Panjiva Blog: Blogging Global Trade

On Monday, we released data showing the extent to which the economic downturn is decimating the global supply base.  Specifically, our analysis showed that there are fewer suppliers actively serving the U.S. market, and, of those that are active, many have suffered an alarming decline in the volume shipped to U.S. customers.

We’ve received questions about whether this is a China-only phenomenon.  The short answer is no.  Some statistics:

World: We saw a 72% drop-off in the number of active apparel suppliers from July to October.  Of those that remain active, 40% are on Panjiva’s Watch List, as a result of suffering a huge decline in the volume shipped to U.S. customers in the most recent three month period.

CHINA:  The comparable statistics for Chinese suppliers look much the same.  We saw a 69% drop-off in the number of active apparel suppliers from July to October.  Of those that remain active, 45% are on Panjiva’s Watch List.

Bottom line: the data suggest that this is not a China-only problem, but nor have Chinese suppliers been spared the pain that the global supply base is feeling.

Check out a related article over at MarketWatch.

Two interesting articles by James Morrissey:

1) The first notes that Chinese authorities are providing assistance to struggling factories — and that this assistance is leading some to call for action against China when quotas disappear at the end of this year.

2) The second notes that the Bush Administration sees no reason to keep quotas in place for China — since China has not yet filled its 2008 quota.

Of course, the economic meltdown is behind both of these stories — it’s why China hasn’t shipped enough to fill its quota (no one’s buying!), and why Chinese authorities feel the need to provide assistance to factories (no one’s buying!).

In the weeks ahead, the Panjiva team will be researching just how bad things are for factories around the world. More soon.

Over at IndustryWeek, you’ll find Panjiva’s thoughts about how to respond to price increases in China.

Given all the trouble that Chinese factories are having, are price increases really still a problem?  So far, yes.  Declining demand is leading to factory closures (see previous post), NOT downward pressure on wages.

Our IndustryWeek piece evaluates three strategies for responding to cost increases:

1. Identify the “New China” (i.e., look to new countries)
2. China is the New China (i.e., look at new regions within China)
3. Leverage your suppliers’ networks (i.e., authorize subcontracting)

Would welcome your thoughts, here or over at IndustryWeek.

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.

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.

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?

Yet another product safety scandal in China.  This time, it’s melamine.  Not surprisingly, many are claiming that there is something unique to Chinese business practices that is the cause of China’s many product safety scandals.  Bee Wilson, in Tuesday’s New York Times, goes a long way toward debunking this notion by pointing out that product safety scandals are not unique to China; in fact, America had its own milk scandal a century and a half ago. The Washington Post a year ago also provided an interesting perspective on the safety of exports leaving the United States.  For those who remain convinced that there’s just something wrong with China, consider this:

Today, not just one — but two great powers are struggling; each facing a crisis of confidence in a key industry.  For China, it’s the manufacturing sector that’s in turmoil.  For America, it’s the financial sector that’s in turmoil.   Though there are of course real differences between these twin crises, it’s the similarities that are most striking.

* In both cases, the troubled sectors had recently experienced rapid growth.
* In both cases, questionable business practices were largely left unregulated.
* In both cases, greed is being blamed, and heads are going to roll.

Interestingly, the remedies being discussed are similar as well: new codes of conduct, increased regulation, stiffer penalties.  While it’s beyond the scope of this blog to discuss how to remedy America’s financial sector, it is clear that the remedies being discussed for China’s manufacturing sector must be supplemented with a push for transparency.  The profit motive is incredibly powerful — historically far more powerful than the most stringent codes of conduct, regulation, and penalties.  The best way to promote safe practices is to make them profitable.  And the best way to make them profitable is to focus, intensely, on providing transparency about who is engaging in safe practices and who is not.  More on this in future posts.