Category Archives: Global Trade

Geopolitical Sustentation 31: China and the New Silk Road

As per our damnation post last year, as part of it’s Grand Strategy, China has recreated the Silk Road, which has been active since November 18, 2015 when the first train left the city of Yiwu in Zhejiang province for a warehouse complex in Madrid, which it reached on December 9th. And it’s not going to stop until it crosses all of China and connects the entirety of Europe and Asia.

And when we say it’s not going to stop, we mean it. As per an article on Forbes on January 21, 2016 on how China is Moving Mountains for the New Silk Road – Literally, they won’t even let mountains get in the way. Four years ago, the entirety of the downtown Lanzhou New Area (LNA) was hundreds of mountaintops, which have been removed to make flat land for development. That’s right, they cut down mountains. In North America, it’s sometimes a massive undertaking just to flatten a few hills for a flat highway. They brought in the equipment and manpower to flatten mountains! If that doesn’t show you how serious they are about trade domination, I don’t know what will.

China is in the midst of implementing its OBOR (One-Belt, One-Road) initiative that will facilitate the creation of a gargantuan network of new highways, rail lines, logistics and industrial zones, pipelines, power plants, sea ports, and even entirely new cities that will stretch from East Asia to Western Europe, span over 60 countries, and impact over half of the world’s GDP, putting an end to US dominance once and for all. (The OBOR initiative also has a sea route, the 21st Century Maritime Silk Road, that goes through the Western Pacific and Indian Ocean, which also connects China to all of Africa (and the Middle East), giving them access to the entirety of 3 of the 6 populated continents and 6/7ths of the world’s population!

China is not only an emerging economy, it is the emerging economy that will soon be powering, directly or indirectly, almost 2/3rds of GDP when the silk road is completed and it has it’s hooks across 3 continents.

And, as we said in our damnation post, China is about to become your upstream as well as your downstream supply chain. You have to abandon your old view of the world, accept this reality, and start preparing for it. It doesn’t have to be the damnation that causes your undoing. It can be your salvation. Your choice.

So how do you prepare for it?

1. Learn Mandarin

Chances are your China partners will speak better English than you will speak Mandarin, but any attempt to seriously learn their language will be seen as a sign of respect and good faith and go a long way in negotiations. And even if you aren’t the negotiator, you will be able to communicate with almost 1 Billion native speakers. (That’s roughly twice as many native English speakers.)

2. Model your source-to-sink Euro-Asiatic supply chain.

Don’t just model the inbound supply chain, model the outbound too – and when you do your network design, strategic sourcing, and logistics models, try to find the best locations for storing inbound and outbound materials and products, for manufacturing to take advantage of a strong network design, and to minimize import/export/FTZ requirements and logistics network length. Long gone are the days when you are sourcing from China to sell in the US. Now you are sourcing from China to sell to the world, China included, so why manufacture in Malaysia to ship back to China. You need to take your supply chain and sourcing optimization to the next level. (Which is something the Six Samurai can help you with from a sourcing perspective.)

3. Treat your Big China Suppliers as Strategic Partners

Even if you are convinced they don’t understand your business model, the American marketplace, and the global consumer and even if you are convinced that their only goal is to rip you off at every turn (because you are paranoid or your golf course buddy found one of the scammers, which there are in every country), they know their local market and their own preferences better than you. And even if China is not a market today, if your company needs growth, chances are it will have to be tomorrow and you will need their guidance, and possibly even their innovation capability. So get ahead of your competition in their books.

Now, more will be required, but this should put you on the right track, er, road. The silk road. Which will again be the centre of global trade.

Geopolitical Sustentation 28: Customs Acts

As per our damnation post, customs is the agency, authority, or regulatory body in a country that is responsible for collecting tariffs on, and controlling the flow of goods in, and out, of the country. Customs is necessary, not just for keeping borders safe (which is often the rationale for their existence these days), but for keeping economies running. Customs levies are not only one of the oldest types of tax, but the foundation for the revenue engines necessary to keep most governments running.

Nor is there anything wrong with, or damning about, creating regulations and acts that clearly define the purpose of a customs agency, the authority it has, the documentation it requires, the taxes that can be levied, and the penalties it can apply for non-compliance. The damnation comes into play when the number of sheets of paper required to capture the rules, regulations, and constant updates to the regulations exceed the quantity of goods flowing into, and out of, a country. For example, in the US, an average importer/exporter has to be fully knowledgeable of half-a-dozen multiple-binder-thick acts as well as a dozen or so global acts. It really is damnation to the power of 100.

So what is Procurement to do?

1. Global Trade Document Management Solutions

That can not only help you with the (e-)paperwork and the e-filing, but also help you identify the acts you have to adhere to, the forms that need to be filed, and the times by which they need to be filed. Some have to be filed before you hit the port, and others before you even leave the port of origin.

2. Customs and Trade Act Monitoring

As per our post on Environmental Sustentation 15, Waste, RoHS, and WEEE, the last thing you want to do is become aware of a new act the day it comes into effect. By the time it is signed into law, even if there is a six month grace period before its enacted, that’s too late. You want to know about a piece of proposed legislation the moment it gets released for public presentation or, if it was drafted in private, the first time it gets red in a regulatory body. A good monitoring solution will not only let you know when acts are updated, but when news is made, you need to know.

3. FTZ Mastery

A FTZ, short for Free Trade Zone, is a zone that allows you to ship goods through country X on their way for sale in country Y without having to pay import taxes or that allows you to delay imports until the goods or materials are actually needed. This can be a blessing to an organization with a tight cash-flow. But more importantly, if country X all of a sudden bans your product or a material in your product, it gives you a way to get your product out of the country and into another where it is not banned, which is much better than having it seized and destroyed on import.

4. State-of-the-Art Logistics Management Platform

If, all of a sudden, due to strikes, trade embargoes, or new legislation that makes your product, or a component, illegal, you have to re-route a shipment in real time, you need a state-of-the-art logistics management platform that will let you identify an alternate route and accomplish the re-routing.

5. Multiple Manufacturing Locations

If something happens and you can’t export or import, and you still need to get a good to market, if you have a local manufacturing location that you can rev up, there’s no better way to meet a need that cannot be otherwise met.

6. Standardize its Design and Cost Structures to the highest common denominator

While it might be cheaper to manufacture different versions of a product for different markets, using the cheapest formulation possible that will get a product through customs, if a company manufacturers to the highest common denominator, and the good meets the regulatory requirements of a number of countries, and one market becomes unavailable, the good is easily redirected to a different market. This is a good lesson for automotive, where each state and province can have different requirements, as inventory can be quickly shifted as consumer preferences change.

Societal Sustentation 48: Workers’ Rights

Now, as we discussed in our original damnation post, this shouldn’t be a damnation because worker’s rights are a good thing, and, assuming one is ethical, there’s absolutely nothing wrong with giving workers the respect and rights they deserve. The problem is, as we previously stated, is that, in the corporate world, not everyone is ethical. Not only do we have to deal with the fact that 1% of the population are psychopaths, but the fact that the top four professions that attract psychopaths are the people who run the corporate world, namely:

  • CEOs
  • Lawyers
  • Media / Publicists / PR / Marketers
  • Salespeople

The only other profession absolutely necessary for a company of any size to survive is an accountant to keep the boxes and make sure they are in order when the tax man comes knocking. In a nutshell, your company is evil, and the only real question is how evil on the scale from skim a bit off the top to sell guns to a known guerrilla group that will use them to commit mass genocide.

And if your company is just a little bit evil, then you know for sure that somewhere, lurking in the shadows of your supply chain, is an organization that is likely so evil that it is using child labour, slave labour, and mistreating both in the process. One has to remember that not all countries have good workers’ rights laws, and this is true of developing countries in particular, and anywhere the men with guns and money have more power than the elected officials, it doesn’t always matter what laws are on the books.

All that matters is that, with the introduction of various anti-human trafficking acts around the world, such as the California Transparency in Supply Chains Act and the UK Modern Slavery Act, if your supply chain uses slave labour, your company is on the hook. Thus, as a Procurement professional, you have to be sure your supplier is compliant, and that they make their suppliers compliant.

And forcing your suppliers to sign a paper that they will comply with your fair labour and fair wage policies isn’t enough, especially if they are outsourcing the work or using multiple locations (unbeknownst to you who only sees the primary “show” location which, just like a model home, isn’t the real thing).

First of all, you investigate them through third parties. Contact companies like Ecovadis and Sedex Global that collect and collate third party and NGO data on suppliers to see a history of their sustainability and ethical practices. Make sure there have been recent audits by trustworthy third party organizations that advocate worker’s rights and that those reviews have passed, contacting additional organizations if you need to. Force the supplier to sign a contract stating that they are fully aware of the regulations you must conform to with respect to worker’s rights and that not only will they follow and adhere to all regulations for their workforce, but that they will only work with suppliers who accept the same. Moreover, they accept full legal liability should they fail to do so and are responsible for all costs borne by your organization should workers’ rights violations occur, be it fines from a government organization, legal defense costs, or reimbursement for goods seized. (And make sure the contract is legally binding in their country and that you can enforce it in their court of law.)

Secondly, monitor on an ongoing basis. Maintain a subscription to at least one organization that regularly reviews, and collates ethical data on, the supplier in question and monitor for any indications that not all may be above-board.

Third, include a mandatory provision that the contract may be immediately terminated for breaches of mandatory worker and human rights by them or any supplier in their supply chain. And don’t be afraid to follow through and shift demand to the secondary supplier the minute a breach is confirmed.

It’s probably not enough, but it’s a start.

Geopolitical Sustentation 33: Taxation

As we stated in our original damnation post, taxation may be the only certainty left (especially if the futurists who think that cybernetics will eventually allow us to preserve our mind and live forever are right). Even if your current government(al system) fails, a new order will rise up and, like every order that has come before, in some way, shape, or form, it will tax you.

And, as clearly pointed out in our original post, taxation makes it nearly impossible to answer the ultimate sourcing question: what is the lowest cost of ownership and the best overall total value. When we source according to total value management, we want to maximize the value to cost ratio — but this can only be done when we understand the cost.

And when so much of the cost is taxes — sales taxes, export taxes, import taxes, special surtaxes, state or municipal taxes on top of federal sales taxes, and so on — and when all of these taxes can change almost overnight, how do you answer the ultimate sourcing question? For example, some countries in South America change their import tariff codes twice a week. Taxes generally change when consortiums or labour groups cry foul when a market is flooded with cheaper goods from a foreign market or “buy at home” lobbyists get upset that the best products are being exported and stir up a fuss.

When a 10% duty today can be a 30% duty tomorrow, how do you build accurate cost models that allow you to create three year plans and cut three year contracts? The answer is, you don’t. So what do you do?

Gather a lot of market intelligence and analyze it. Taxes for most of the products or services you are buying are usually going to fall into one of three categories:

  • stable
  • trending, with significance confidence as to approximate future prices, up or down
  • changing unpredictably

If the tax rate is stable, then the organization can take confidence that it will most likely be stable for the life of the contract and put a tax increase in the low risk category and, more or less, ignore it unless an event occurs or information is obtained that something might change.

If the tax rate is trending up or down, then you can do what-if analysis at different tax rates defined as now, 6 months, 1 year, 2 years, contract length to see at what point the lowest cost or highest value buy tips to another market and if that will happen in the first half of a contract period, work with a potential supplier in a market with a stable or lower tax rate to see if there are other cost reductions that would make the other supplier a lower cost over the expected contract length.

If the tax rate is unpredictable, and could increase significantly to a point where the buy would cost considerably more than the next lowest cost buy or cause considerable financial harm to the organization, the organization should consider if there are sources of supply that would avoid the tax rate entirely. If not, then the organization has to figure out some sort of hedging strategy that would allow it to profit financially from the tax increase to cover the increased costs of supply. And that should be left to the financial pros — but it’s good to know when they should be trying to work their voodoo and when they shouldn’t.

Economic Sustentation 05: Currency Conservation

As we have previously indicated, there is no salvation, at least not now. It’s only going to get hotter, and the best you can do for now is survive. But survival will be easier if you know what to do, or at least know what you might try, so, in this post, and the posts that follow in this series, we will present some of the options at your disposal, starting with currency (conservation).

So how can you protect against the currency fluctuations that can cause you significant economic damnation?

As indicated in our original damnation post, one preventative measure you can take is to determine the Purchasing Power Parity (PPP) of a currency to determine whether it is undervalued, and likely to rise, or overvalued, and likely to fall, and base your total cost of ownership models not on the current value against your base currency but the expected (average) value over the course of the contract.

But of course, this is not enough to predict every fluctuation in currency as some currencies rise and fall as the result of significant investment being pushed into a country (because of low wages, energy costs, etc.), being pulled out (because of new, burdensome, tax laws, etc.), or political actions that cause boycotts of goods from a certain country, or even trade embargoes. The latter situations can cause currencies to rapidly rise or fall seemingly overnight. So what can you do?

First, whenever possible, try to buy in the standard, or preferred, currency of the organization, and, in particular, the currency that most of the customers are paying in. If the organization is being paid in US dollars, then it should, whenever possible, try to buy in US dollars. This even eliminates (potentially costly) exchange fees from the picture.

Second, if this is not possible, because demand exceeds supply and the supplier has more negotiating leverage or the customers are buying in a currency that is not the preferred currency of the organization going forward, try to negotiate discounts as a result of currency strength increases against a major currency or gold. If the supplier suddenly has considerably more buying power from their dollar and their customers have considerably less, then it might be in the best interest of the supplier, especially if it is producing its goods from raw materials bought in a different market using a weaker currency, to pass on a bit of savings to its customers that might otherwise have to default on a contract or risk bankruptcy otherwise. It won’t always be possible, but if your organization is a major customer whose absence would be felt financially by the supplier, it’s worth a try.

Third, if you have to deal with multiple currencies, keep investments in multiple currencies so that trades can be made at strategic times to allow the profits in the currency trades to cover the increased costs of an unexpected rise in the currency required to pay a supplier. While the currency markets aren’t a zero sum game, generally speaking, value lost in one market always appears in another. And while SI realizes that, in the eyes of an economist this is a gross simplification, economics and trade works because, at any one time, there is a fixed amount of GDP in the world and a fixed value of a currency related to that GDP. Thus, at any point in time, value is conserved just like energy is conserved in our universe under thermodynamic laws.

There’s no silver bullet, but there’s enough lead that, if properly sprayed, will get the job done.