Transcript: Another Ducking Digest?! December 11, 2023

Another Ducking Digest?!
December 11, 2023: A Global Shift: Navigating New Trends in Manufacturing and Trade

Happy Monday! We have Lindsay with his cool mug and his clothesline in the background. Lindsay, what, for those we can’t see, does the mug say? The mug says “Edinburgh,” not “Edinburg.” Edinburgh. And what is the deal with your decorations behind? This is the holiday festivities. You know, when you’re married as long as I am, Sarah, you just have to go with the flow. If the wife wants the Santa Claus Christmas laundry line out, then that’s the way it’s going to be. You know, I get it, I get it.

So, we were off for a couple of weeks. Lindy had a very special visitor in town and was out and about showing her around. I don’t even know where you went, Tahoe, and a few other places. So, the visitor is gone, Lindsay is back, our show is back, and there has been a lot of news in the headlines. I would say this week, and the last couple of weeks actually, with just a lot of stuff happening. And so, what I’ve asked Lindsay to do today is go through some of the major stories and drill down on what it means and how it impacts small and midsize manufacturers.

So, Lindsay, with that, I’ll turn it over to you, and maybe if we want to pick like three or four headlines for this week. Sure, sure, because as you say, Sarah, there’s a lot. And that’s part of our challenge, is that I think the mistake for even a supply chain professional and a small manufacturer would be to ignore the news or discount the news. You know, “I got too much going on in my own life, let alone you want me to think about what the business press is telling me, let alone The Wall Street Journal.” So, yeah, as we do want to factor in the news, we only want a little part of it. So, we have to have a protocol about how do I filter the headlines, right? Because every morning there’s a new headline.

Right, so, so this week’s big news, big headline, is that Apple is starting production or ramping up production in India. And you know, whenever someone throws something out like that, there’s going to be a certain portion of the masses who say, “Okay, we shouldn’t be building in China anymore, everyone’s going to India.” Well, okay, tap the brakes, let’s see what this means. So, first off, what does it mean? They’re going to ramp up, they’re already building. Apple’s already building iPhone 15s in India. Good, they plan to build 500 million a year. Okay, now there’s a data point. I don’t do 500 million of anything, let alone an iPhone. I mean, I did a back-of-envelope calculation. Even if my material cost of goods is only $300, that’s still going to be a $15 billion dollar a year cost. So, you know, and I am first to admit, I am totally unqualified to talk about managing a $15 billion dollar a year outsourcing agreement.

Right, so for the small US manufacturer, how does it affect me? How does that news about India affect my outsourcing strategy? And so, that’s a good, you know, what the strategy guys call QFAs.

And Lindsay, one point of clarification, did you say they’re moving production, or they’re starting new production? Because that’s a very important word. So, the recent launch of the iPhone 15, the product was available the day of the launch, and that was a first. And the reason that Apple attributed to that was that they were already building it in India. So yes, they’re already have a foothold. Now what’s happening is they’ve announced that the headline is they’re ramping to 500 million units a year. So yes, they have the new plant that Foxconn is building, we’ll talk about that, is down in the South, south of India. And then additionally, they already have another plant in, you know, on the east coast, and the third plant that’s being set up by an investment group. So, they’re multi-site within India, they’re established, they’re already building, now they’re ramping up. So yes, the best practices that we can look at this, even though you say, “Well, Lindsay said it doesn’t apply to me.” Yeah, but look at what they’re doing. They’re diversifying, as well as, most of us talk about divers as having a backup supplier, right? An alternate supplier. Well, Apple’s taking it to the next stage, demonstrating here’s how you do it with an alternate country, alternate country, alternate suppliers. They’re only doing it for some of their production, about 25%. My god, they claimed that they’re going to build the low-end product there, which, okay, that makes sense for a startup. Start with the low-tech stuff, they’re going to ramp up. That’s a learning for me because, as a supply chain outsourcing guy, even Apple doesn’t plan to come out the gate at full production. You know, you have to plan on a pilot build, a first production run, and then that staggered ramp, you know, as we bring up local suppliers or we develop expertise, or we affirm that everything’s lining up well enough. And they’re going with a multi-site strategy, as you said, there are three big factories supporting it, and they’re heavily involved with the supplier. So these are all good practices that we can pick up.

Yeah, even though the Apple involvement with the supplier, which in this case is Foxconn, the Apple engineers are actually working with Foxconn to design the factory around the product. Wow, so, but you know, the lessons learned is, you know, involve the supplier in your outsourcing decisions. The new Foxconn factory will start producing in April before it ramps up to 20 million phones a year. Well, and I would say, a best practice is diversify your supply base as much as possible. And diversification doesn’t only mean different suppliers, but it means different locations. So if a natural disaster or something comes through a certain region, you’re not crippled.

Yeah, yeah, yeah, the tough to do. I think having a plan B behooves us all to have a plan B whenever we’re sourcing from a remote location. Most of us are unaffected by the turmoil in Ukraine and Palestine, but obviously, you know, tsunamis in Asia are more pertinent. Hopefully not the political environment in China, but you know, it’s something we got to bear in mind. Obviously, COVID had that impact, you know, shutting down the Eastern Seaboard docks in China. And it behooves us to have that plan B that we can go to, to avoid shutting ourselves down.

So we talked about this being the headline, how do we push it into perspective? Well, first, and that’s especially important in supply chain, especially important for the small manufacturer because what one perspective can be, “Well, it doesn’t apply to me.” Well, okay, let’s think about that. The Chinese Trade Surplus, we learn, it’s reported this week, as Chinese Trade Surplus for November increased. Okay, how did it do that? Well, first off, Chinese consumers bought less, China imported less. That’s strange, why? Chinese consumers bought less. So that’s another problem that we got, this big question mark around, how’s the Chinese economy going to do in the coming year? A lot of very clever people don’t know the answer to that, and there’s a lot of fearful predictions around what’s how stable the economy might be, and what the actual real debt is versus the number that’s broadcast by the National.

Lindy, what about Indian exports? What is the latest headline on that figure? Thank you, thank you. So, jump to that one. So, you know, India, if there’s a migration from China to India, Susan, you know, are they equal now? No, you know, Indian exports are less than a tenth of Chinese. So, but you can’t marginalize that, that’s still a huge amount. It’s greater than every other emerging country in the world, with the exception of Mexico. So that’s a big chunk of stuff. Apple came right out the gate and said that the Indian product will cost more, the Indian labor costs more than Chinese. The infrastructure is, I think they use the word “rickety.” There’s the organized labor constraints in India. Interesting, interesting that your local governments, working with Apple or pushing back on Apple, know whether or not they’ll be allowed to work employees 12 hours a day when they have demand spikes. Wow, so, yeah, India’s India is there, it’s definitely a force to be reckoned with. And as a small manufacturer, I want to ride on the coattails. And that’s one of the interesting things, maybe the closing thought for this morning is, we’re seeing, certainly seeing two points. One, we’re seeing the investors are talking about investing far less in China. And what we’re seeing this year in 2023 is about 5 billion. The Equity Funds will invest about five billion in China, and that’s down from 100 billion in 2021. So there’s a clear, significant decrease, 100 billion to five billion is a massive trend. And at the same time, in August, we got, there were some interesting reports that US Equity Funds are investing in Indian startups, manufacturing startups.

So there’s this coiled effect, Sarah, that – okay, this is good enough for Apple, this is good enough for the big guys. How do we make it happen for the small manufacturers? So, I think for the small manufacturer, you know, standard rules about outsourcing from a remote location. I want local presence, I want a dude who’s going to call on my factory, who’s going to run core interference and coordination for me, who speaks the same language as me, and is going to work the late night calls with his remote counterparts. Plus, I want local presence, but I also want remote cost benefit of the lost region. So, Lindsay, there was another headline that I want to make sure we get through today. Again, I know there was so much that we’ll probably carry this conversation over to the next couple of weeks, but it’s a company called BK Yellow Freight, and I would like to have you talk about this headline and why it’s so important and impactful to us working in manufacturing. So, okay. Yellow Freight, Yellow Freight declared bankruptcy. That was the big news. Yellow Freight was the number three LTL carrier in the US. This week’s update is they’ve gone ahead, rather than accept any reorganization, they have gone ahead with auctions and sold off, raised 1.9 billion by selling off 130 of their distribution centers. And then on the coattails of that, there’s tens of thousands of pieces of equipment that have to be sold. There are trucks, forklifts, etc., etc., etc. So, not sure who’s administering the auctions, but certainly if you’re in the market for a few forklifts and you want to save some money on used forklifts, maybe the Yellow Freight auction will be a place to go. Certainly, you know, tens of thousands of pieces of equipment, hundreds of thousands of forklifts being sold into the used market, maybe we’ll see a reduced price on used forklifts. And then, what about the headline around DHL, which, if I recall, I think they’re the number three LTL carrier in the US. Yes, yes, yes, yes. Yeah, the – I think I, yeah, got them mixed up. Yeah, L-DHL, number three, e-FedEx and UPS obviously being the big guys. Teamsters have called for a strike at the Cincinnati Hub. Interestingly enough, DHL is saying that’s not going to have any effect, that the Cincinnati Hub is, as big as it is, it’s just one of three, and the other two are going to, at the global level, be able to pick up the slack. Overall, we’re seeing holiday freight rates staying stable, staying low at the international level. We’re, there’s a bit of a reset, you know. A year ago, when we were talking, Sarah, we were talking about international shipping freight rates being up to $6,000 a box instead of $2,000 a box for containers on the Chinese Eastern seaboard to the US West Coast. Now they’re back to 2000. And is it M-C or Mer, the giant consolidated shipping line? They’re now saying that they’ve laid off 10,000 people, they’ve got more ships than they need for the next few years. So there’s an overabundance of supply whereas a year ago, we were crying, begging freight forwarders to take care of us. We’re seeing a lot of manufacturers renegotiate their shipping contracts, and probably it’s a good reminder that shipping contracts maybe are better suited to be 90-day contracts rather than annual contracts, just because of this global effect. So, we are just about at time, Lindsay, and I know there were several other headlines we wanted to get to, so I say let’s table those for next week because I’m sure more things will come up this week too that we’ll want to discuss. Susan Walsh is joining us from the UK, and she says hello and good afternoon. Hello, Susan. Well, well, good. So, closing note for our friend Susan, you know, the Open AI last week, we had one conference in Las Vegas, Susan would know which one it was, and then this week we had the Open AI Summit in New York City. And the takeaway from New York City was that the big guys, the big guys are still struggling with AI adoption. They’re str- and the big guys were talking about Johnson and Johnson, FedEx, Fossil, and they’re saying, you know, it’s difficult. If these best-in-class global manufacturers are saying AI is difficult, we don’t need to be losing sleep over it today. However, as selfish, myopic supply chain professionals, what we do need to do is expect this to come up in conversation and have a thoughtful response. And how can we, how can we – and when you say this, you mean AI, AI, yes – how can we manipulate the situation to our personal advantage? And what I’m talking about, Sarah, is Susan’s expertise of cleaning up the data. You can’t move ahead with AI without clean data. So use this time, use this interest, use this opportunity to invest in cleaning up our base data. And we can use our standard ERP reports as flags. That is my, is my data clean? Because if my standard ERP reports don’t run because of data problems, that’s a red flag that I’ve got to fix something in my system, and that’s a table stake before I can move ahead with AI. And obviously, Susan’s the expert at that, with her team. Yeah, Susan said in all caps, when you were talking about the AI Summits, Lindsay, it’s because they don’t have clean data, which is why they can’t adapt and use AI. So again, to your point, use this time to really focus on your data cleanup strategy. And I would also add to that, maintaining your clean data as well. Cleaning it up is one thing, but then keeping it clean ongoing is another piece of that. You gotta, yeah, you gotta one, fix it, two, turn off the spigot, make sure it doesn’t get corrupted again, because, you know, down the road, if an AI initiative le- you know, the first thing the implementation team is going to say is, well, you know, supply chain gave us bad data, you know, they told us it was all good, and turns out that it’s all wrong, and it’s corrupted, and doesn’t meet Sarah’s criteria, and, you know, therefore it’s Supply Chain’s fault. And we definitely want to be able to say, hey, we’ve been working on a cleanup, that often times will take, you know, 12 months. Alrighty, with that, Lindsay and I are wishing you a wonderful Monday afternoon or evening, Susan. Thanks for chiming in, lovely to see you from afar, and we will see you next week. Thanks, Sarah.