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Trump, trade wars and China – an interview with Mike Wilson, Panalpina

20 November 2018

Mike Wilson, pictured, Global Head of Logistics and Manufacturing at Panalpina, is a newly chaired Honorary Visiting Professor at Cardiff Business School.

Here, he talks to Professor Aris Syntetos, from the School’s Panalpina Research Centre, about supply chains, Sino-US trade wars and who will be the ultimate winners in global logistics.

Aris: Let’s start with some background detail. How did supply chains get to where they are now?

Mike: Let me firstly say, these are my views and not necessarily the views of any organisation I am involved with…so, supply chains and thereby the third party logistics (3PL) industry experienced huge growth over the last decades for two reasons; globalization and Customer’s propensity to outsource.

As manufacturing centralised and moved to low cost labour countries, the third party logistics industry followed. Demand for product transportation from low cost countries back to customers in developed markets boomed; manufacturing grew as consumers wanted more and more; and supply chains settled into long, complex networks, which is how they remained for several decades.

For original equipment manufacturers (OEMs), outsourcing allowed them to move from fixed manufacturing costs to a variable cost model, which allowed for fluctuations in demand and capacity. This enabled third parties to become aggregators and ‘experts’ in a particular area, whether that be manufacturing or supply chain.

What was the impact of this outsourced model?

Because of outsourcing, many OEMs lost the ability to manage their own supply chains; making any kind of change became complicated and costly. Supply chains matured and we saw incremental improvements such as shaving lead times and reducing inventory levels through better forecasting techniques and demand planning. These minor improvements all chipped away at the same block, and whilst improvements were made, the law of diminishing returns took over and the whole industry became commoditized.

Now the world is changing. New technologies are popping up all over; from digital manufacturing to the Internet of Things, machine learning and artificial intelligence, open source design and software platforms. The result? The previous constraints to manufacturing and supply chains are being quickly removed.

Companies now have more options and choices in where to manufacture products, speed and proximity to market has become much more critical, and, of course, the economic and political environment plays a huge part in the decision-making process. The move away from globalization towards national protectionism (or patriotism as far as Donald Trump is concerned) is accelerating the migration of supply chains. The trade wars we are seeing only accelerate this migration.

So what is behind the current “trade war?”

There are a number of aspects to Trump’s trade war with China, but the real focus is on growing Chinese economic strength and the perceived threat that it poses to the US. The Made in China 2025 strategic initiative, for example, is rightfully seen as a direct threat to the US. The initiative would see Chinese manufacturing capability moving further up the value chain into areas such as electronics and medical technology.

At the same time, China has been accused of suppressing its official currency, the Renminbi, for the last two decades in an effort to create a trade surplus and dump cheap commodities onto the foreign market. But it is by no means certain as to how the rest of the world will react to this trade war. Many EU firms, for example, have long been unhappy about how government-subsidized Chinese competitors seem to have an unfair advantage in global markets.

We also see regular disputes regarding China’s misappropriation of foreign technology and its failure to protect intellectual property – for example, forced technology transfers as well as joint venture and local content requirements. So the implications are much bigger than a ‘who blinks first’ stand-off between the US and China.

And what will be the impact of a trade war on China?

With the now inevitable trade war, we will see a number of impacts across the entire supply chain. Chinese companies will start to suffer, particularly the small ones, which make up a significant proportion of Chinese manufacturing. There are four distinct manufacturing groups in China: component suppliers for Chinese-manufactured products (export and domestic), component suppliers for non-Chinese products (export), finished goods manufacturer (domestic), and finished goods manufacturer (export).

Small component manufacturers (who produce either for export or for finished goods exported out of China) will be hard hit: manufacturers whose products are, for example, in electronic devices that we use every day such as smart phones. Finding an alternative source of supply will be difficult, but this is what Trump is advocating; move the manufacturing back to US.  The impact, at least in the short-term, will see the consumer taking the brunt of trade tariffs in the price of products. But the Trump philosophy is that prices will eventually even out as production and jobs move back to North America.

We will also see the smaller exported Chinese e-commerce producers hit as tariffs take hold, as the price-sensitive e-commerce market becomes more expensive.  The Chinese government is likely to extend support through lower rates and taxes, but likely, it won’t be enough. OEMs will look to re-evaluate their manufacturing strategies in the light of trade tariffs, and we will see localization happening much faster.  Ford, for example, recently said that it would stop exporting vehicles manufactured in China to the US.

This trade war will have a major impact on supply chains as manufacturing moves away from China, and it is difficult to see either the US or China backing down.  Xi Jimping has stated that China will not return to the “Century of Humiliation” that was experienced from the beginning of the 18th Century, and the US will also stick their position. Overall, global manufacturers need to think seriously about where best to position their production capabilities.

Who will be the winners and losers?

It is difficult to predict the future and winners and losers in this game. But one would assume that the United States is a clear winner from this strategy; although in the short term they will see an increased cost of consumer goods, in the long run they could see major wealth creation.

Surprisingly for some, Mexico may well come out of this quite well.  Now that Trump’s Mexican rhetoric has somewhat cooled, it appears that the US government has softened their approach to NAFTA. The automotive and electronics industry rallied, and Mexico has settled on a long term tariff of 2.5% for automotive trade.

Mexico has the infrastructure and skills to support manufacturing as well as a low-cost labour rate. Much of the re-shored manufacturing will be automated and digital, and so labour rates are no longer a primary consideration, which benefits the US and Canada. But there will still be manufacturing requiring enough labour content to be significant in overall product costs, and therefore Mexico would seem like a solid option.

The trade war could have a knock-on impact throughout South-East Asia; Vietnam, Thailand, Malaysia and Indonesia, who were building up manufacturing infrastructure as the natural successors to China, could well be overlooked in terms of export products and Mexico could pick up the spoils due to its more established infrastructure and proximity to market. However, some manufacturing will certainly continue to move to South-East Asia.

We will also see an impact on other economies, particularly in emerging markets. Turkey and Argentina have both said that they would suffer and increase interest rates in the event of a trade war, and the significant drop of over 20% we saw in 2017 in Foreign Direct Investment will hit emerging markets as well as strong economies.

But it is difficult to see past China as the loser in this scenario. The domestic market will certainly help to some extent, but it probably won‘t be enough. China will certainly be looking for friends in the global economy and its “One Belt, One Road” initiative will potentially see closer ties with the Middle East and the former Soviet States. It is even building stronger relationships with Russia and Putin as we recently saw with their joint military endeavours. How this will all develop, nobody knows for sure, as there are multiple variables, egos and political strategies in play.

How do you see the impact on US politics?

Whatever anyone says about Trump, he can claim a victory from this policy. He has simply piggybacked on the inevitable; movement away from China was happening anyway. High-level Democrats also support trade tariffs as a method of relocating and reshoring production. The imbalance between supply chain and consumer demand (e-commerce shoppers expect their products immediately) meant that manufacturers simply could not keep up; inventories were rising and with the technological advances in manufacturing, localised production and reshoring was already underway. Imposing trade tariffs to the extent that we are seeing will just serve to accelerate an existing phenomenon.

And now the golden question; what will happen to global supply chains?

The elongated, take-make-dispose supply chain that has been the mainstay model for the last number of decades is under threat. It won’t all change overnight, but we are certainly experiencing the change today. Supply chains are going local; as mentioned earlier, FDI decreased significantly in 2017 according to the U.N. and this is a bellwether to the slowdown in globalization.

Technological advances in the digital age help to mobilize manufacturing, and time to market becomes the key element in the product life cycle. Many companies will already be reconsidering their manufacturing and supply chain strategies and the trade war will only emphasize this. OEMs have long outsourced manufacturing and supply chains: they will need help to redesign and implement new strategies for both.

Relocating large production facilities can be expensive, but new manufacturing techniques will help by making old methods of production obsolete.  What we will see is the rise of the multi-disciplined mixed-use facility. Micro-factories combined with distribution close to the points of consumption. When we consider the nature of e-commerce and the expectation that goes with it, then moving manufacturing and supply chains as close as possible to consumers makes so much sense. We see product design becoming modular for quick assembly and reuse, which further encourages localization. On top of that, we will see new suppliers take advantage of creating facilities to service the re-shored manufacturing, and local sourcing will further affect the supply chains we have seen in the past.

The real winners in all this will be the organisations who can help provide the services that come with the movement in manufacturing and supply chains. From advisory services that help with distributed manufacturing and supply chain redesign, to new digital services in manufacturing and flexible models of distribution close to the point of consumption; these are the core competencies required for adapting to the new world. Mr Trump is just a figurehead in a much bigger global game. We should all be prepared for radical change.