama Be Good For Global Trade?

Josh Green | November 5, 2008
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Now that CNN has called the race for Senator Barack Obama, it’s time to ask — Will President Obama be good for global trade? My prediction: yes.

Over the last several months, I’ve been asked this question by a lot of people who care about global trade. Indeed, Candidate Obama generated a fair amount of concern with statements that suggested he’d put the brakes on trade. For instance, he called the North American Free Trade Agreement (NAFTA) a “bad” trade deal, criticized the U.S.-South Korea Free Trade Agreement, and opposed the Central American Free Trade Agreement (CAFTA). For a detailed accounting of Candidate Obama’s statements on the subject of trade, visit the Council on Foreign Relations website.

Candidate Obama’s statements notwithstanding, I predict President Obama will be good for trade. Some more specific predictions:

1) President Obama will be far more pro-trade than his campaign statements would suggest

Because of the electoral college system, U.S. presidential campaigns are all about swing states — states where the electorate is evenly divided between Democrats and Republicans. For some reason, the most evenly divided states (Ohio, Pennsylvania, Michigan) are states that have been particularly hard hit by globalization. Therefore, it’s not surprising that a candidate for president would employ anti-trade rhetoric. (Indeed, I’m surprised when candidates don’t employ anti-trade rhetoric!) With the campaign over, President Obama will be intensely focused on enacting policies that can jump-start America’s economy. Will these policies be pro-trade or anti-trade? To answer this question, I look at the economic advisers that Obama has surrounded himself with. At the top of this list: Robert Rubin, the former Goldman Sachs executive turned Clinton Treasury Secretary, who is decidedly pro-trade. In the months ahead, look at who President Obama appoints to key economic posts in order to assess whether my prediction is likely to be right or wrong.

2) President Obama will be more effective than his predecessor at facilitating new trade agreements

Over the last eight years, America’s unilateralist stance — in a number of arenas — has diminished its ability to play a constructive role on issues of concern to the global community. President Obama will put an end to America’s unilateralist stance which will likely enhance America’s ability to lead on, among other things, trade. And leadership is needed. The failure of the Doha round and the failure of governments to effectively coordinate on consumer safety issues are just two examples.

But let’s say President Obama proves effective at facilitating new trade agreements; will he be able to get them passed here in the U.S.? My prediction: yes. Republicans tend to support free trade, while Democrats need some convincing. A Democratic president is far more likely to succeed in bringing enough Democrats along to ensure passage — either by including “fair trade” provisions, or via old-fashioned arm-twisting. It’s no accident that NAFTA was passed while a Democrat was in the White House.

Your thoughts?

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Even More Melamine — And No Solution In Sight

Josh Green | November 3, 2008
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As David Barboza reported over the weekend in The New York Times, Chinese authorities are expanding their melamine investigation.  Melamine is the toxic chemical that should not be making its way into the food supply chain — but that nevertheless has been.  By now, some may be tuning out news about food (and product) safety scandals.  Not sourcing executives…  Managing risk — particularly food and product safety risk — has risen to the top of the agenda of most sourcing executives.  The same is true for government regulators, both here in the U.S. and abroad.

What is perhaps most interesting, though, is that there really aren’t a lot of good ideas on how to effectively manage this category of risk.  I was struck by this comment from a professor at NYU, who was quoted in Barboza’s article:
“’A year ago, everybody should have been in a complete panic about it and done something then,’ said Marion Nestle, a professor of food studies and public health at New York University and the author of ‘Pet Food Politics: The Chihuahua in the Coal Mine.’ ‘Someone should have required that melamine not be in any food product.’”

Professor Nestle seems to be assuming that simply requiring that melamine be excluded from the supply chain would have solved the problem.  Not so — and particularly not so in China.  The number of participants in the food supply chain — just in China — is huge.  How would you communicate new requirements to all these participants, let alone enforce these requirements?

Putting the right regulations on the books is perhaps a necessary step, but a much more comprehensive approach to solving the problem is required.  As noted above, regulation must be coupled with communication and enforcement.  In addition, key players (government regulators, inspection agencies, private sector leaders) must agree on standards and provide for transparency about who is abiding by these standards.  This last piece creates positive incentives for good behavior — an important complement to punishments for bad behavior.

Your thoughts?

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