Tag: global trade

OM Podcast #34: An Inside Look at Tariffs

In our latest podcast Barry Render interviews Bob O’Donnell, Vice President of Business Development of Life Sciences at East Coast Warehouse, who previously spent 13 years with Maersk Logistics and Services.  Barry and Bob discuss tariffs and their potential impacts.

Bob O’Donnell

Transcript

A Word document of this podcast will download by clicking the word Transcript above.

 

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Prof. Barry Render
Prof. Barry Render

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OM in the News: Is “Friend-Shoring” a Solution to Global Supply Chain Challenges?

The onset of the COVID-19 pandemic and Russia’s invasion of Ukraine had profound consequences for the global economy, not least by exposing the fragility of global supply chains, which had to contend with restrictions that prevented goods and raw materials from reaching their end destinations. And while a host of stop-gap solutions have been proposed to counter these issues, the flare-up of geopolitical tensions over the last year has prompted key trading players to look to “friend-shoring”—the manufacturing and sourcing of components from countries with shared political values—to resolve this persistent supply-chain turbulence. This also means countries perceived as economically safe or low-risk, to avoid disruption to the flow of business.

But this potential solution is not without drawbacks, writes International Banker (March 30, 2023). The practice has stoked concern within the international community about the possibility of further geo-political fragmentation and deglobalization of the world’s economy – the decline of interdependence between nations, global institutions and enterprises.

The US government, as an example, has stressed its intention to obtain components and raw materials from ‘friendly’ countries with shared values to increase security of domestic production. US Treasury Secretary Yellen set out the new approach to trade last year, saying: “Rather than being highly reliant on countries where we have geopolitical tensions and can’t count on ongoing, reliable supplies, we need to really diversify our group of suppliers. And we need to deepen our ties with those partners and to work together to make sure that we can supply our needs of critical materials.”

Yellen added that the US is providing $500 million in debt financing to its biggest solar-manufacturing company to build a plant in India to help diversify supply chains away from China. Other American multinationals are also opting for greater exposure to India—an ostensibly friendlier option than China. Tech giant Apple recently made friend-shoring moves, relocating some of its iPhone production to India from China. Currently, only 5% of Apple products are made outside of China, but this could rise to 24% by 2025.

The United Kingdom, meanwhile, proposed the creation of a network of liberty. “The more freedom-loving countries trade with each other, build security links, invest in our partners and pull more countries into the orbit of freedom, the safer and freer we all are,” said the Foreign Secretary.
Classroom discussion questions:
1. Explain the difference between friend-shoring, nearshoring, and reshoring? Where does Mexico fall?
2. What are the advantages and disadvantages of friend-shoring?

 

OM in the News: Tariffs and Global Supply Chains

The potential costs of tariffs being discussed by the U.S. and China have prompted many firms to get creative with sourcing strategies, reports Supply & Demand Chain Executive (March 29, 2019). Oftentimes, that means working with Chinese suppliers to find alternative countries to buy from to avoid the tariffs. The same factories that were relied on in China are now shifting to countries like Thailand and Vietnam, a move that’s expected to take at least 6 months — and increase prices. Companies that have simply accepted tariffs as a new way of doing business are taking control of their own supply chains instead of waiting for a political solution. The challenges are especially great for American companies with manufacturing hubs outside of the U.S.

“We have heard that it takes at least 2 years to get manufacturing up and running someplace else, but its closer to 5,” said one industry exec. The diversified supply chains have made the shift particularly expensive and lengthy for tech companies. Apple, for example, sources parts from 43 different countries to assemble its iPhones. Late last year, its key assembler, Foxconn, announced it would invest $230 million in factories in India and Vietnam to expand its presence outside of China amid the trade spat.

The global rethink of supply chains goes beyond the tech space. In a recent McKinsey report, 33% of companies surveyed said uncertainty over trade policy was a top concern. Nearly half said their companies would shift their global footprint in response, and expected to invest more in local supply chains. Trade uncertainty has only accelerated a trend that began well before U.S.-China relations turned frosty. Rising labor costs in China have been a key driver for the shifts, especially among apparel makers. The China exit is seen as a bigger hit to the domestic economy there, with factory activity shrinking to a 3-year low. Exports slumped to the worst in a decade. Unfortunately, the China slump hasn’t led to a significant bump for the U.S.

Classroom discussion questions:
1. How does the trade war impact global supply chains?

2. Where does a firm like Apple fall in the “Four International Operations Strategies” graphic in Figure 2.9?

OM in the News: Jobs for Americans and Pink Slips for the Chinese?

Yes, you read the headline right: “Jobs for Americans and pink slips for the Chinese”, says the quote  in the current issue of Businessweek.  It turns out companies from China are setting up shop in the US to avoid trade barriers, to capitalize on the US government’s alternative energy push, and to pick up on some of our new technologies.

For 20 years, US manufacturers have decamped to China in search of cheaper labor and parts. Now things may be turning the other way. China’s Suntech  just opened  a solar panel plant near Phoenix to bring the company closer to its American customers (which means big savings on shipping costs) and into compliance with “Buy American” government contracts. Tiajin Pipe is opening a $1 billion steel pipe mill near Corpus Christi, Texas, to circumvent 63% US tariffs. Tiajin will employ 500-600 people. Beijing’s Pacific Century Motors just bought Michigan-based Nexteer Automotive, a car part manufacturer, and employs 3,600 workers in Saginaw.

 Letting  in Chinese companies isn’t as controversial now that the US is bleeding manufacturing jobs. With unemployment hovering near 10%, US officials have put aside concerns about unfair Chinese competition. “Chinese companies, thanks to government-backed loans, monopolies, and preferential treatment, are awash in cash and should be a source for investment in the US economy–investment that would help maintain and create jobs in the US”,  wrote the US ambassador to China  in a diplomatic cable on Jan.28,2010, which was recently disclosed by WikiLeaks.

How does this relate to pink slips in China?  Suntech is using more advanced equipment in Arizona than in its home plant in Wuxi.  Here, 30 Americans are producing the same number of solar panels as 100 Chinese. “If it works well, we can integrate the same manufacturing technology in China”, says the plant manager. “This would help Suntech China make a manpower reduction”. Perhaps this is the 1st turnabout in US-Chinese relations.

Discussion questions:

1. What are the benefits and dangers to the US  of  Chinese plants opening here?

2. What happened when  a China oil company tried to buy Unocal for $18 billion in 2005? Why the change?

OM in the News: Megaships as Part of the Supply Chain

There may be a (post) recession here in the US, but as Asian trade swells, the demand for massive container ships is booming. “Megavessels–ships longer than the 1,063 foot-high Eiffel Tower”, writes today’s Businessweek , “are in demand again”. Shipping lines are preparing for the 2014 completion of the $5.25 billion expansion of the Panama Canal, plus the recovery of global trade. It takes about 3 years to build a new “big” ship–one that can move more than 8,000 20-foot containers. The Canal can only handle ships with up to 5,000 containers now, but will accomodate vessels with up to 12,600 containers in 3 years.

Global trade is expected to expand 11% percent this year and 7% next year, recovering from an 11% drop in 2009. Currently there are 61 ships in operation that can carry more than 6,000 boxes, with 144 more on order to begin service starting in 2014. All except 12 come from South Korean shipyards, especially leader Daewoo Shipbuilding, in Seoul. Daewoo is even taking calls for ships that can carry 20,000 containers, double the current capacity of most megaships.

Manufacturers who ship from several continents–think consumer electronics or appliances–like the massive ships because they can lower transportation costs. One 20-foot container can hold 1,000 42″ LCD TVs. LG Electronics’ Logistics head states: “Although sea transportation is already the most energy-efficient mode of transportation, we are constantly studying…efficiencies…that save money”. Adds an industry analyst: “The trend is big ships. Its not a choice but a must. Its going to be a fight of who can carry more at lower costs”‘.

Discussion questions:

1. Why do the Koreans dominate this industry? Who are US competitors?

2. Why are megaships supply chain and OM issues?

3. Are government policies a part of this industry?

Teaching Tip: Global Trade, Deficits, and Logistics

If the trade deficit is a topic that arises in your OM class, a visual image of the Port of New York and New Jersey is worth 1,000 words. Fortune (Nov.15,2010,pp.14-15) discusses the “Container City” one passes in driving on the NJ Turnpike.

In the first 8 months of 2010, 70,000 more full cargo containers entered the Port  than left it.  In other terms, 45% of the containers exported from the Port are empty, a reflection of the US trade imbalance. Yet a 3rd statistic: 1.80 to 1 is the ratio of imports to exports, up from 1.75 to 1  last year.

Six of the world’s largest ports are now in China, up from two just a decade ago. The largest port in the US in the Port of Los Angeles, the world’s 16th biggest, down from 8th ranked a decade ago.

What all of this means, of course, is that we are running a huge trade deficit, of which the logistics imbalance is one surrogate measure. Who benefits? My cousin Bob is the only one I know. He ships scrap metal to China for recycling and pays only a fraction of the shipping charges he would if he were sending  from China to the US.