Category Archives: Dick Locke

China’s New Labour Militancy

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

In my last post I wrote about the loosening of the controls on the value of the yuan. Since then, the yuan has weakened about 1%. That’s one of two developments affecting China sourcing.

The other, which I think will have more immediate effect, is new labor militancy among the employees of export related industries. They are realizing they are in a very strong bargaining position, because they are working for first tier suppliers of consumer products, such as computers, telephones and cars. The Apples, Dells, HPs and Hondas of the world aren’t going to stay customers of companies who take (with or without government involvement) repressive measures against labor militants.

This is unlike the situation in Mexico, where the federales broke a miner’s strike a few weeks ago. Miners are about as far back up the supply chain as you can get, so it’s unlikely the mine’s customers are going to feel consumer pressures. The mine is in Cananea, and is more or less an historic site because there was another famous government-assisted strike breaking there about 100 years ago. In that 1906 incident, the US Army got involved, 60 miles inside Mexico.

In China, the suppliers are generally conceding to labor’s demands. Will that lead to a massive departure from China? Not in itself, particularly in the electronics industry. As a rule of thumb, electronics assembly costs are 80% material, 15% overhead and only 5% labor. A small increase in labor costs at the assembly level is unlikely to be a deal-killer. That’s helpful, because resourcing all that electronic assembly work out of China is going to take years. Foxconn alone has 800,000 employees in China. Resource that!

Thanks, Dick.

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China (Kinda) Loosens Controls on the Yuan

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

China announced last week that they will no longer peg the yuan to the US dollar. Instead, they are going to control the currency against a market basket of the currencies of countries they trade with. This is what Singapore did a decade or two ago.

This is at best a stop gap measure. It complicates the task of the Chinese government in setting exchange rates. Just because it’s more complex, it increases the credibility of those who call the Chinese currency controls “manipulation”.

China really should just let the currency float. Apparently internal pressures from their business community are stopping them from doing that.

So what does this mean for people sourcing in China? It’s probable that the Chinese currency will get stronger against US dollar. But even that isn’t certain. They tied the value of the yuan partially to the value of the euro. If the euro were due to collapse due to fiscal problems in its “club med” (Spain, Italy, Greece) countries, the yuan could actually weaken against the dollar.

So, what happens to your costs if the yuan were to appreciate, say 10%? Would the price for your Chinese product go up 10%? Probably not. The answer depends on two things. First, what fraction of the manufacturing cost of the product is Chinese? You do know the answer to that question, don’t you? You should.

In assembled products, it’s rarely 100%, because a lot of the components are imported.

Second, how competitive is the market for the product you are buying? If there’s a lot of competition, sellers can’t always pass on cost increases to buyers.

I also expect change will be slow. It’s more likely that the recent labor militancy will have a larger and more immediate effect, particularly on the price of higher-technology products. More on that in my next post.

Thanks, Dick. (Global Supply Training)

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More Headlines You Hate To See

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

Your supplier’s employees are committing suicide. News articles are showing up mentioning your company’s name as a major customer. Your actions are being tracked carefully. (Apple and Dell investigate Foxconn plant)

Headlines like: Foxconn Makes Employees Promise Not to Kill Themselves [DailyTech.com], “Plenty of Foxconn shame to go around”, and Foxconn suicides: capitalism and Marxism treat men like animals cover articles that name Apple, HP, Nokia and Dell as key customers. The term fair trade electronics gets increased currency.

What went wrong here? It would be professional malpractice to even venture a guess without talking to any of the principals involved. Instead I’ll write about electronic industry practice and ask a question or two.

The electronic industry has an Electronic Industry Code of Conduct that major buyers require suppliers to agree to follow. You can download a copy from the EICC site. You can also see the logos of their members, which include Foxconn. It looks like a good specification to me. It covers the key issues of employee relations and environmental responsibility and requires that signers require at least their first level suppliers to comply.

Of course, a key question is whether Foxconn actually complies or just agreed to comply. I don’t think anyone not directly involved can answer that.

So here are my questions:

  1. What do others think of the EICC specification?
  2. And do other industries have similar, cooperatively developed codes of conduct (on a global scale)?

Let’s get some discussion going.

Dick Locke, Global Procurement Group and Global Supply Training.

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Here’s What Happens If You Don’t Write Your Contracts in Plain English

A while back, Dick Locke, who has an entire state on his side, wrote a great post on the importance of plain English in contracts that I’m betting many of you didn’t take seriously enough. To help you understand why this is very important, here’s a short video from The Temp Life that describes what might happen if you don’t follow his advice:

Would Guanxi have saved Alcatel?

A recent article in the April 17th Edition of The Economist in the special report on innovation in emerging markets noted how Li & Fung, a Hong Kong-based company, has long been a pioneer, working closely with a network of about 12,000 companies operating in more than 40 countries. It puts together customized supply chains from its vast network of associates and keeps an eye on quality and order fulfillment. Similarly, Dachangjian, a motocycle-maker in China’s Guangdong province, works with hundreds of parts suppliers.

Specifically, it noted how these post-modern guanxi have several powerful qualities. For instance, they can contract or expand with demand. As a result, Li & Fung and Dachangjian seldom have problems with excess capacity when times are hard or with waiting lists when times are flush. Furthermore, they can be turned into engines of innovation. Li & Fung relies on its partners to help solve problems, not just fulfil orders. Dachangjiang provides its suppliers with rough sketches rather than detailed blueprints and encourages them to innovate.

Guanxi, the linking of two people in a relationship of mutual dependence, is common in Chinese business. While it has its downsides, as every gift of significant value will soon be followed by a request for a huge (personal) favour, it also has its upsides. Your partners stick by you in your times of need because you stick by them in their times of need.

I can’t help but think that if Alcatel had more of a guanxi relationship with their suppliers and kept track of the basics, as noted by Dick Locke in his recent piece, that they wouldn’t be blaming their suppliers for their recent 10% sales decline. But I’m not the expert, so I asked Dick Locke (SI’s resident expert on global trade) to elaborate on the advice he provided and whether guanxi would help Alcatel. This is what he said:

 

Well, doctor, sometimes I think we’re doing point-counterpoint. I didn’t see Alcatel blaming suppliers and I can’t imagine they could. I don’t know where their supply base is so let’s not put a country-specific name into the conversation. Let’s just call it “relationships”. But yes, they would have done better in their upturn if they had done something different. It could be maintaining better personal relationships, it could be a better matching of business strategies and it could be the existence of better contracts.

 

I’m not sure where they fell down. I do know that the telecom industry tends to see supplier relationship management as primarily a contractual issue. In my seminars, I usually ask how many people work at a company that ever took a supplier to court. About the only companies that say yes tend to come from the telecom world. Maybe it’s a legacy of being in a regulated industry. If Alcatel’s supply base is in Asia, most companies there value relationships over contracts. If it’s in Germany, it’s contracts over relationships.

I was bothered by the Li & Fung story. Suppliers able to contract and expand on demand? The economist made a nice assertion, but there was nothing to back it up. And putting a middleman between buyer and seller? How can you ever develop relationships? In a world where a toy manufacturer’s paint supplier’s pigment supplier can cause millions of dollars of expense and an an untold amount of reputation damage, buyers need to meet, understand and build relationships with several layers of their supply chain.

 

I did note that Li & Fung’s primary market was fashion and consumer goods. Clothing is built to old fashioned quality standards, with AQL plans still the norm for quality mangement. Buyers are willing to accept lots with 10’s of thousands of out of spec goods per million. That method of quality management isn’t adequate for most other industries.

Actually, it’s perception vs. reality. Point vs. CounterPoint is when there are, theoretically, two equally valid ways to approach a public issue. What we’re doing is addressing a perceived reality and either affirming it or denying it, so that, at the end of the post, a buyer can make not just a truly informed decision, but the right one. (Which, in this case, is a focus on the core principals of supply management: better strategy, better contracts, and better relationships.)

Thanks, Dick! (Global Supply Training)

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