Category Archives: China

As The World Turns

By Lloyd Graff

What a year I’ve been blessed to experience. 

First big thing for me is that I am alive, not suffering from dementia except for occasionally forgetting Cubs players’ first names, and I’m still writing this blog most weeks, which a few people evidently still read. 

When you see your peers dying and failing, these are major things to be grateful for every single day. 

Enough personal thought. 

This has been a huge year in a lot of ways. From a business standpoint this has been the best year Graff-Pinkert has ever had. We paid off all our debts, gave the biggest raises, and the biggest bonuses, and still had leftovers. 

This is after an awful 2020 that seemed like the end of the line for our business, and was for many. How did this happen? 

First, I must admit we took advantage of the federal government’s Paycheck Protection Program loans, and it actually worked like it was supposed to for us. It gave us liquidity when we needed it, kept workers working, and came promptly. With government failures rampant, this was a program that worked brilliantly for smaller businesses.

COVID-19 has been a tragedy for millions of people, but from a business point of view it has been a great boon to many folks in the machining world. 2021 will be seen as the year when reshoring–bringing back work from China–became a reality and not a prediction. It happened because bigger firms finally saw the downside of dependence on China for the sake of a few pennies per part. 

When you are dependent on a container traveling thousands of miles with a possibility of a lot of bad things happening on the way, your company is fragile, which means your job as CEO is in jeopardy, which means that the company private jet might have different passengers soon. Suddenly China did not look nearly as attractive, and jobs finally came back to the United States and Mexico. 

Companies needed machine tools, and some of that business trickled down to our used machinery company. Also, the U.S. and the rest of the world began to live with COVID and its deviant variants.

The major professional sports franchises figured out how to maneuver around absences and quarantine. Zoom video conferencing became a lifesaver for businesses in a million different ways. 

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From a political point of view, 2021 will be remembered as the year China began its long-term decline as a dominant world power, as we saw with Russia in the 1970s and ‘80s. 

China has had enormous vitality and growth for 25 years. The Communist regime provided economic freedom to allow the entrepreneurial and creative class to thrive as long as they stayed in line politically. But with the persecution in Tibet, the genocide and enslavement of the Uyghers, the jailing of protesters in Hong Kong, and President Xi consolidating power to become dictator for life, the failures we saw in Russia, Eastern Europe, and Venezula are visible. 

Some see China now reaching for world domination. I feel fortunate to be witnessing the beginning of its long-term decline. 

I wish you all a wonderful year ahead and look forward to an upbeat and hopeful 2022.

Question: What has been the highlight of your year?

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Why Manufacturing is Leaving China, with Andrew R. Thomas—EP 142

By Noah Graff

Our guest on today’s podcast is Dr. Andrew R. Thomas, best selling author and Associate Professor of Marketing and International business at the University of Akron.

Thomas says today reshoring is finally happening. After decades of sending manufacturing work to China, Western companies are finally realizing this strategy is often not the answer for generating better profits.

Scroll down to read more and listen to the podcast. Or listen on your phone with Google Podcasts, Apple Podcasts, Spotify, or your favorite app.

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Main Points

Why Manufacturing First Left the U.S.

Thomas challenges the claim that most Western companies sent manufacturing operations to China solely out of greed. Starting in the 1990s many U.S. manufacturers, particularly small and medium sized companies, were pushed to move operations to less expensive labor markets because of a change in the dynamics of the American business model. For 30 years, business schools and consultants preached to maximize efficiencies and focus on core competence. They prescribed the “Toyota model”—outsource what you don’t do well and focus on what you do best. 

In the 1980s and 1990s big box stores like Walmart signed large contracts with American manufacturer suppliers. At first, the suppliers prospered from having such large customers, but after a few years, the Walmarts began to squeeze them on price. The suppliers did not have negotiating power because they no longer had a diverse group of smaller customers to compete for their business. They were forced to seek cheaper labor overseas just to survive. For decades, reshoring did not even appear to be an option for Western companies.

The Pandemic and Labor Markets

Because of the supply chain problems brought about by COVID-19 and the country’s increasing wages, China is no longer the answer for many Western manufacturers to produce the cheapest parts. Thomas points out that manufacturing work is currently coming back to the West, but not exclusively to the United States. Much of the work leaving Asia will land in Latin America and Eastern and Central Europe. In those regions labor is cheaper and more abundant.

While the United States and Western Europe provided a safety net to businesses and unemployed workers in 2020 and 2021, poorer countries did not have the resources to do so. Thomas says in countries such as Panama, where he lives much of the time, the only government assistance people received was a modest stipend for food and necessities, and free rent. These desperate conditions have made people in poorer countries eager to work.

Andrew R. Thomas, Author and Associate Professor

American Legacy of Global Leadership

According to Thomas, since the United States was founded, Americans have always had the notion their country was special. They believed it was important to share their values and lead the world.

This identity was solidified in 1944, when 44 allied nations sent delegates to the Bretton Woods conference in New Hampshire. The conference set up a framework to regulate an international monetary system. It created the International Monetary Fund and the International Bank for Reconstruction and Development. It ultimately established a dominant economic position for the United States and the U.S. dollar.

More than just setting up an international economic framework, Thomas says Bretton Woods spawned a gentleman’s agreement between the United States and its allies based on four guaranties. 

—If a country allies itself with the United States, the U.S. will provide that country with military protection.

—The U.S. will provide countries with capital to rebuild post war economies. 

—The U.S. will encourage open trade.

—The U.S. will secure the world’s supply chain with its Navy.  

Much of these foundations are still present today despite claims of the last few U.S. presidents that they want to meddle less in international conflicts and focus more on the domestic economy.

Self-Reliance from New Energy Security

Thomas says one factor changing U.S. international trade is the current revolution in fracking technology. A trillion and a half dollars in private capital has been invested to build an infrastructure for fracking. For the first time in recent memory the U.S. has a choice to not be carbon dependent on foreign countries, which would give it considerable power.

It will be interesting to see how much the United States’ legacy as the world’s watchdog lives on, while its ability to focus its energy inward grows.

Question: Have you seen reshoring in your business?

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Ep. 107 – Reshaping the Supply Chain After COVID-19, with Professor Yossi Sheffi

By Noah Graff

Our guest on today’s show is Professor Yossi Sheffi, author of the new book, The New (AB)NORMAL: Reshaping Business and Supply Chain Strategy Beyond Covid-19.

In the interview, Sheffi explains how companies and governments around the world have dealt with the supply chain disruption over the past year’s pandemic. He also gives insight on how people can prepare for the next time the world’s supply chain is turned on its head

Scroll down to read more and listen to the podcast with Google Podcasts, Apple Podcasts or your favorite app.

 

 

Main Points

Yossi defines supply chain as the series of activities that take a product from the raw material stage to a finished product through a series of transportation, shipping, and creation until it finally reaches the consumer. He says the final stop of the supply chain is the responsible disposal of the product after it has been used. (3:15)

Yossi gives his background. He studied civil engineering in Israel and then came to the United States to conduct operational research at MIT, where he studied network theory. Originally he wanted to utilize his education in the urban planning and transportation sector, but he became frustrated because nobody was applying what he thought were brilliant ideas. Eventually he found an opportunity working with trucking companies, using the same mathematical principles he had researched, in the end saving these businesses a lot of money. From there, he branched out into working with the customers of the trucking firms such as manufacturers, retailers, and distributors to optimize their operations. In the process, he started five companies, which he says were all successful and sold out to larger companies. Yossi said he always returned to MIT because he is passionate about teaching and research. (4:35)

Yossi says the secret to being able to do so many projects is to have a very understanding wife. He credits her with keeping their relationship strong and helping him maintain a good relationship with his kids, despite working more or less 24/7. (6:10)

Yossi discusses some of his past books which cover different aspects of the supply chain. In March of 2020, while he was working on a book about new supply chain innovations, the world was struck by the COVID-19 pandemic. He saw this as one of the most significant historical events in the history of the world’s supply chain, so he stopped working on the book he was writing and wrote the New (AB)Normal from March until August of 2020. He says it was essential to get the book out quickly before COVID-19 became tired, old news. (8:30)


Yossi talks about how the US is still slow in fighting COVID-19. He compares vaccination rates in the US to those in Israel. He says Israel plans to have its entire population vaccinated in two and a half months. At the time of this interview (Dec. 2020) Israel was vaccinating upwards of 150,000 people a day, while his home state of Massachusetts was only vaccinating 30,000 people daily. (9:50)

Yossi says one distinct thing about Israel’s approach to the coronavirus is that its government did not hedge its bets of the efficacy of the vaccines. It assumed the two vaccines based on the mRNA from Moderna and Pfizer were effective and ordered them before they were approved by the FDA. Ironically the country was currently in lockdown at the time of the interview, while health professionals were administering the vaccine from 5AM until 10PM (soon to be 24/7). He says the Israeli government even got some of the ultra orthodox authorities on board with administering vaccines on the sabbath by invoking a rabbinical rule that states life is more sacred than anything else. (11:45)

Yossi compares the supply chain challenges for distributing the COVID-19 vaccine to those in the automotive supply chain. He says that in some ways distributing the vaccine is easier because no one is concerned about minimizing costs. (14:15)

Yossi discusses the bullwhip effect on the world’s supply chain, which was significantly apparent in 2020. He says when estimates for supply and demand become distorted because of a disrupted supply chain, the solution for manufactures to not overreact in their inventory buying is to listen to the final consumer. Thus, even Tier 2 or Tier 3 automotive suppliers should be monitoring car sales to predict upcoming production demand, rather than only listening to what the Tier 1 companies tell them. (16:05)

Yossi talks about China. He says country’s autocratic measures enabled it to quarantine successfully and get the pandemic under control. He says that early on during the pandemic, the Chinese government asked banks to give significant loans to medium and small sized companies. He says the Chinese government preferred to keep companies running rather than give money to individual citizens, while in the US the government preferred to support individuals rather than protect businesses. He says that European countries also preferred to support companies rather than individual citizens during the pandemic. He adds that it’s unclear which approach was the best choice. (19:50)

Yossi shares what he found the most shocking about how the supply chain malfunctioned during the pandemic. He says medical supplies in the United States were terribly low, leaving many hospital workers unprotected. He says the US used to have a strategic reserve of PPEs and other medical equipment, but it withered away during the Obama administration. In his new book, Yossi gives suggestions on how the United States should prepare for a future pandemic, including rebuilding a strategic inventory. He also says hospitals need to be stress tested for crises events, and a medical personnel reserve, much like the Army Reserves should be created. The medical personnel reserve would be comprised of people trained to do basic care. It would free up nurses and doctors to do more difficult work. (24:45) 

Yossi gives advice to Tier 2 and Tier 3 manufacturers on how to survive a pandemic. He says they need to ensure they are not too leveraged. He also encourages membership in larger manufacturing associations so they have a voice that represents their types of businesses in Washington. (28:45)

Yossi says he is skeptical that significant manufacturing work in China will return to the US or move elsewhere because it is extremely difficult to replicate the extensive supply chain infrastructure that already exists in China. He says some final assembly of products may leave China, but the parts will continue to be made there. He says this is why it is vital to keep the manufacturing and proprietary knowledge that is already in the United States from leaving. (31:50)

Yossi says that one of the most interesting things he has learned about recently is the COVID-19 vaccine distribution in Israel. He says one key difference between the vaccination process in Israel verses in the US is that in the US patients are required to sign legal wavers to protect against lawsuits, while in Israel just getting in line is considered legally signing off on the procedure. This enables much greater efficiency in the vaccination process. (32:55)

Question: What would you have done differently in 2020?

 

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The Manufacturing Rebound

By Lloyd Graff

I talk to a lot of folks in the machining trade every day, and the clear sense I am getting is that business is improving. The automotive segment is definitely firming. Auto related work has bounced back from the April, May, June, July doldrums. Demand has picked up, and car showrooms are extremely short of hot inventory. 

European and Japanese companies were also shut down, and the supply chains are strained. Guns and the medical sector are strengthening. 

We are seeing an uptick in the used machinery business. The auctioneers are surprised at how strong their sale prices are holding up. Inventory of late model Swiss-type and multi-axis CNC machines appears to be light.

On the macroeconomic front, the recent perverse behavior of stocks is being attributed by pundits to the surprising decrease in unemployment after PPP money ran out and extra layoff checks ended. Evidently some people did choose to return to work.

Small businesses, especially those travel-related and restaurants, have been severely hurt, but the wounded giant called the American Economy appears to be healing. The prospect of multiple viable vaccines being approved soon, while good for most people in business, is viewed by some speculators as negative for tech stocks like Apple and Amazon, which have continued to thrive despite the swooning economy. It appears that improving conditions are sell signs for the option trader gamblers. 

From my observation, the impending election does not seem like it will be a significant issue for the stock market, but it could be an issue small business people.

They should ask LeBron for advice. He seems to know all.

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Do politics and NBA basketball mix well? 

Maybe the better question is does China own the NBA? Or perhaps the real question is does LeBron James play for the Los Angeles Lakers or Nike?

The three questions are tied together. LeBron signed a contract in 2019 easily worth a billion dollars with Nike, becoming its most valued endorser, though Michael Jordan trails him very closely.

The NBA also signed a $1.5 billion dollar contract last year with Tencent, the Chinese mega company, granting it the exclusive rights to broadcast all of the NBA games it chooses to air in China. The games are mainly watched by young people on their cell phones as they ride public transportation to work in the morning. 

The NBA has built academies in China to teach and promote the basketball. When Daryl Morey, the general manager of the Houston Rockets, had the audacity to tweet critically about communist China crushing the human rights demonstrations in Hong Kong, the Beijing Party leaders bristled. Then the NBA bosses cowered and tried to make nice.

LeBron, who probably sees himself as a potential president of the United States, and heir to Oprah and Martin Luther King Jr. in America, had a real dilemma. It was magnified when COVID-19 hit midway through the 2020 NBA season. The players were undecided about continuing to play, but LeBron had the NBA, Nike, China, and Black Lives Matter all looking at him to thread the needle. It was a time to prove himself to be politically skillful before he even stepped on the court again with Anthony Davis and the rest of the Lakers.

I watched LeBron play brilliantly Monday in the playoff series, ironically against Daryl Morey’s Houston Rockets. Black Lives Matter signage was everywhere in the Orlando bubble, where all of the games are being played and broadcast on TNT and Disney’s ESPN. Player uniforms displayed social and political messages, and a huge VOTE sign was prominently displayed during all broadcasts. 

It is a fascinating mishmash of sports, business, politics, and LeBron, who is proving himself to be the Confucius of America in 2020.

Question: Is your business rebounding?

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Ep. 86 – Work is Coming Back from China, with Mike Micklewright

By Noah & Lloyd Graff

On today’s show, we’re talking about manufacturing returning to the United States from overseas. Our guest is Mike Micklewright, Director of the Kaizen Institute.

Mike says we may have finally reached a tipping point when manufacturers accept that it makes sense to produce goods again in North America.

Scroll down to listen to the podcast. Or listen on your phone on Apple Podcasts and Google Podcasts.

Main Points

(2:15) Mike Micklewright explains that Kaizen is about transforming businesses to get rid of waste in their processes and building a culture of continuous improvement. He says this is accomplished by putting the right systems in place for leadership and communication.

(3:30) Lloyd Graff asks if the Kaizen Institute has its own waste. Mike says the institute needs to limit waste like all organizations and it has systems in place to try to operate by the principles it espouses.

(4:30) Mike defines on-shoring as bringing the industrial base and manufacturing base back to the closest proximity of the consumer.  

(4:50) Mike says that manufacturing goods overseas and shipping them to the consumer creates significant waste. He says companies that outsource to China don’t always look at the total cost of production. 

Mike Micklewright, Director of the Kaizen Institute

(6:45) Mike says that one challenge to bringing manufacturing back to the United States is that purchasing people are evaluated on a metric called Purchasing Price Variance (PPV). He says PPV signifies the actual price vs the standard price. He says the standard price sometimes means the price of an item the previous year, and purchasing people are trying to make the actual price lower than that. Making products overseas is one way to try to accomplish that goal. Mike says the purchasing people often do not look at the transportation costs or other logistics costs. He says they also fail to take into account risks such as labor strikes, natural disasters or pandemics.  

(8:35) Mike says there is a ton of data available to present to top management of companies to try to make them see the waste caused by off-shoring. He says we need to utilize various tools available to present the data, otherwise they will just choose to ignore it and keep doing what they have been doing. He says the trade war has also helped pursued companies to bring work back.

(10:20) Mike says Covid-19 and other recent catastrophes have made companies consider risk factors more than ever before. He says Covid-19 demonstrated how reliant the United States is on imports from foreign countries for its livelihood.

(11:40) Mike says Japanese companies set a good example of how to be self-reliant. They want to keep their manufacturing close to their consumers. They also don’t want to borrow money from their governments or from foreign governments. 

(14:00) Mike says the US isn’t totally ready to bring a lot of manufacturing back. He says the US manufacturing base has shrunk and the country has less people with skills and interest in manufacturing. He says implementing robots in shops and new education programs are helping to deal with the workforce problem. 

(17:25) Mike says outsourcing to Mexico is less of a problem than outsourcing to China. He says it creates less waste because Mexico is closer and its culture is more similar to that of the US. However crossing borders has challenges as well as potential for political strife between countries. Mike says bringing back manufacturing from China and putting it in Mexico is called near-shoring, as opposed to on-shoring. He says near-shoring has been occurring more than on-shoring.

(20:15) Mike says he hasn’t seen a lot of waste costs for the manufacturing industry caused by Mexican drug cartels. But, he says their influence the Mexican government could increase risk of doing business there.

(22:30) Mike says wages in China have been rising for the last 20 years, and this has brought some work back to the US. He says Covid-19 and the trade war may have finally caused a tipping point for companies to bring work back to the US. Yet, still he admits he can’t name specific companies doing it. He says some information about this is confidential.

(23:00) Lloyd says we hear in the used machinery business that US companies are quoting against China, but still he seldom hears of much work actually coming back. Mike says we need to get salespeople to understand the concept of “total cost of ownership” so when they are asked to make a proposal they are not just presenting a price tag. 

(27:00) Mike says that even though we have not seen on-shoring yet on a large scale, the issue is hitting mainstream news rather than just business news, which could mean we are at a tipping point.

(29:00) Mike says that he just bought a 1992 Winnebago to take a two week trip. He says he bought it at a good price, but then he had to pay an inspector and it needed lot of repairs. He says his purchase was a demonstration of people’s natural inclination to look only at price, rather than look at total cost. 

Question: Is work coming back from China?

 

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Ep. 72 – Coronavirus and the Supply Chain with Daniel Hearsch

By Noah Graff

On today’s podcast we’re delving into a topic that’s been on many people’s minds these days, the coronavirus.

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Our guest is automotive supply chain expert Dan Hearsch, Managing Director at AlixPartners. Dan is briefed daily by his associates in China about how people in manufacturing are dealing with the coronavirus. FYI, this interview was conducted one week ago on Feb. 26, 2020.

Main Points

(2:55) Dan gives his background working in the automotive industry for OEMs, as well as Tier 1 and Tier 2 suppliers. Today he is a consultant, focusing on supply chain and procurement projects.

(3:55) Dan says many people have been comparing the coronavirus, also known as Covid-19, to SARS, the last serious epidemic in Asia back in 2003. He says the big difference between the SARS outbreak and the current one is that in 2003, China was roughly only 4% of global GDP, while today China has a much more significant role in the global supply chain and its own internal economy is much larger than it was 17 years ago.

(5:30) Dan says one of the hardest things about the coronavirus outbreak is knowing what the local response is going to be. He says that it seems like the quarantine policies in China, Korea, and Italy are the correct response.

(6:00) Dan says he’s briefed daily on the latest news in China from his associates in there. The news is based on what they are seeing from the Chinese government and what they are seeing in real time from the companies with whom they work.

Daniel Hearsch of AlixPartners

(6:55) Dan says he hears there is a decreased incidence of new coronavirus cases and the death numbers seems to be falling, which makes people hopeful that business will get better soon. He says the worst thing to do is to send people back to work too soon because they could get sick again and the quarantine process would have to start over.

(7:40) Dan says the Chinese New Year amplified the spread of the coronavirus because of all the people traveling back to their homes in the countryside. However, he said that from a business standpoint the Chinese New Year was helpful because people who buy goods from China were already planning for an eight day shut down. People had planned to have extra material already in transit on the water, but had not planned for further delays.

(9:40) Dan says the majority of factories in China that were down have opened up again. He sites a Chinese government survey of 982 enterprises that said 41% had resumed by February 14 and predicts over 80% should be back up and running this month. He says the biggest problems relate to transportation and workforce issues because a significant number of people are quarantined or have trouble traveling. His sources say that Chinese manufacturers in the survey are running at only 30-40% of their potential productivity. The Chinese government is comparing the current electricity usage in various industrial areas to past years to gage productivity. It found that the level of usage was about 57% that it was at this same time of year in 2018 and 2019.

(12:15) Dan says that the automotive sector has a very lean supply chain, meaning companies hold very little safety stock, which makes it vulnerable to the decrease in supplier productivity.

(16:40) Dan says that some North American manufacturing companies are going shorten their supply chains as China, Korea, and Italy can’t supply enough parts. He says this trend would lend itself to machining processes that are fast to set up. He says capacity shouldn’t be a big problem because the domestic automotive market has been down of late.

(18:50) Dan says China has both a supply and a demand problem because many of the domestic customers who buy parts are also closed. This differs from the United States that only has a supply problem because companies are still purchasing goods and consumers are still buying.

(20:40) Dan says that many of the large scale supply chain problems caused by the coronavirus are not new. He draws a comparison to the aftermath of the Fukushima nuclear power plant disaster in 2011, which exposed the problems that occur when companies have too many suppliers concentrated in one region and do not have enough relationships with backup suppliers.

(23:45) Noah asks if the pharmaceutical supply chain in China has similar issues as automotive. Dan says the problems are probably similar. He says the transportation issues could be significant as suppliers try to catch up on a backlog of shipments, though he predicts the production processes might not be as labor intensive as those of automotive.

(27:45) Dan says that the coronavirus is a common type of virus—the same type of virus as the common cold. He says the Covid-19 epidemic is quite contagious and has a high fatality rate of 2.5-3% compared to .05% for typical flu. He says limiting personal contact with other people and washing hands regularly is the best practice to protect oneself against the virus. He says that a lot of people make mistakes such as wearing the wrong type of protective masks and wearing a mask more than one time.

(31:20) Dan says if the United States has an outbreak the impact on its economy shouldn’t be as dramatic as China’s. A higher percentage of people have the ability to work remotely while quarantined because a smaller percentage work in factories. Still, he admits an outbreak will still significantly affect the domestic supply chain.

(33:30) Dan says out of China’s study of 982 surveyed Chinese companies 42% of those enterprises will run out of cash in the next three months and 10% will run out of cash in one month because they can’t cover their fixed costs. He says it is likely the Chinese government will act as a safety net, though he is not familiar with the bankruptcy laws there.

(36:40) Dan says the best case scenario is that the most problematic countries get the Covid-19 epidemic under control and it doesn’t become a global pandemic. He says it is possible that in 4 to 5 months most suppliers will be back up to speed in the problematic countries.

(38:25) Dan says the precautionary health measures by governments seem to be the correct plan to deal with the coronavirus epidemic. He says saving people’s lives is more important than keeping factories running, not just for humanitarian reasons, but also for long-term business success.

(39:30) Dan says it is vital for manufacturers to set up alternate suppliers as soon as possible to prepare for a pandemic or other supply chain setbacks.

Question: Have you noticed supply chain interruptions due to the coronavirus affecting your business?

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Trade War 7th Round

I keep trying to make sense out of the trade war with China. It isn’t easy. I use metaphors to describe the tariffs and the tit-for-tat jabbing of the two major powers. It is a bit like Ultimate Fighting Championship, but it is much more complicated. Donald Trump has an election battle coming up, and a booming economy is his biggest asset going into 2020. China’s Xi has no election, but he has Communist cronies who are not all fawning stooges.

Trump has immigration woes that he is trying to turn into a positive politically, but it isn’t working well.  Xi has Hong Kong mass demonstrations, which are now more than an annoyance to his regime. It is a problem that is a public relations horror and potentially could spark rebellion within China, despite its rigidly controlled press. Just like a million people leaving Central America desperately knocking on the door of a country built by immigrants is a problem without an easy solution here, the longing for freedom in Hong Kong ultimately overflowing into China is a problem that just won’t evaporate.

China under Xi wants to overwhelm the United States in every way other than a shooting war. Manipulating outdated trading norms developed by Kissinger and Clinton and maintained without a whimper by every administration since then out of convenience and laziness has served China beautifully as it has eviscerated American industry and workers in exchange for $5 t-shirts at Walmart and Target. The Obama Administration timidly objected to the Chinese trade bullying, but had no taste for a trade war which would have been rather uncomfortable and unpopular.

Pugnacious Donald Trump was looking for a fight. He seems to thrive on nonphysical, non-shooting warfare. Advisors convinced him that it was a winnable war if he played it right. Tariffs were his weapon of choice.

Tariffs probably hurt China a bit more than they hurt the United States because we buy a lot more from them than they buy from us, and if the farmers take a fist to the jaw, Trump and Congress can cushion the hurt with subsides. If t-shirts bump up $0.50, Walmart can eat a little bit and the richer American workers can absorb their annoyance with fatter paychecks. China can manipulate its currency to cheapen its goods and the Fed can manipulate interest rates to make mortgages cheaper.

This is why, after two years of trade war, the American economy is still quite good and China’s economy is still growing.

The mavens in the press here have exaggerated the impact of the tariffs, and some are trying to talk the country into a recession for political purposes. It is having an effect: capital spending is slowing, and big business bureaucrats are becoming fearful because they tend to be sheep. Machine tool sales are weakening. Japanese production of machine tools is soft.

Was Trump right in picking this fight with China? Short-term, politically, it was dumb. Since most politicians only think in terms of the next election, it was a stupid aberrant move in their eyes. He hurts his base in rural America. Any gain for American industry is far away and foggy.

Barack Obama saw the same things as Donald Trump, but was afraid of confrontation. Trump relishes confrontation, but appears to lack a coherent strategy. The Chinese want to outlast Trump and may succeed, but Xi may be in trouble at home amongst his enemies because Trump has not folded yet. Hong Kong is potentially very dangerous for the regime with the Chinese home economy softening, and China’s ambitious plans for a Belt and Road initiative to aid developing countries seeming to have faltered.

Trump’s Huawei gambit has given Xi a black eye, but the company evidently has some attractive 5G products at good prices, which will allow it to weather the storm.

Put it all together and the two fighters have fought a draw through six or seven rounds of a 15-round bout. China has not given in on intellectual property theft, and America keeps jabbing them with tariffs.

I do not see a knockout or surrender in the foreseeable future. The stock market will be a yo-yo. Big business will play defense. Growth in both countries will gasp a little, but keep on going.

Is the battle worth the trouble? The Chinese certainly think so. Do we?

Question: Where were you on September 11, 2001?

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Trade Wars

By Lloyd Graff

Today is the last day of the Major League Baseball trading season.  I am a nutty baseball fan, Chicago Cubs variety, who follows such folly with a fanatic’s intensity.

Maybe it’s the machinery dealer in me, but I love the trading.  Every team is looking for that player who with change of scenery turns into a butterfly from a caterpillar.  Other times non-contending teams will trade a star at the end of his contract for a potential star at the beginning of his career.  The classic case of this was in 2016 when the Cubs traded their best young minor league player, Gleyber Torres, for the services of Aroldis Chapman, the hardest throwing relief pitcher in the game who was at the tail end of his contract.  Chapman, who could throw 105 mph, helped the Cubs win the World Series in 2016.  Gleyber Torres was an All-Star this year for the Yankees.  Chapman left the Cubs after 2016 and re-signed with the Yankees.

These “deadline deals” can be transformative for a team.  The Cubs made a great deal with the Texas Rangers in 2012 trading Ryan Dempster, a once great relief pitcher, and a decent catcher, Geovany Soto, for pitcher Kyle Hendricks, then a minor league pitcher out of Dartmouth who had a fastball that could not break the proverbial “pane of glass.”  In a little less than a year Hendricks had become one of the best pitchers in the game, and Dempster had retired.

As I was preparing to write this piece I had a heretical thought for a baseball fan.  Does the act of trading a player make him a kind of high-priced slave?  The player usually has no say on where he might be sent.  He has to uproot himself and maybe his family on a moment’s notice.  He immediately has to acquaint himself with an entirely new group of teammates, some of whom may be hostile because he threatens their position.

The NBA players are pushing back on the notion of easily trading players.  Star players like LeBron James, Kawhi Leonard, and Anthony Davis can almost call their own landing places and influence whom they would like to play with.  In football the Le’Veon Bell holdout at Pittsburgh is a precedent for important players to command more leverage in their employment, though the NFL seems to be very hardline in resistance.

I don’t know exactly how things will play out, but the players are destined to get a say.

Question: What are the best or worst sports trades in history for you?

 

 

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The Hole in China’s Apple

A tiny gecko can literally climb up sheer glass.

A team of robotics geeks in Denmark thought, wouldn’t it be cool if we could mimic the gecko in a robot’s gripper? Wouldn’t that be a great product?

They accomplished just that and started a company in Odense, Denmark to sell their gecko gripper, called OnRobot.

Odense, home of Universal Robots, is the robotics incubator of the world. Poetically enough, it is also where Hans Christian Andersen wrote his fairy tales. The gecko gripper concept grew from a research paper written at Stanford University in Palo Alto, which was picked up by NASA as having the potential for retrieving satellites in space. The folks in Odense saw its potential.

Would this have happened in Shanghai?

Recently, things have become quite ugly for China after 30 years of almost unimaginable growth. The Chinese leadership, starting with Deng Xiaoping, has been almost maniacal in pushing growth in China.  With shrewd planning, an industrious and hungry population, heavy borrowing, and a knack for stealing and copying the hard-won knowledge of their competitors in the United State and Europe, they have continued their ascent.

Shanghai is not Palo Alto, California, or Odense, Denmark. Companies like Huawei and ZTE have become electronics giants in recent years by developing copycat products based on intellectual property theft and industrial espionage while playing footsie with bad actors like Iran. This has been abetted by the Chinese government, which has afforded them immense lending resources as part of China’s extraordinary rush to catch up to the United States and ultimately surpass America in almost every way possible.

The Chinese leaders did not have time for the kind of entrepreneurial organic growth of a Universal Robots or OnRobot. They wanted to leapfrog the agonizing trial and error and market flops that little startups have. So Huawei and ZTE and countless other firms stole their way to the top.

They did not have to try that hard to do it. Many large firms virtually handed the Chinese their intellectual property in exchange for market opportunity. Apple’s current falling earnings are a direct result of weakening iPhone sales in China as their competitors are making nice copies for half the price. The only edge Apple has left is their high-class brand, but that apple is now more than half eaten.

Apple was not naïve about China. Its gamble was that they would make billions of dollars in China before the intellectual property theft really bit, and then they would use that money to fund research which would net the next generation of killer phones or some other monster product.

The Chinese leadership’s gamble was that the American leadership would make the same short-range gamble as Apple. In exchange for gaining lucrative markets for America’s relatively cheap commodities, the U.S. would allow intellectual property theft without retribution and the looting of the American and Western European industrial complexes by subsidized ones in China. For example, the Chinese steel industry has grown to be by far the world’s biggest, and yet it is hopelessly inefficient, as the government has run it as a make-work project for hundreds of thousands of workers.

The Trump tariffs on steel and aluminum have hurt American companies who use the materials, many of whom are our customers, as well as the Chinese. The Huawei case in which the founder’s daughter is the mouse who was caught in the trap in Vancouver, Canada, is as clear a signal as America can send to China — that things finally are changing.  It is starting to get uncomfortable for both the U.S. and China as the stalemate continues to bite.

Both countries have a huge amount at stake in the trade talks going on right now in Washington.  Shanghai is not Palo Alto.  It is not Odense. What is being exposed to the world at this moment is that despite the enormous growth in China over the last 30 years and its overarching ambition to surpass America in every way, it is weak at its core. It can be seen as similar to Japan in 1990.  Many futurists saw Japan surpassing the U.S. at that point, but despite America’s missteps, like the Iraq War, it did not happen.

China does not innovate. It mostly copies and steals intellectual property.  Its education system does not produce risk takers.  Nonconformists often end up in jail. I believe the top leaders in China understand this is a profound weakness, but it is extremely hard to address it because doing so would undermine the soft foundation of the country — economically, socially, and politically.

I think Donald Trump, the New York real estate developer and gut puncher, gets this. The amiable Bushes, Clinton, and Obama seemingly did not understand China’s basic weakness and refused to play the strong hand that they had.

The big question ahead of us is will Trump play his strong hand too aggressively and screw up the world economy, or will he find a path to a compromise? The Fed’s recent pullback on interest rate hikes was its statement that they are worried that the whole poker table might collapse.

Question: What copycat or knockoff products have you purchased?

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Ep. 3 – Part 2 of Miles Free Interview

By Noah Graff

Miles Free, Director of Research and Technology at the Precision Machined Products Association, opines on electric cars, economic patriotism and how American machine shops have evolved to thrive in today’s economy.

Question: Are tariffs aimed at China economic patriotism or a tool for the enemy?

Listen to Swarfcast in the player below.

Honda Assembly Plant in Liberty OH   (Dayton Daily News)

 

 

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