This month we spoke with Rosemary Coates about the impact of tariffs on NextGen supply chains. She is the executive director of the Reshoring Institute and president of Blue Silk Consulting.
NextGen: Tariffs on Chinese and American goods are hotter than hot right now. What’s your view on the impact tariffs are already having and will have on supply chains?
Coates: That’s a tall order, but I’ll give it a try.
Ultimately, companies want a stable environment to plan new production, investment and to hire people. Stability. Supply chains need stability for the same reasons. Most unfortunately, tariffs are a huge disruptor of stability. At the same time, tariffs have quickly become a powerful catalyst for companies to re-think their supply chain strategies.
It’s worth pointing out that twenty years ago, moving manufacturing to China was the fashionable thing to do. Everyone did it. In many ways, companies didn’t have to be so deeply thoughtful about their move to China as is necessary today. They chased low-cost labor and low-cost operations and then compromised on the distance from final markets. Pretty easy. That passed as strategy for a long time. And besides, who wasn’t interested in visiting China?
And then the world really did change. Globalization complicated supply chains enormously. And that requires a different thought process when evaluating NextGen supply chains.
NextGen: How should that thought process be different?
Coates: Companies do themselves no good adopting a short term, knee jerk reaction on how they think tariffs will affect the future of their supply chains. Forget fashion. This requires strategic thought and rigorous analysis to figure out their next step for the foreseeable future.
NextGen: Can you give us an example of that?
Coates: You could say I have worked both sides of the supply chain during the past 15 years. I’ve helped companies move manufacturing to China. And I established the Reshoring Institute five years ago to promote manufacturing in the U.S. Both have their strengths and weaknesses. Ultimately, it comes down to each individual company and its overall global strategy. Supply chain strategies do not live in a vacuum.
For example, I’ve been working with a company that manufactures water filtration equipment. You can see their product in hotels, in the company break room or at the gym. They are headquartered in Europe and manufacture in China, but their growth market is the U.S. The question is: Are they better off long- term moving some manufacturing to the U.S., or keeping it all in China?
We did lots of analysis and the company has decided to move the final assembly of products sold in the U.S. to the U.S. Some of the considerations included increased labor and manufacturing costs in China. And now they have to deal with U.S. import tariffs too.
Furthermore, surveys show that Americans are willing to spend up to 15% more for a product made in the U.S. So, the economics of their decision, and their global supply chains have changed. And when all was considered, the company developed a cost structure that made the move to assemble in America a good strategic decision.
NextGen: Can you drill down a little more with this company or some others?
Coates: I’ve told you what I can about that company. However, I can tell you about a running shoe company that manufactures in China and wants to know what its other options might be in light of tariffs. Manufacturing in the U.S. never made it to the table because of the high costs to manufacture here. So, they focused on Asia.
In China, the company pays a worker $300 a month and offers a 10% bonus if quotas are met. Room and board are included. In Vietnam, they would pay a worker $200 a month and a 10% bonus. But every worker lives on their own, eliminating room and board.
On the surface, a move to Vietnam sounds like a no brainer. In fact, tariffs are not even part of the equation so far. However, and trust me, there are several howevers here.
There are quality issues in Vietnam. Productivity levels are not as high as China. And the country only has 90 million people and a high level of employment right now. Oh, and I heard the other day that the Trump administration is not looking so favorably on the balance of trade with Vietnam. Sounds like an implied future tariff to me.
Suddenly, what looks like a favorable labor situation has some complications. Clearly, we are a long way from the early days of ultra low labor costs in China. And all those complications are what companies have to evaluate wherever they want to manufacture – Mexico, Malaysia, Thailand, Vietnam or elsewhere.
NextGen: As companies evaluate their strategies, can you offer them some advice on building NextGen supply chains?
Coates: As I said at the beginning, businesses and supply chains need stability. Their NextGen supply chain strategies must provide that wherever the manufacturing takes place. It starts with evaluating cost structures and realizing that the economics are not nearly so straightforward as they once were.
Companies also have to realize that supply chains are going to continue to expand across the world. We live and work in a global economy. Those are the facts. We cannot and will not be able to return to the 1960s. This is not your grandfather’s manufacturing environment. There is no single country or continent that will have all the advantages for manufacturing going forward. There is no new China out there. And sometime in the future, places such as Africa will have its own appeal.
Ultimately, the biggest impact of tariffs on supply chains is how they affect costs. And just as important, how will the company absorb those costs. There are considerations here that just didn’t exist even a few years ago. Global supply chains aren’t going away, but they will be defined differently in different places around the globe going forward.