Panjiva Blog: Blogging Global Trade

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.

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).

The past week has been an historic one in the financial markets, and this morning’s retail sales results are just a reminder that we’re not out of the woods yet – and probably won’t be any time soon. The Federal Reserve warns that we face “one of the most challenging economic and policy environments in memory”, and the IMF says the recent events constitute “the largest financial shock since the Great Depression.” Unfortunately, no one can say how much worse things will get – and how long a recovery might take. This uncertainty poses a unique challenge for the manufacturing community. We’re hearing from our customers that they’re cutting their order sizes and, when possible, delaying their orders until they have more visibility into what the future holds. Beyond taking prudent steps such as these, is there anything you can do in the face of uncertainty? Yes. Presume that things will settle down (they will), and plan for the moment when they do. Here’s how:

Position yourself to have maximum leverage once things settle down

As you and your peers delay orders – and cut order sizes – factories that have been living on the edge will go under. Once things do settle down, everyone will be making urgent requests of those factories that are still standing. (Delayed orders will turn into orders that need to be filled asap!) These factories will not be able to make everyone happy. Make sure you’re a priority at that critical moment. The more orders you place during the lean times – and the bigger your order is at the moment things settle down – the more important you’ll be to your factory when it counts. If you’re spreading your orders over a large number of factories, consider consolidating your orders with a smaller number of factories in the months ahead.

Identify backup factories

If a key factory goes under – or can’t meet your needs when everyone jumps back in with urgent requests – you need a back-up plan. Look within and outside your network for factories that have the same capabilities as your existing factories. For each and every factory that you use, you can and should have a back-up factory in mind.

Bottom line: planning now will save lots of headaches later.

More bad news for those who are in the business of selling to consumers: September Retail Sales Reflect the Slowdown.  Unfortunately, declining consumer spending is just one of the three alarming trends that, together, constitute “The Great Squeeze.”  What’s The Great Squeeze, and how can you survive it?  Here are our thoughts…

One of our customers basically predicted The Great Squeeze several months ago.  He argued that consumer spending was destined to slow down (clearly, he was right).  That’s bad in and of itself, of course, but — even worse — he predicted that this slowdown in consumer spending would occur just when the cost of inputs was on the rise.  Indeed, we’re hearing this from lots of our customers these days: the cost of manufacturing is going up, particularly if you’re manufacturing in China (as most are).  Why are manufacturing costs going up, even as the global economy cools down?  First, wage rates are going up, particularly in Southern China, as more and more companies choose to manufacture there and the competition for labor goes up.  Second, Chinese authorities are putting in place new regulations — and enforcing old regulations — that increase the cost of doing business in China.  (These regulations are valuable, because they protect workers and the environment.  However, that doesn’t change the fact that they increase the cost of doing business.)  Declining consumer spending and rising cost of goods — this is a recipe for a sharp decline in profitability for those caught in the middle.

Of course, there’s more to the story.  Evan Clark, in Thursday’s Women’s Wear Daily, highlighted the impact that the credit crunch is having on retail.  Indeed, just as companies are facing declining profitability, they are going to have an incredibly difficult time getting the credit they need to pull through.  Lower consumer spending, rising cost of goods, and limited availability of credit — this is The Great Squeeze.

The key to surviving The Great Squeeze is narrowing your focus.  If you are trying to serve a broad set of customers with a broad set of products, you are going to struggle.  You are going to struggle to stay close enough to your customers to know exactly what they’re going to spend money on.  And you are going to struggle to stay on top of your supply chain and keep costs down.  On the other hand, if you focus on a narrow range of customers, you will know better than anyone else what they will spend money on.  And, if you narrow your product range, you can put all of your efforts into keeping costs down on a manageable number of products — either by improving your manufacturing processes, or by finding lower cost suppliers in new regions.

Narrowing your focus is scary, because you’re putting all your eggs in one basket.  However, today, the only alternative to narrowing your focus is conducting business as usual — in other words, surrendering to The Great Squeeze.

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.