This is just a guess, but I’m betting the following conversation took place recently between Warren Buffett, who owns $50 billion of Apple shares, and Tim Cook, CEO of Apple Corporation.
“Hi, Tim, it’s Warren. I’ve been thinking about Apple’s China exposure, Tim.”
“Yeah, me too, Warren.”
“Tim, what if this Huawei stuff really gets out of hand, or Trump and Xi start to snarl at each other in Japan, or Hong Kong really blows up, do you think China might retaliate against Apple?”
“Yeah, Warren, that’s our biggest nightmare. We have no backup plan in place, honestly.”
“Well, Tim, I think you better start putting one together, fast. I don’t think you or I are Donald Trump’s favorite.”
I think all over corporate America some flavor of this discussion is taking place. Dependency on China, and even NAFTA darling Mexico, is a troubling fact of life for companies dependent on a world supply network. That reliability on China and Mexico that seemed so comfortable just a few years ago is now suspect.
People often ask me if the tariffs have had much effect on the people we do business with. The easy answer is “No” because China has absorbed most of the steel price increases or the market has just accepted them because of their ubiquity, but the nuanced answer is a big “Yes” because they have lifted the long-term competition with China from the theoretical to reality. Reliability of supply is even more important than price. When the bedrock of reliability is eroded by political uncertainty and a doubtful “rule of law,” pricing attractiveness becomes secondary.
This is what we are seeing today with a clarity that was clouded by the rose-colored glasses business people wore from the Clinton through Obama presidencies.
Theft of intellectual property was the price companies like Apple figured into the profit margins that fueled the stock and provided vast reserves for research for new products. It could be tolerated by Cook and Buffett. But disruption of the supply chain, even just a whiff of a scare – that was a curse.
For Silicon Valley, China is key to supply, but for the machining world Mexico is our China. In the automotive industry Mexico is the liver and kidneys of the supply organism. GM, Ford, Daimler, Toyota, etc., cannot survive anymore without the plants in Querétaro and Metamoros. In Mexico, like in China, price is important, but reliability is number one. NAFTA has brought good prices, stable labor relationships, and proximity to American factories, but the new regime in Mexico City, a more aggressive worker attitude, and the recognition in Mexico that the United States and U.S. companies are terribly dependent on the Mexico supply chain have radically changed the dynamic. Add in the Central American immigration pickle and Trump’s quixotic tariff gambit and suddenly companies have another supply chain nightmare.
In recent weeks labor disruptions at automotive suppliers, with big ransoms demanded and exacted to go back to work, have sent chills through the automotive world from Detroit to Stuttgart. The realization that companies can be held hostage and that the rule of law is a hollow theory in Mexico City have challenged auto companies and Tier One suppliers to wake up to the need for dual suppliers with at least one in the U.S. This cannot happen overnight with bidding and PPAPs, but the will is there, finally, to bring work back to America. The abject fear at a Ford truck plant or a Camry assembly facility that for want of an $8 part the whole joint can be stopped in place is moving the needle at last.
The trap of “just in time” is also becoming apparent. It just does not work if Mexican workers are blocking the suppliers’ doors.
We are in the early stages of redundant sourcing. It will change the outsourcing world that has been flowering almost unimpeded for 25 years in China and Mexico.
The countries are very different, but the supply issue they share affects our machining world in a profound way. The “game” has finally changed.
Question: Has the move to dual sourcing affected your company yet?