What Automotive Supply Chain Leaders Need To Understand Before Reshoring

[Transcript]

Jan Griffiths: 00:03

Welcome to the auto supply chain prophets podcast where we help you prepare for the future in the auto supply chain. I'm Jan Griffiths, your co-host and producer.

Cathy Fisher: 00:13

I'm Cathy Fisher, your podcast host. Our mission is to help automotive manufacturers recognize, prepare for and profit from whatever comes next in the auto supply chain.

Terry Onica: 00:23

I'm Terry Onica. Your podcast host will be giving you best practices and key supply chain insights from industry leaders.

Jan Griffiths: 00:29

Because the auto supply chain is where the money is. Let's dive in.

Jan Griffiths: 00:37

Hello, and welcome to another episode of the auto supply chain prophets. A hot topic that's on everybody's mind these days is reshoring. It wasn't too long ago that we were all talking about off shoring and we proudly wore the badge of honor for that high percentage of spend that we had in China. And now that strategy is changing. We have a special guest with us today. She is Rosemary Coates and she is the executive director of the Reshoring Institute. She has many decades of experience, both offshoring and onshoring. Rosemary is also an author, and she's particularly excited about her book called The Reshoring Guidebook.

Cathy Fisher: 01:30

So speaking of labor, we wanted to ask you about the UFLPA. Tell us a little bit about that consideration.

Rosemary Coates: 01:39

Yeah, that's a Uyghur Act. And the reason why I know this stuff about importing-exporting 'cause I'm a licensed Customs broker. So over the years, I've worked with import-export projects for my customers all over the world. And in China's while I have a quite a bit of background of working in China, but UFLPA is related to the Uyghurs and the Uyghurs are a race of people in the far western provinces of China, and Zhejiang province. And they have been sort of put into camps by the Chinese government, where they're working sort of slave labor and labor camps. And there's a lot of human rights issues that are involved with the Uyghurs and so forth. So what the US government did, of course, there was outrage around the world, when we found that these labor camps were making products that we were incorporating into our products or standalone consumer product. So what the US government did is put into place a restriction that any product that's coming from Zhejiang province, or is a known labor camp product is restricted from coming into the US. Now, the US government has always had restrictions against prison labor, we don't allow products to come in that are made by prison labor around the world when we find them. But this particular act, the Uyghur Act, is very sort of draconian, I mean, it just stops all the shipments from these areas. The other thing is the wiggers, have been bussed throughout China to all kinds of manufacturing plants as for hire labor, and if a product is made in a manufacturing site that's using this kind of weaker labor, those products are excluded from being imported into the US as well. So it's a very, very restrictive act, that is aimed at reducing the amount of products that are made in these areas and then imported into the US.

Cathy Fisher: 03:49

It sounds like it would be very complicated to keep up with that risk, if you well, from a supply chain standpoint, and not only the Uyghurs it's very interesting. In the past 12 months, we've actually seen some quite public situations of automotive suppliers, and in fact, even an OEM that's been caught with some unfair labor practices as well. So what advice would you have for supply chain leaders that they don't overlook the dimension of fair labor practices as part of their supply chain?

Rosemary Coates: 04:24

There's no question in my mind that that you have to have positive control over your supply chain. And you know, we've been preaching this for a while saying you can't just expect everybody to mind all the laws and do all the right things that you have to go out there and look at your supply chain. And that means not just once a year having a meeting in a conference room going over what business you've done together, but you need to go out to the factory and have a look. It means that you're not only having a look at the factory from time to time when you do tell them you're coming, but also surprise visits. And you also want to be there at the factory when they're making your product, not just any product. So there are lots of ways you can control this, you know, great example is Apple, they have policies in place. So they control their suppliers all the way down to the mind. If they're buying copper wire, for example, they're gonna go visit that copper mine, and control all the tier four, tier five, you know, all the way up to tier one suppliers. So they know what's happening in their supply chain, which is really admirable. But even with that, sometimes, you know, there are hidden things that that are going on that you don't know about child labor, sometimes or wiegers. But there's no substitute for, for very positively controlling your supply chain. And that means additional cost. So it's not like, you can just snap your fingers and you have enough personnel to be flying around the world to look at things. But you sure better know, where are those things coming from? Who's making them? What's the content? Are they being outsourced? Are there subcontractors involved? All these things should be in your purview as the buyer products,

Jan Griffiths: 06:20

Rosemary, you just said two words that every supply chain purchasing professional never wants to hear. And that is additional cost. In the automotive industry, as a recovering supply chain and purchasing professional, I will tell you that there's a reason that we went to China, and that was cost. And we can talk all day long about the ethical supply chain, we can talk about, it's the right thing to do. We can talk about vulnerability, we can talk about all these things, and they all have value. But at the end of the day in automotive, purchasing people are judged, rightly or wrongly, by the cost of that product. And in all my decades in automotive supply chain, I never actually saw a company that had a really good handle around total acquisition cost. So when you're talking to heads of procurement in the automotive supply chain, they're faced with this need to reshore product. But there's a cost. What have you seen good companies do whether it's in terms of harnessing the total value, putting together a total acquisition cost model? Give us some guidance? Because I know my colleagues out there and I like oh, no, it's going to cost a ton of money. And it's going to impact my PPV, and I'm going to lose my bonus. So, what advice do you have for purchasing professionals out there, Rosemary?

Rosemary Coates: 07:55

It's got to come from executive management. But I would say 95% of the customers that I work with, I have some kind of incentive in purchasing departments based on cost. So the buyer gets a bonus or gets annual reviewed or whatever, based on how much money they say, Absolutely, yes, which is a misalignment of goals, if the executive team is saying let's think about reshoring, or, you know, we should be able to mitigate the risk in our supply chain that has a spender sociated with it. And so it's a misalignment of goals in the purchasing department, with executive management goals until that's aligned, nothing's going to make a difference. So really have to be at the executive level and know that you are going to institute policies and procedures that don't simply focus on cost saving, certainly that's important. But also have another goal in mind. And that's maybe sustainability. It may be reshoring, it may be building your supply base in the US, but those things need to be rewarded as well, if that's the direction that your senior executive leadership team is going. And so that misalignment of goals until that's fixed, it's just not nothing's gonna work.

Jan Griffiths: 09:17

Yes, totally agree with you.

Cathy Fisher: 09:19

So Rosemary, if an organization is committed to leaving China, and let's say reshoring, what are the things that they really need to be thinking about strategically to effect that change that's not going to create a bunch of other problems for their business?

Rosemary Coates: 09:37

That's a big question. And another big pothole that a lot of companies step in when they decide they're going to bring their manufacturing back. You know, I spent many years helping companies offshore and establish manufacturing in China. I've been all over China and looked at a zillion factories. And I'll tell you leaving is not going to be easy for a couple of reasons. So first of all, most Chinese employees and your factory in China are on employment contracts. And those employment contracts are one or two years usually. And if you decide that you are going to have a layoff, which are very difficult in China, layoff or closing or leaving your factory, that kind of thing, you have to pay out all of those employment contracts to the end. And that's a big surprise to a lot of companies. So there's a lot of wages that have to be paid out, in order to move on or close your factory. So that's probably the biggest one. But there are also other things, you have to apply for a permit to leave China. And sure, you could, essentially, you know, lock the door and turn off the lights, and get on the airplane and leave. But you'll never be allowed to come back to China. So if that happens, you violate those laws, you'll be excluded. And we'll never be able to get a permit to come back to China. So you don't want to do that, right. But when a company decides to leave, they have to sort of plan for it and be strategic about it. So first of all, you have to get a permit. And that can take six to nine months. And if you're in a strategic industry, that China feels as important for their own building of their industry, they may never give you a permit, because they don't want you to leave, they don't want that technology to leave. So that's, you know, another issue. Lots of companies, if they're manufacturing in China will send tools and molds and dies or have a mold made in China, and sent to the factory, you're never getting those back. I'm telling you, even if your names on those tools, and you have a contract that says you owe them, you're never getting them back. And that's because the point of view in China. So if you have sent them a tool or something they use in their factory, it is part of their factory infrastructure going forward, and you can't get that back. And if you sue them in court in China, you're not going to win. So basically after write off most of that investment, any tools and dies. And then in addition to that, you've taught this factory how to make your product, you've given them the schematics, you have overseeing the quality, you have a approved vendor list, so they know who your vendors are, you've taught them the manufacturing processes. So if you decide to shut down that factory, guess what, they're not going to just go to sleep at night and forget what you taught to them, they're gonna come to work the next morning, make the same product and sell it under a different name probably, compete with you in the world market. So you know, that's another huge issue.

Cathy Fisher: 12:53

I have this other question in my mind for you, Rosemary. And I wonder, is Africa the next frontier?

Rosemary Coates: 13:01

Interesting question. Africa has a world of possibilities, I guess I would say. You're seeing a lot of apparel and footwear manufacturers going to Africa, because they have a lot of labor content in their product. So when you look at supply chains, there are products that are made that have lots of labor. And there are products that are you know, that use machine tools and labor has been extracted from that. Apparel and footwear are still in the lots of labor category. So people sitting at sewing machines and gluing things together. And then it's very labor intensive. So in those cases, you will want to look for a low cost labor market and Africa seems like a perfect place, we've seen a lot of peril and move to Bangladesh, because it was super low cost. Africa, you know, it's a likely place to continue to develop this kind of industry based on whether or not they can support the infrastructure, you can't just set up a factory in the middle of nowhere. And you have to be able to get your products out. So you need somewhere with roads and accessibility to ports and airports. And the Chinese have invested in their Belt and Road Initiative worldwide. So they're making all kinds of investments in Africa and infrastructure that will facilitate this manufacturing idea, but also the Chinese will be able to maintain some control over those things. So Africa seems like a great target place for development over the next maybe 25 years or so. Not sure they're very much there today. But you are seeing some movement and some development of manufacturing there now.

Cathy Fisher: 14:45

We kind of see the development of the labor market that happened in Mexico, let's say the 1980s and then China and India. And I do want to circle back and asked about asked about Indian just a moment. But then also, you know, you hear some rumors about what's happening in Africa that that there's a lot of people there, there's a lot of labor markets that you could take advantage of. Rosemary, what could you tell us about India, because at one time, India looked like it was going to be super competitive in terms of less expensive labor. But it hasn't taken off in the same way that we've seen other markets like Mexico and China.

Rosemary Coates: 15:30

Clearly, the labor is very inexpensive. In India, and a lot of the low end, you know, as I was saying, plastics, for example, consumables, those kinds of things, paper products are good for in an Indian market where there's lots of labor, and it's very inexpensive. Moving up the sophistication curve, the maturity curve, there's some automotive in India, they have their own brands, and there's some development there. But I would say it's probably not all that strong. It's just developing now. India, have some issues, too. So there's a lot of power outages and those kinds of things in India, I know, the times that I've been there, you're trying to work on your computer, and the power goes out. And it's frustrating. So there's a lack of good roads, and you know, just the infrastructure is, is really still Third World. In a lot of cases, it's just not modernized in the way that you would find in China, which is like super modern, super efficient. And then, you know, the other thing to consider is, if you're moving things over the ocean, from China to the US, it's maybe two weeks or so, and good weather. If you're moving in from India, it's four weeks. So you've got two additional weeks of inventory investment if you're procuring parts from India and two additional weeks of time, should you have an issue. If you have a quality issue or something like that, you've got another two weeks to wait. And geographically with respect to North America, it's not very convenient. So I'm a little lukewarm on India as a potential location, much, much more an advocate for Mexico, if you're looking for low cost labor market, at least you don't have to worry about having your you know your goods in a container off shore of Long Beach for three weeks waiting to get unloaded. Mexico, you just drive across the border. Right?

Cathy Fisher: 17:33

Yeah, that's a lot easier.

Jan Griffiths: 17:35

Well, I think the other thing too, about Mexico is that Mexico is really well versed in automotive . They speak the automotive language. And that was one of my biggest struggles sourcing in China was just the the unwritten rules, if you will. The way that we do business in automotive was not well understood in China. And it certainly is, and continues to evolve in Mexico.

Rosemary Coates: 18:03

Yes

Cathy Fisher: 18:03

Well, since we've been almost all the way around the world, we might as well stop in Europe, as well. I'm really curious. We talk about reshoring here to the US. Is there also reshoring happening in Europe? Or are they pulling out of China as well?

Rosemary Coates: 18:21

Yeah, I think not as enthusiastically as we are. But that's because we have the trade war going on. Right. So the trade aspects of it, the bad relation we have with China now has changed in the past six or seven years. Europe is still favorable in terms of China, although there is a movement to reshore. The Reshoring Institute worked with a group in Europe a couple of years ago that was funded by the EU, they were funded with 20 million euros to investigate the possibilities of reshoring. And across Europe. So there's development work, there's economic work that's going on. So I think they're quite not not quite as enthusiastic. And then the other thing is, instead of reshoring, to specific countries, there are reshoring within the EU. So a lot of development work in the Czech Republic, for example, in Poland and so forth, although I think there's some hesitation now because of the war. So Eastern Europe, though, is a very low cost area for sure. And a likely destination for manufacturing alternatives in Europe. The other thing is that I understand after doing all this research with all these universities with these, you know, academic thinkers, what they would say is that the consumers want it the consumers would prefer local products, and the manufacturers are open to it, but the government is not very supportive. So it's another thing you know, in the in the US we have all three of those things we have demand and we got manufacturers who are interested. And we've got government support, especially with our three big bills: The infrastructure bill, and the chips and science act, and the inflation reduction act. All three of those have funding for manufacturing in the US. So the US government is much more supportive, not so much in Europe. So I think we're gonna see this trend after a while and this idea of local for local. So manufacturing locally for the local customer base, I think we'll see that as a positive looking trend around the world, not just Europe, and the US going forward.

Cathy Fisher: 20:35

Yeah, and I think that that's a very important message for global manufacturers, which the automotive industry has consistently aspired to be global manufacturers, that this idea of local for local means that they have to really be on their game from a supply chain perspective, to be able to manage those different localities. And, will they optimize their supply chains, globally, as well?

Rosemary Coates: 21:01

We tell our clients, you can't just snap your finger and redevelop your supply base, right? Exactly bringing manufacturing back to the US, you got to expect it's going to be 18 months before you redevelop your suppliers here. Because as manufacturing went offshore to China, all the suppliers went with them. You have to redevelop all of that. And that's not a trivial task. Like I said, I, we average, we we tell people, it's 12 to 18 months before you can really feel comfortable that you've made a good dent in sourcing locally in the US.

Cathy Fisher: 21:37

And I think that there's also besides just the sourcing, it's generationally rebuilding those talents in our society, because we really have lost a lot of the manufacturing know how and even the enthusiasm for those careers. But fortunately, I would say in the past five years, in particular, we're seeing a strong motivation towards that direction. But that also requires manufacturers to think in the 21st century.

Rosemary Coates: 22:08

When suppliers and manufacturing all went offshore, there was no need for all these people with skills and that were electricians and plumbers, and in a manufacturing environment, machine tool operators, tool and die makers, all these things that were fairly low demand over the period when we outsource most of our manufacturing to China. And today, with manufacturing coming back, we need all of those skills. I would say the community colleges across the country have done a very good job of stepping up and providing the kind of skills that are needed to fill those jobs. My grandfather worked at Halsey Taylor, in Warren, Ohio, they make drinking fountains. And he was a metal worker. And he used to come home from work and he was smelly and dirty. And he had grease under his fingernails. It was gross, right? It was gross. And so that was my idea of manufacturing. Today's environment, of course, doesn't look like that at all. It's very clean. I live in Silicon Valley and be you go to a manufacturer here, you got to get on a bunny suit and wear a mask. And so you don't introduce any particles. And there aren't computers across all manufacturing floors. So even if you're soldering or that kind of thing. You have to move inventory along you're scanning things, you know, the use of computers is integrated with manufacturing today. I mean, my grandfather couldn't operate in that kind of environment, right. So the skills have changed. And the benefit of community colleges, they provide that crossover between high school. And an engineering job is kind of somewhere in the middle, but includes the ability to work with computers and communicate well that these are skills that we didn't necessarily need in the past.

Jan Griffiths: 23:57

Let's boil all this down, Rosemary. If you're a supply chain executive, or a CEO of a tier one auto company, and you're listening to this and you're thinking, I really I need to reshore. I know I need to do it. I need to pull my sourcing supply chain back from China. Let's be specific, and bring it back to the US. What are the top two things give us two things that that executive needs to look at immediately. Obviously, there's a whole list of them we've covered a lot. But what are the top two that you from your experience you've seen people perhaps stumble with or fail or have massive impact to the company's bottom line. Give us two things.

Rosemary Coates: 24:39

The first thing is planning. There's no substitute for planning. You need to lay it all out understand what the project is about. All the component parts, just jumping in the middle of just saying oh, we're gonna look at total cost of ownership or something. That's not good enough. You have to have a plan and strong leadership, project management leadership. I wrote a book a couple of years ago, called The Reshoring Guidebook, which is step by step, how do you go through this, and planning is the first chapter, getting visibility, getting organized, and so forth. That's really important. And then the second thing that I would recommend is that you really do a deep dive analysis on your suppliers. So understanding in detail, where are you vulnerable? So where do you have long lead items that are persistently long lead items that you need to pay attention to? And also, where do you have single source items or strategic parts that are not easy to find, or to procure, and those have got to be your top priority. You can buy fasteners, a lot of different places, but you can't necessarily buy that specialty semiconductor chip. And that's gonna take some planning and you need to have control of that and complete visibility on it. So I would say, overall planning your project, and then really, the first step would be to evaluate those suppliers where you have risk.

Jan Griffiths: 26:08

Great advice. Great advice, Rosemary Coates, thank you so much for joining us today. It has been a pleasure.

Rosemary Coates: 26:15

Yes, my pleasure. Thank you.

Jan Griffiths: 26:20

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