CIPS’ Bill Michels talks China trade, other global insights: ‘Brexit. What a headache!’

“The days of chasing low-cost labor around the globe, manufacturing in one location and shipping things around the globe are numbered,” said procurement veteran Bill Michels, VP of operations for the Americas at The Chartered Institute for Procurement and Supply (CIPS).

The U.S.-China trade war is the latest development in a trend away from overseas manufacturing, said Michels, who in part 2 of our Q&A also discusses automation, reshoring, protecting intellectual property, and the fallout of Brexit if the U.K. splits with the European Union at the end of this month.

Michels, whose career has focused on global trade, has been with the well-known group for professional development and certifications for a year and a half. And we caught up with him to discuss the state of procurement in an article yesterday.

We also tapped into Michels’ experience with Europe and China to get his take on current events and how markets and supply chains are shaping up for the future.

Q&A

Spend Matters: You have some background with China as well as the UK. How has the U.S.-China tariff battle reshaped supply chains in China?

Bill Michels: Forgive me for sending you to the CIPS USA website, but there’s a podcast on the topic there, “The China Sourcing Syndrome,” and an article on that subject.

The takeaway in those is that a lot of smart companies were migrating what they could easily move out of China long before the trade wars started — mostly because the cost differential has been shrinking and the risks of long supply lines have been growing. Based on earthquakes in Japan, floods in Thailand, climate changes, regulation and other factors, global companies have been building smaller duplicate factories closer to the markets they serve. For instance, as China has become a richer country with a huge middle class, it has become a market to serve as much as a location for production.

There is also a reshoring component to bring manufacturing back to North America, using automation to negate the need for low-cost labor. Robots often improve quality, and they never get tired. The flip side of that, of course, has been the decline of the U.S. tool and die industry. It followed factories overseas and now the workforce has been depleted — the craftspeople have long gone.

Meanwhile, other countries have been building infrastructure and skills to compete as low-cost sources — Vietnam, Malaysia, Mexico and even a few African nations are examples.

So the trade war with China is likely to accelerate a trend that had started long before the first tariff — although there are technology companies with huge investments in China that won’t be able to move as quickly as perhaps they would like.

One key issue for companies working overseas is protecting their intellectual property (IP). Will the trade talks be able to resolve this with China? And how do companies working overseas anywhere protect their IP?

Protecting intellectual property might be the most important goal for U.S. businesses sourcing from China, but it’s very difficult to believe that U.S. negotiations will be successful in defending our companies’ IP. The Chinese are too intently driven to compete with the U.S. for technological leadership to give up their efforts to benefit from what we know. Even if there is lip service to protecting IP, I’d be surprised if there is commitment to keep their hands off.

Savvy procurement professionals and their organizations are holding back their critical IP, only outsourcing non-critical components. It is safe to assume that there is little to no protection, and buyers need to assess the risks.

Overall, it is essential that buyers carefully select which components to outsource and where they outsource. Besides protecting intellectual property, companies should consider corporate social responsibility factors, including fair wages, forced labor, corruption and environmental considerations.

The bottom line is there are changing dynamics and procurement must be flexible and agile to manage them.

What’s your view of Brexit? And how should North American businesses be preparing for the split?

Brexit. What a headache! U.S. firms could, in the long run, benefit from trade barriers between the U.K. and the European Union, but in the short term the uncertainty of it all is what a Brit might call “a bloody mess.” If there’s a hard exit, it could take a year to get all the ports up to speed on managing all of the thousands of categories of goods that cross borders each way. U.S. supply chains are quite likely to be caught up in customs delays, even if their goods are only in transit through the U.K. to the E.U.

The most common tactic right now is simply stockpiling inventory on the destination side of the border — either way. U.S. firms also should be mapping their supply chains — seeing if there are components that have manufacturing inputs from both the E.U. and U.K. They may be several tiers deep in the supply chain, but those will create the first big impacts because they are likely to be subject to tariffs and border delays starting November 1.

How do you see the U.S. tariff dispute with Europe having an impact so far, and how will the dispute be resolved?

At the start of my career, we made endless calculations to determine best landed cost as a criterion for selecting suppliers and origis. It is essential that procurement professionals consider currency as well as cost, understand the customs harmonized code and create models for what they are sourcing. In the late 1980s I was working with a pharmaceutical company that built a supply chain with multiple moves in more than six countries that offered tax and cost incentives for manufacturing. Get used to local content laws — insistence that a certain percentage of materials and labor must come from the manufacturing country — as they are coming back.