China and the Shifting Global Supply Chain | Rosemary Coates

Julia Raymond Hare:
Hello and welcome to the Retail Rundown podcast. I’m your host, Julia Raymond Hare. If you’re a regular, you might have noticed that I’m returning from a one-month hiatus from our wonderful show. And during that time I enjoyed working remotely from the gorgeous, beautiful country of Portugal. It needs two adjectives there because it’s amazing. There were local delicacies like grilled sardines, green wine, cliff lying beaches, and just being immersed in different culture was wonderful.

Julia Raymond Hare:
Also, part of our team here at RETHINK is based in Lisbon, so we got to collaborate a bit in person. Quick thank you to our exceptional guests hosts for the past few weeks, and to our production team who keeps this top-rated show rolling year-round. With that said, it feels great to be back with our excellent guests today, Rosemary Coates. Rosemary is a supply chain expert. She’s the executive director of the Reshoring Institute and president of Blue Silk Consulting. Thank you for being here on the show.

Rosemary Coates:
Thank you. I’m delighted to be here.

Julia Raymond Hare:
And for our listeners before we dive in, you should know Rosemary is the author of five books, including a bestseller on Amazon called, 42 Rules for Sourcing and Manufacturing in China. So of course, we’re going to talk a little bit about that today. Rosemary, I’d like you to kick us off. You can tell us a little bit about yourself and your background, and also we’ll dive a little bit into the state of the global supply chain.

Rosemary Coates:
Yes. Great. So I’ve been in management consulting for over 25 years and spent a good part, 15 years or so helping companies with their global manufacturing strategies, primarily offshoring to China and setting up operations in China. And I became an expert at that, that’s what the executives I was working with, wanted me to do and so we did that. And then long about 2012, both Barack Obama and Mitt Romney were running for president and they were both trying to bashing like crazy. And I’m going, “Oh man, I can’t tell anybody what I do for a living. This is awful.” So that was started to get to me as well as, looking at how many people were being laid off and how many plants we’re closing in the US. And it just was just didn’t feel good anymore and didn’t feel right.

Rosemary Coates:
And then on top of that, I have five grandkids and we had a family reunion and I’m looking at my grandkids, thinking, if I keep sending all this manufacturing off shore, these kids aren’t going to have much of a future. Nothing to really be substantial because manufacturing is the backbone of our economy. And I knew we were putting a big hole in the middle class. So all of that combined together and I had this brainstorm idea one day thinking if we started an Institute that was focused on research and helping university students learn that, we could maybe make a difference. And so out of that became the Reshoring Institute.

Rosemary Coates:
So now we help lots and lots of companies at the Reshoring Institute. We’re non-profit, non-partisan, and we have low costs consulting rates. So we’re helping lots of companies with this decision to bring manufacturing back. On the other side, my Blue Silk Consulting firm is still working very much in global strategy, and global manufacturing and also a place where I do expert witness work. So I get involved with lots of legal cases involving international supply chain disputes, and that’s really quite interesting also.

Julia Raymond Hare:
Wow. I think you’re the first guest on the show to have that kind of experience and work, being an expert witness. I do want to say, it sounds like a great initiative, a respectable mission, that you have at both your company and the Blue Silk Consulting and really timely because just last year, around this time, in the UK, the companies like Amazon, Ikea, Nike were called to parliament to address some claims that their suppliers might be using forced labor, and it’s really a tough issue. And from your work as a witness and both of the companies that you run, what are some of the greatest challenges that supply chain leaders are facing today?

Rosemary Coates:
Well, clearly when the pandemic started, it introduced so much risk into global supply chains. Companies that were happily importing from China and sourcing worldwide and so forth, all of a sudden got pinched because the supply chain shut down, starting with Wuhan China, which is the automotive center of China. So it’s like the Detroit of China. And they shut down the city and within a week, companies around the world were experiencing shortages of auto parts. So really introduced risk into the supply chain in a way that we’d never seen before. And I think it really pointed out the vulnerabilities in our supply chains around the world. And people couldn’t get parts, they couldn’t continue their production lines because… Like I saw a headline that said, you can’t make a car with three wheels. If you can’t get the parts, you can’t produce your product.

Rosemary Coates:
So it became such a huge risk. You mentioned the forced labor and what’s happening with the Uyghurs in China, this is a critical issue. I think we’ve known forced labor, prison labor, and other kinds of human rights issues have been going on for a long time for sure. But this discovery about the prison camps, and the Uyghurs has rocked a lot of supply chains around the world. Where companies had to sit up and take notice of what was happening in their supply chains, and why weren’t they aware of this? Why weren’t they controlling it? What steps do they have to take now to make sure that doesn’t continue to happen?

Julia Raymond Hare:
And it sounds like it’s something that is so complex and in some areas it’s still not required by a regulation. So it’s not something that all companies choose to take on for a number of reasons and a lot of them valid, but how do you… Creating a transparent supply chain is not easy right, because there are oftentimes so many different suppliers. How do you consult brands and retailers and manufacturers to approach this beast?

Rosemary Coates:
Well, I really wish there was a silver bullet, but there isn’t. It’s all about maintaining control over your global supply chain and knowing where things are coming from. Understanding who those suppliers tier one and tier two and tier three suppliers, who they are? Where they are, and what kind of operations are they running? And that takes a lot of manpower like we’ve never seen before. If you are sourcing in the US for example, you don’t have so many of those issues, and maybe you can get away with fewer people to run your operations here. And hopefully that’s one component of what you’re thinking about. But when you have a global supply chain, it’s very important to be hands-on and to understand what all of those components of the supply chain consists of.

Rosemary Coates:
It isn’t just the Uyghurs, if you go back a few years, you may remember the Rana Plaza in Bangladesh, that collapsed and killed about 1300 people. Now there’s a sewing factory that was built on top of a poorly constructed building, up to four story’s that were built on top of the first story. And they started experiencing cracks in the walls and so forth that some of the workers refuse to come to work and were fired. And the rest of them, being so desperate to even work at these low-wage jobs, went to work. And even though the building was starting to crack, they were told work anyway, it’ll be fine. And sure enough, the building collapsed. So understanding those kinds of situations, there were a lot of big brands that were being manufactured in Rana Plaza. And even though I think most of the companies were aware that they were manufacturing there, they didn’t audit to the extent that they understood this was a significant risk in terms of the building and how they were putting a human beings at risk in this situation.

Rosemary Coates:
So there is no substitute for hands-on global supply chain management. It has to be done, and it has to be done extensively, and that means you’ve got to hire extra staff. So if you take a step up and you look at the landscape, you’ll see that adding people and control in the global supply chain adds a lot of cost, a lot of cost. And so then when we’re looking at total cost of ownership, if you take into consideration all those kinds of additional costs, suddenly it becomes much more competitive and interesting to manufacture in America. And so then we’re helping companies now make those decisions.

Julia Raymond Hare:
So we were saying total cost of ownership of running a global supply chain with that hands-on management, which you said, there’s no substitute for. The trade-off in a way is bringing it back to the US because the overhead is so incredible.

Rosemary Coates:
Yeah, that’s one aspect of it. The other, what we’re experiencing right now today are the skyrocketing logistics costs. Holy cow. Previously I would get a container from Shanghai or Shenzhen China to the US west coast for about $1,500. And today’s price is six, $7,000, maybe more for the same container, if you can get it. So not only are you, do you have to queue up to get container space and shipping space from China in particular, but around the world. But the price has gone up so significantly, and that makes it difficult to stay in business if you’re operating on a thin margin.

Julia Raymond Hare:
Absolutely. And Rosemary, are you saying that cost is pre-pandemic averages compared to post, or is this something that has taken, five years or so. From going $1,500 for a container from China all the way up to six or 7,000?

Rosemary Coates:
Well, it’s only been the last couple of years, two years maybe, max. And that’s when supply chains were at risk because of the pandemic. In today’s environment, the cost of logistics is so high for a few reasons. So primarily it’s because of the container imbalance around the world. So there are too many containers that are in the Western hemisphere and not enough in China where they’re trying to ship products out. So if you have your products ready to go and there’s no container available, you have to wait.

Julia Raymond Hare:
You’re out of luck.

Rosemary Coates:
You’re out of luck, exactly. So that will eventually right itself. I would say, probably within the next 18 months or so, it’ll even out a little bit. But there are also issues like port congestion, maybe you get that container and you get it on the ship and you pay your $7,000, and you get to the port of Oakland. And for as far as you can see, there are ships waiting to be unloaded. So you could wait in the Harbor for two or three weeks before your ship could be unloaded.

Julia Raymond Hare:
Wow. Two or three weeks?

Rosemary Coates:
Yeah. Logistics is just amazing. And it’s not just the Port of Oakland. I live in Silicon Valley, so I’ve watched things here. But it’s the same situation in most ports around the world, there’s port congestion all of a sudden. We thought the economy had taken a big downturn when COVID really was in full swing in March and April, May of 2020, but it created such chaos in global supply chains, that it’s got ripple effects to this day. I mean, even the ship in the Suez Canal that we all thought was funny. And the late night comedians, Stephen Colbert joking about it. But it had ripple effects around the world when ships couldn’t get through the Panama canal. And so we’re still working off the backlog from the Suez Canal. So all these things regarding logistics have made a huge difference in the cost and in the timing of goods coming to the US.

Julia Raymond Hare:
Wow. I had no idea, some of the things that you shared just now about why the cost of logistics are so high? From the port congestion, the container imbalance, these are all very real issues. And is it something that China, their role in the global supply was already shifting or has the pandemic brought to light… Basically has the pandemic brought to light what was problems that were already going on? Or are these completely new problems solely because of the pandemic that you foresee going away?

Rosemary Coates:
Probably some of each. As I mentioned before, we expected to have this major downturn during the pandemic period, especially the early period that we were going to have a major recession and so forth. And it never really materialized. In fact, the import statistics tell us that we imported more goods from China last year than we did in any previous year, so the trade imbalance-

Julia Raymond Hare:
What?

Rosemary Coates:
Yeah, the trade balanced actually grew. So I guess we were all at home ordering stuff from Amazon and-

Julia Raymond Hare:
Yeah, I guess it makes sense if you think about it, but I’m a little shocked to hear that stat.

Rosemary Coates:
Me too. The first time I heard that the west coast ports had increased in volume during the pandemic. I’m like, “What?” I re-read the articles, but sure enough the statistics show everywhere that we had an increase in imports this year, over last year. I mean, it’s just amazing.

Julia Raymond Hare:
It is. And with all of the increase in imports, then there’s this flip side of the coin where companies are considering at the same time to move production out of China. So how do you see that in the next five years? I mean, do you think we’ll have a substantial shift because of what we’ve learned from the pandemic of moving production back to the US? What will be the key drivers?

Rosemary Coates:
That’s a really great question. I would say if I scrolled back, 10 or 15 years, I think executives were making decisions based solely on cost and what their competitors were doing and wanting to take an exciting trip to Shanghai. Yeah, I actually had one executive tell me that he had never been to Shanghai and he was really looking forward to it. And that was the reason why we should start setting up operations there, so he could go.

Julia Raymond Hare:
No, conflict of interest there.

Rosemary Coates:
Yeah. So there was some of that. But I think the decisions were more simplistic back then and really focused just on cost. And I don’t know to me, it seems like executives got a lot smarter in the last five years or so. And today’s decisions are very complicated. So it just a matter of looking for a low cost environment, it’s what should our manufacturing strategy be like? Where in the world should we be sourcing? Should we take advantage of sourcing from China, but also from Vietnam and maybe Indonesia and Bangladesh and Mexico. Central Mexico, by the way, the labor rates there are roughly equivalent to those in China. So the decision today is based on a much broader worldview, looking at the costs of course, businesses always look at the costs, but also looking at time to market. Which markets are growing?

Rosemary Coates:
So you don’t want to shoot yourself in the foot. If your market is growing in China, you probably want to keep some operations there. And if it’s, your market is taking off in the US then you probably need to look at potentially manufacturing here too. So maybe not either/or, but having two operations. And that can be multiplied by three or four times, and all of a sudden you’ve got a big global complex network of manufacturing and that’s where we are today. And as I said, I think executives got a lot smarter and a lot more analytical about making these sorts of decisions.

Julia Raymond Hare:
And would you say there’s more competition? We see a lot of people who are independent sellers on Amazon and Walmart, different marketplaces around the world, Alibaba, of course. But then we also see this increase in D2C brands. Is that driving up costs for some of the larger retailers or do they control most of that?

Rosemary Coates:
Certainly shifting for sure. I mean, the Amazon effect is real and that’s D2C, it is, our expectations are different. I mean, now we order something and we want it here in a day or two. I mean, we’re not going to wait around for two weeks for something to come. So there’s different expectations, fulfillment requirements, as well as the shifting business models around the world. I would say from my perspective that there is a trend towards a more D2C, and I think we’ll see more of that going forward. But I don’t know that there’s ever going to be a full replacement for a retail environment, with brick and mortar stores and big retailers that offer a broad array of [inaudible 00:26:34] and vendors and so forth.

Rosemary Coates:
I think we’re still going to see some department store activity. And hopefully more after the pandemic, we’ve passed the worst part of it. I think people are a little afraid to go into a lot of stores right now. So I don’t really see it as an either/or, or morphing into something different. It’s just gotten more complex and there are more [inaudible 00:26:58] and more models available today than there ever have been in the past.

Julia Raymond Hare:
Yep. And Rosemary, I know this is a little off track, but I just want to get your opinion because I did do a series a while back on luxury in particular, because China’s one of the biggest drivers of the new luxury growth. And people were saying that it’s really hard to break into the China market. So for retailers and brands selling into China, it’s really tough. Has that been your experience with the companies you’ve worked with?

Rosemary Coates:
Yes, absolutely. I have a lot of clients that are very frustrated trying to get a foothold in China. Advertising is different. People use much more mobile capabilities than they do online with a laptop or a desktop, and most of the computing is done on their phones. The retail environment is different from a payment perspective. Brands are, it takes them a long time to develop brands. There are specifics about the culture too. So here’s an example. If we look at our Amazon pages, there’s a lot of white space and product is displayed in a kind of simple manner. If you look at a similar product being sold in China, the webpage has got flashing lights and it’s pink and red, and it’s got lots of text on the page and it’s a different preference and a different culture and a different way of consuming information.

Rosemary Coates:
And unfortunately, I think a lot of companies don’t understand all that part of the culture. Having done business in China for 25 years, I’ve learned a lot about the culture for sure. But there are many days when I would go back to the hotel and all of a sudden I’d have an aha moment saying, “Oh, that’s why it had happened today?” Because it’s culture-related or there’s some protocol that happens in China that it’s nuanced and you don’t necessarily notice it until you have some experience. And then all of a sudden you’re like, “Oh that’s why that happened. This is why the boss showed up in the middle of the meeting and.” Yeah, if something crazy happens like that, and you don’t recognize it until later you can see the patterns.

Julia Raymond Hare:
And it must be tough because not only is the culture very different for retailers and brands to enter the Chinese market effectively, but also the pace is much faster. So not only do you have to adapt to a whole new style of advertising potentially, and all of the technology, we know they’re more advanced with technology. But the pace that you have to do it is incredible as well. So I heard someone said they have billboards in China where they have the digital billboards for advertising, and you’ll often see mistakes sometimes made on the advertisements, but it doesn’t matter because they’re only up for eight hours and then it’s a completely new one. And you’ll never see the other one again.

Rosemary Coates:
And if it’s translated to English, it’s often a, what we call Chinglish.

Julia Raymond Hare:
Chinglish. Yeah.

Rosemary Coates:
Translation is bad and it’s, it can be quite funny. Actually. I have a whole file full of Chinglish assigns that are really hilarious because they were so poorly translated. But yeah, that’s right. The pace is faster, the consumption of products is different. What appeals to the Chinese and/or any culture for that matter has to be understood before you can be successful in that culture.

Julia Raymond Hare:
Amen. And Rosemary, if you can talk to this next question, I have to ask because it’s very timely. Covering the retail segment, we’re looking at the predictions for the upcoming holiday shopping season, and I wanted to get your point of view. That could be a global point of view or more North American focus, whatever you’d like, but what are you hearing?

Rosemary Coates:
Well, I’m definitely hearing there’s going to be delays. And so getting your containers of holiday goods, whether it’s decorative goods or apparel, or gift items, that sort of thing, out of China’s going to be very difficult. You’re going to find there are delays and your time to market is extended by it could be four, six weeks, something like that, which means you may miss the window of opportunity for the market. And I think we’re going to experience lots of that this holiday season. So as far as getting electronics here, I would say there are going to be some out of stocks and there’ll be some disappointed people and kids because of that.

Rosemary Coates:
I don’t think it’s a complete dearth of products, I’m not saying that, but there’s certainly going to be limits and shortages on products coming around the world, not just to the US but mostly to the US and Western Europe.

Julia Raymond Hare:
Mm-hmm (affirmative). And electronics is a big one, especially for the increased demand we’ve seen over the past year for that category. So do you expect it to be any worse than last year for the electronics category or better?

Rosemary Coates:
Oh yeah. I expect it to be worse. And it’s partly these delays, but also a shortage of semiconductors around the world. A few things have happened to contribute to semi-conductor shortages, certainly the pandemic disrupted production for sure. But there are all kinds of shortages related to capacity issues and unexpected demand. When we were all stuck at home, lots of us bought laptops and our kids were going to school on laptops. So we had to have additional laptops there. We bought electronic gadgets and so forth and all those things consume semiconductors.

Rosemary Coates:
So there was a huge spike in demand and a whip of the supply chain that caused this shifting back and forth. And a shortage of somewhat conductors across all electronics. I mean, are used everywhere. And used in cars and laptops and desktops and phones and appliances and semiconductors are everywhere. And because of this shortage, we’re going to see a shortage of products I’m sure.

Julia Raymond Hare:
Mm-hmm (affirmative). Absolutely. Well, you heard it here, to our listeners from supply chain expert, Rosemary Coates. She’s also the executive director of the Reshoring Institute and president of Blue Silk Consulting. Rosemary, you told me that you also have your own podcast, so I’d like to give you a moment to let our listeners know where they can get in touch with you and find more about what you do.

Rosemary Coates:
Great. I think the best way is to go to our website, which is ReshoringInstitute.org and on the tab under thought leadership, all of the podcasts that I host are listed there. My podcast is Women in Manufacturing and we interview really interesting women that run manufacturing companies across the country, so that’s a fun one. But also on the website, we publish all of our research, all of our case studies, white papers, everything our students produce, it’s all there on the website. So it’s a fun place to go and filter around and see what’s interesting to you.

Rosemary Coates:
It’s all downloadable, it’s all free. We don’t make you sign up for anything, because we’re a non-profit and nonpolitical, we think we’re a public service so we publish everything. And people are free to go and have a look and have fun. That’s ReshoringInstitute.org, and you can contact us through that website as well at info@reshoringinstitute.org.

Julia Raymond Hare:
Perfect. Thanks for joining today, Rosemary. I hope to have you on again.

Rosemary Coates:
Thank you very much. I appreciate it.