Panjiva Blog: Blogging Global Trade

Today, I was asked, “Given the state of the economy, who’s looking for new factories?” Based on what we’re seeing at Panjiva, here’s the answer (factories, take note):

Growing companies

Yes, there are companies that are growing despite the problems in the economy. These companies are looking for factories to supplement the production capacity that’s been available to them, and they are looking for factories that can help them introduce new products. These customers, though hard to find, will be the most sought-after by factories.

Entrepreneurs

There are always entrepreneurs looking to get new businesses going. Some may be wary of starting a business in the current economic environment. On the other hand, these days being an entrepreneur isn’t much riskier than being, say, a banker… So expect to see a fair number of people taking the entrepreneurial plunge. Traditionally, factories have avoided working with entrepreneurs, because entrepreneurs place smaller orders and their growth is anything but certain. However, in this environment, order-starved factories will be more willing to work with entrepreneurs.

Companies under margin pressure

As I’ve noted in previous posts, lots of companies are facing significant margin pressures, thanks to declining consumer willingness to pay and increases in the prices of their inputs — particularly when their goods are manufactured in southern China. Some companies are trying to protect their margins by moving production to new, lower cost geographies. Plenty of factories will be interested in attracting business of this kind, but they shouldn’t be surprised when these companies move again, when yet another geography offers lower prices.

So, yes, there are companies that are looking for new factories. However, there’s no doubt that factories around the world are having to cope with smaller orders and fewer inquiries from potential customers. A painful situation, to be sure. More on this in future posts.

During the last year, 58% of companies suffered financial loss from supply chain disruptions.  (I came across this statistic, which comes from an Aberdeen survey, while reading an article in Industry Week.)

My bet is that the ACTUAL percentage of companies that suffered financial loss from supply chain disruptions is much higher — but only 58% had the courage to admit it.  And, frankly, the percentage is certainly going to go even higher, given the high number of factory closures now occurring around the world.

Nevertheless, I hear from some sourcing executives that they have strong relationships with their suppliers and are therefore not worried.  It makes me wonder…  Did the 58% of executives, who suffered financial loss from supply chain disruptions last year, express similar confidence prior to the disruptions?

Another article in the New York Times about factory closures in China.  According to government statistics, 67,000 Chinese factories closed in the first half of the year.  11,000 per month.  And that was BEFORE the global economic meltdown.

It’s scary enough that all of these factories are closing.  It’s even scarier that these closures are happening without any warning.

See a previous post about how you can spot risk in time to do something about it.

Two interesting posts over at SpendMatters:

* One notes that Indian suppliers are refusing to take orders from American companies because they’re worried the American companies won’t be able to pay.  (This, by the way, is consistent with what we’ve been hearing from suppliers.)

* The second highlights concerns that buyers have (or should have) about the effect of the financial crisis on suppliers…  Will they survive?  Will they cut corners?

So suppliers are concerned about buyers, and buyers are concerned about suppliers…  I.e., everybody’s worried about everybody, and rightfully so.  Given this state of affairs, what steps should solid buyers take?

1) Be prepared to prove to your suppliers that you’re solid.  References from your customers and your bankers may be able to help in this regard.

2) As Jason from SpendMatters suggests, be vigilant in monitoring your suppliers.  Check out a previous Panjiva post on how to look into a supplier’s financial health.

David Barboza reports that the Chinese government has unveiled a massive economic stimulus package.  US$586 billion will be spent in the next two years on a wide variety of infrastructure projects.  Will this effort:

A) Help Chinese authorities cope with unrest that is resulting from widespread factory closures?
B) Provide infrastructure that will make China’s manufacturing sector even stronger in the decades ahead?
C) Bolster Chinese consumer spending — including spending on imported goods, thereby providing a boost to the global economy?
D) All of the above?

I’m going with D.  This is a brilliant move, and one that suggests, among other things, that China is growing more comfortable with its role as a leader in the global economy.

Now that CNN has called the race for Senator Barack Obama, it’s time to ask — Will President Obama be good for global trade? My prediction: yes.

Over the last several months, I’ve been asked this question by a lot of people who care about global trade. Indeed, Candidate Obama generated a fair amount of concern with statements that suggested he’d put the brakes on trade. For instance, he called the North American Free Trade Agreement (NAFTA) a “bad” trade deal, criticized the U.S.-South Korea Free Trade Agreement, and opposed the Central American Free Trade Agreement (CAFTA). For a detailed accounting of Candidate Obama’s statements on the subject of trade, visit the Council on Foreign Relations website.

Candidate Obama’s statements notwithstanding, I predict President Obama will be good for trade. Some more specific predictions:

1) President Obama will be far more pro-trade than his campaign statements would suggest

Because of the electoral college system, U.S. presidential campaigns are all about swing states — states where the electorate is evenly divided between Democrats and Republicans. For some reason, the most evenly divided states (Ohio, Pennsylvania, Michigan) are states that have been particularly hard hit by globalization. Therefore, it’s not surprising that a candidate for president would employ anti-trade rhetoric. (Indeed, I’m surprised when candidates don’t employ anti-trade rhetoric!) With the campaign over, President Obama will be intensely focused on enacting policies that can jump-start America’s economy. Will these policies be pro-trade or anti-trade? To answer this question, I look at the economic advisers that Obama has surrounded himself with. At the top of this list: Robert Rubin, the former Goldman Sachs executive turned Clinton Treasury Secretary, who is decidedly pro-trade. In the months ahead, look at who President Obama appoints to key economic posts in order to assess whether my prediction is likely to be right or wrong.

2) President Obama will be more effective than his predecessor at facilitating new trade agreements

Over the last eight years, America’s unilateralist stance — in a number of arenas — has diminished its ability to play a constructive role on issues of concern to the global community. President Obama will put an end to America’s unilateralist stance which will likely enhance America’s ability to lead on, among other things, trade. And leadership is needed. The failure of the Doha round and the failure of governments to effectively coordinate on consumer safety issues are just two examples.

But let’s say President Obama proves effective at facilitating new trade agreements; will he be able to get them passed here in the U.S.? My prediction: yes. Republicans tend to support free trade, while Democrats need some convincing. A Democratic president is far more likely to succeed in bringing enough Democrats along to ensure passage — either by including “fair trade” provisions, or via old-fashioned arm-twisting. It’s no accident that NAFTA was passed while a Democrat was in the White House.

Your thoughts?

As David Barboza reported over the weekend in The New York Times, Chinese authorities are expanding their melamine investigation.  Melamine is the toxic chemical that should not be making its way into the food supply chain — but that nevertheless has been.  By now, some may be tuning out news about food (and product) safety scandals.  Not sourcing executives…  Managing risk — particularly food and product safety risk — has risen to the top of the agenda of most sourcing executives.  The same is true for government regulators, both here in the U.S. and abroad.

What is perhaps most interesting, though, is that there really aren’t a lot of good ideas on how to effectively manage this category of risk.  I was struck by this comment from a professor at NYU, who was quoted in Barboza’s article:
“’A year ago, everybody should have been in a complete panic about it and done something then,’ said Marion Nestle, a professor of food studies and public health at New York University and the author of ‘Pet Food Politics: The Chihuahua in the Coal Mine.’ ‘Someone should have required that melamine not be in any food product.’”

Professor Nestle seems to be assuming that simply requiring that melamine be excluded from the supply chain would have solved the problem.  Not so — and particularly not so in China.  The number of participants in the food supply chain — just in China — is huge.  How would you communicate new requirements to all these participants, let alone enforce these requirements?

Putting the right regulations on the books is perhaps a necessary step, but a much more comprehensive approach to solving the problem is required.  As noted above, regulation must be coupled with communication and enforcement.  In addition, key players (government regulators, inspection agencies, private sector leaders) must agree on standards and provide for transparency about who is abiding by these standards.  This last piece creates positive incentives for good behavior — an important complement to punishments for bad behavior.

Your thoughts?

I’m hearing a lot of anxiety from our customers about the possibility that their factories might fold. This anxiety is justified. The economic slowdown is causing lots of buyers to reduce and delay orders. For suppliers with high fixed costs, this behavior could prove fatal. How do you find out if your supplier falls into this category — before the supplier goes under and leaves you hanging? Some ideas:

1) Buy a credit report on your supplier

Credit reports will tell you if your supplier is paying *its* suppliers on time. If it’s not, chances are good that your supplier is in trouble. D&B is a good place to start for this kind of information.

2) Look at your supplier’s export activity

Is your supplier’s export activity dropping precipitously? Definitely a sign that you should be preparing a back-up plan. (Full disclosure — Panjiva sells this kind of data, so obviously I think this is a particularly effective approach.)

3) Ask your supplier contact

Simple enough, but most people overlook this approach. Ask your supplier contact if he or she is worried. Chances are good that your contact will put a positive spin on trouble at the supplier — but you never know what you might learn until you ask.

Figuring out if your suppliers are about to fold is really important… Gives you a bit of time to come up with a back-up plan, and minimize the disruption to your business. Have other ideas on how to figure out if your suppliers are about to fold? I’d love to read about your ideas here — and of course via email (josh@panjiva.com).

Just want to take a moment to welcome those of you who are new to Panjiva’s blog. Panjiva’s mission is to make it easier for companies of all sizes to do business across borders. With this in mind, we’ll be discussing issues affecting the global trade community — those of us doing business across borders. This is a HUGE topic, so we’ll cover a lot of ground. Here, though, are a few themes you can expect to see popping up on a regular basis:

• Risk

Choosing to do business across borders opens up a world of opportunity, but it also comes with quite a bit of risk. What are these risks, and how can you mitigate them? This is a favorite topic of discussion within Panjiva, and in conversations with our customers. We’ll share what we’ve learned — and are learning.

• Transparency

“Transparent” is not a word we’ve heard used to describe global trade. This is too bad, because transparency promotes cost savings and helps mitigate risk. In the course of Panjiva’s work, we seek to provide a new level of transparency to those doing business globally. On this blog, we’ll highlight other efforts to promote transparency, and point to areas where more transparency is urgently needed.

• Simplicity

Doing business across borders is an incredibly complicated activity. We’ll do our best to help you cut through the complexity — and identify ways to simplify the process of doing business across borders.

Members of the Panjiva team will be regulars, and we’ll also feature a variety of guest contributors. If you’re interested in guest-contributing — or just want to vent — e-mail blog@panjiva.com.

Thanks for joining us!

If 2007 was the Year of the Recall, 2008 was the Year of Regulation. This past year, some of the nation’s biggest industries pushed for new federal regulations to cope with consumer concerns about product safety — breaking from a tendency to block regulatory measures. They got what they wanted. This August, the U.S. enacted the Consumer Product Safety Improvement Act of 2008 (CPSIA), one of the most comprehensive overhauls of consumer-product safety regulations since the 1970s. The Act aims to provide “new safety safeguards that emphasize resources, accountability, disclosure and testing…from the factory floor to the store shelves.” What does this mean for those of us in the manufacturing world? First, it means that there are new hoops to jump through. Second, it means that it’s really important to jump through these hoops – because the CPSIA provides for increased civil and criminal penalties for those who fail to abide by the new regulations.

Clearly, familiarizing yourself with the CPSIA and its implications is essential. Some suggestions on how to go about this:

• * Sandler Travis, one of the leading law firms focused on trade, provides a very nice overview of the new requirements. Visit their site, and click on the link entitled “New Mandatory CPSC Import Documentation Requirements Effective November 12.” At the bottom of the summary, you’ll also find the names of a few different lawyers you can call to get more info.
• * The big inspection agencies are very focused on the CPSIA and can provide a lot of helpful information. SGS has a bunch of web-based seminars; check out the schedule here. You’ll see that there’s a seminar on toy safety tomorrow (Wednesday, 10/29) at 1 pm Eastern.
• * And, if you’re feeling really ambitious, you can read the entire CPSIA. (Have fun.)

What’s Panjiva’s take on efforts to improve the safety of consumer products through regulation? Some thoughts:

First, there’s no doubt that more needs to be done to improve the safety of consumer products. Last year, we advised President Bush’s Working Group on Import Safety that much more could be done with existing resources. Specifically, the government could be using data it’s already collecting to more effectively focus inspection resources on goods that are potentially unsafe.

But there’s more to the story than just using data to effectively allocate scarce government inspection resources – undoubtedly, new regulations were needed to protect American consumers and the businesses that will fail in the absence of consumer confidence in product safety. The CPSIA would seem to be a step in the right direction then. Nevertheless, there are some in the business community who worry the CPSIA will simply create another set of bureaucratic hurdles that increase the cost of doing business, without actually helping consumers and the businesses that sell to them.

So will the CPSIA succeed in protecting consumers or simply create more bureaucracy? At this point, it’s hard to know – because much depends on implementation. Our take is that the CPSIA will succeed if those implementing it put particular emphasis on two concepts: harmonization and transparency. More on this in future posts.