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Unwind from China? Can It Be Done?
This is a subject that has come up first in the comments with the @jameslileks post “Watching the CCP Press,” and which @iWe explored further by asking “whether one would trade with Nazi Germany.” We need additional information, indeed hard data, to even begin to look at the practicalities. Some here have mandated that we somehow absolutely cease trade with China. Others (and indeed most, I should think) would argue that an absolute embargo is both undesirable, and indeed impossible in any situation short of open warfare, but that we should certainly reevaluate what we are trading with China, and how we are doing so.
But to even have that discussion we need to know something of the extent of what we buy from China (and really, from everywhere else too), and how that really affects us, otherwise, should the absolutists be granted their immediate wish and all trade cease, the results may be distinctly unpleasant. I own and run a company that manufactures electronics, and so, at least as far as electronics go, I do have rather a lot of insight into what exactly comes out of China, and whether alternatives exist. I have done a Country of Origin query on the bills of materials (BOMs) for a couple of my products, and will detail those below, and what the implications are.
Product 1:
Product one has a total of 27 separate parts, with 16 unique component types (i.e., several are used multiple times).
- It uses 4 different resistor values, and a variable potentiometer (an adjustable resistor). The fixed resistors are made in Israel, the pot is made in Japan. There are substitutes made in Japan, China, Taiwan. Resistors are commodity parts.
- It uses a single capacitor, which is made in Japan. This is a specialized part, sole source.
- It uses 1 schottky diode and 1 zener diode. These are commodity parts, but 90% of these are now made in China, with the rest made in Taiwan.
- It uses a transorb made in Morocco (with dies made in Europe)
- It uses a single 8-bit microcontroller made by NXP (who bought out Freescale, who was spun out of the ruins of Motorola in the early 2000s) in Taiwan. This is a sole-source part.
- It uses a single power MOSFET. This is made in Malaysia, but the dies actually come from Europe.
- It uses several stamped and plated brass terminals. These are made in Pennsylvania.
- The circuit board is made in Illinois.
- The aluminum enclosure is made 20 minutes from my shop (and ask Alcoa where the metal came from).
- The adhesives holding it together are made in Cleveland, Ohio.
Product 2:
Product 2 has 42 different components, with 27 unique part numbers.
- It uses 3 different resistor values. The resistors are made in Israel (see above).
- It uses 4 different values of resistor arrays. The arrays are made in Japan.
- It has 1 tantalum capacitor, which is made in El Salvador (but others in this same series are made all over the place).
- It has 3 different ceramic capacitor types, which are made in Malaysia and China.
- It has a capacitor array which is made in Mexico.
- Same diodes as above.
- Same transorb as above.
- Transorb array also made in Morocco (with dies from Italy)
- All LEDs come from China (China has basically cornered the world market on LEDs).
- The microprocessor was assembled in the Philippines, and while I do not know for certain where the die came from, I’m guessing Europe.
- The OpAmp was assembled in Malaysia, but the die came from the USA.
- The regulator came from Mexico
- The power MOSFET came from China (sole source, no other options available)
- The connector came from Mexico
- The circuit board from India
- The plastic case from a local plastics shop
- The adhesives from Cleveland and New York
- The wiring harness assembly came from China (I could have gone domestic, but at 4x the cost, which for this type of product would price me out of the market).
Okay, this doesn’t look too bad, right? And we’re assembling this all here in Ohio too. But that is not the end of the story.
During the COVID wave’s first crash through China, a number of component manufacturers started putting out ECNs (engineering change notices) when they could not obtain needed materials or supplies from China. Most of the components listed above ship on what look like rolls of movie film, with the parts in tiny pockets on the miles of tape. There is always a clear-plastic cover tape running over the pockets to keep things in place too. The tape material ranges from paper to plastic. And these reels of parts themselves are shipped either singly or in stacks in cardboard sleeves and boxes. Turns out that Wuhan is one of China’s paper hubs, and they were making the cardboard that plants all over the region were using, and when then was unavailable then other sources had to be found in a hurry, and then (this being a high precision field) qualified. Delayed some parts shipments by weeks, or even months. Some of the plastics too came from China, though plastics (unlike forests of trees) are fungible and rather easily sourced.
Diodes are very old technology — they predate (and indeed made possible) the radio — so unwinding that from China is theoretically easily feasible, but economically senseless at the moment. Yes, you could adapt Intel’s state-of-the-art fabs here in the US to made diodes by the billions if you needed to (and do so quickly), but they have most of the world market on high-end computer CPUs, and it’s better that they continue to focus on those. Everything else on my list that comes from China? It’s either old-tech too, or (like the wiring harness) labor-intensive. No US or Mexican cable house could come close to China’s prices on those, and that harness’s cost is already is 50% of the product cost — going domestic would force me to raise prices to an uncompetitive level. Only other option there would be putting in my own harness shop, but that would require me to hire another 5 people, and/or make a capital equipment investment in highly automated cut-strip-terminate-insert equipment (well into the six figures) — I don’t make enough other wiring harnesses to ever pay for that.
Mind you, this is just a microcosm of worldwide manufacturing, and I did not even touch on the raw materials used in these parts (Conflict Minerals regulations mandate I trace those too, by the way), which come from all over the world. Tantalum, a material used in high-precision small capacitors, only comes from 2 major regions of the world: Russia and Congo. A lot of the world’s tungsten comes from China. Put simply, the further upstream you go in the supply chain, the murkier the origins get, and the more the sources cross paths back and forth with each other.
The Chinese government is tyrannical. The CCP is immoral. They are a strange and frightening blend of Maoism, Nazism, and Wilhelmine vainglory — a sort of horrific reincarnation colonial-era Europe with modern methods. Can we totally embargo them? Not anytime soon, and not if you insist on keeping your current standards of living and disposable income. China took over 20 years to get where it is in the world economy, and goods and services ebb and flow through there more than you might guess. Should we reconsider what we buy from China, what we sell to China, and how much control they have? Absolutely; you’d be amazed to learn what US companies are owned by Chinese fronts now. But before you attempt anything drastic, take some time to learn where the things you use and rely on every day actually come from — a total embargo now could leave you in the dark and stuck at home.
Trade is complex, and attempts to control it too heavily always are disasters.
Published in Economics
I think you’ll see this for consumer markets, because consumer markets tend to be sooper crazy price sensitive, and the company doesn’t want to be in the position of not making payroll.
Industrial markets tend not to be price sensitive.
And for government markets, well, the whole idea is to spend as much money as possible.
#31 namlliT noD
Actually, Boston-area VCs historically shy away from consumer-market-centric startups and instead focus heavily on industrial-/B2B-oriented opportunities.
(I’m deliberately ignoring the heavy tilt here to life sciences, biomedical engineering, etc., including business-process and/or EHR-type solutions solely targeting healthcare providers, pharma R&D trial management, etc.)
Yes, ultimately the B2B prospective customers’ customers frequently can be consumers, so in that sense price sensitivity considerations get incorporated into what a startup is innovating upstream and for whose manufacturing scale-up the startup is contemplating a Chinese sourcing arrangement.
For example, a high school-era friend whose startup innovated “glow-caps” for medication bottles (to remind people to take their prescribed medicines and obtain refills) at one point was pursuing a deal with McKesson as part of optimizing the latter’s whiz-bang heavily automated/robot-ized fulfillment centers.
The glow-caps weren’t trivial as technology goes, and were sufficiently out in front of the commoditization curve, notwithstanding the fact that the medication bottles with the glow-caps on them had as their destination(s) consumers’ medicine cabinets. But in any event, part of the the table stakes for gaining consideration from McKesson was a China manufacturing arrangement already in hand.
It’s not just pushing by VCs, it’s also the fundamental economics and the increasing difficulty of manufacturing some products in the US not only because of overregulation but also because so much of the supply chain (including the services supply chain) has moved offfshore.
Several years ago, I met a woman with a new startup; she was an electrical engineer and had some successful startups behind her. She was also an American Indian, Cherokee IIRC. The mentioned that she wanted to put the customer service operation for her product on her tribe’s reservation; I asked if she’d considered going another step and putting the assembly there too. She said she’d love to, but it was just too difficult in the US these days; she mentioned specifically the unavailability of certain testing facilities which are much more available in China than they are here.
My business is private, but many of my customers are not. We’re not a huge business, but several of my customers are, and they treat their suppliers as though their suppliers are also large businesses and also publicly traded or else owned by large investment groups. Drives me nuts.
The attitude I sometimes get from these guys (and why I have sometimes turned down opportunities) is that somehow everyone needs to behave like they do: “what’s your cost-saving offshoring strategy?” “What’s your threshold for shifting production to China?” “Suppliers to us must agree to annual manufacturing audits and create initiatives based on our efficiency finding,” (i.e. “If we tell you to relocate your manufacturing to China, you’d better have a plan.”). I swear, the next such company rep that flaunts his Six Sigma Black Belt is going to be hung from the rafters by it. I refuse to do business with such companies because their understandings of costs are fatally flawed.
Case in point: we presented a module to a customer that saved them hundreds of dollars in parts and labor over their older electro-mechanical wiring system. I mean, it was a total no-brainer – our $90 module, versus their $400 stainless steel box stuffed with relays, fuses, and wiring terminations. Their engineers loved it. Their accountants?
A: “So, we require all suppliers to agree to a 2% annual cost reduction.”
Me: “Why?”
A: “Because we’re buying so much, and we expect you to be able to cut costs by improving your manufacturing efficiency every year.”
Me: “Do you understand how electronics manufacturing works? We’re already as efficient as you can get, it’s all automated.”
A: “Then amortize your tooling.”
Me: “No tooling, and this is an off-the-shelf module.”
A: “We expect you to find savings, including offshoring if necessary.”
Me: “I’ve already saved you hundreds of dollars per vehicle.”
A: “That would be for this fiscal year – suppliers have to show us savings every year.”
Then they demanded annual incentive rebates. And that was why that company still isn’t a customer.
Reminds me of a story related by Clay Christensen: Someone introduced a power tool which combined the functions of several previous power tools. The buyers in the retail chains couldn’t relate to it, because they were trying to optimize the cost-performance of those *individual* power tools, there was no place in their structure for a combined tool.
A lot of of the miseries of brick & mortar retailing–not all, but a lot–were brought on by themselves.
One major reason a lot of American manufacturing moved offshore (and this is rarely discussed) is that many American investors are generally among the most short-sighted and personally nasty I have encountered. What is more, I often wonder if this is somehow baked into the American “cake”, as it were.
The conversation I cited in comment 34 is hardly unique. In the nearly 20 years we’ve been in business, I’ve had many such arguments. Large firms come swaggering in, laying down terms that would have me selling my products at a loss within 5 years. They demand yearly price cuts, demand “volume rebates” on top of those, then demand I kick in 5 or 6 figures for their “marketing budgets”. If I need to ever raise prices back up, as labor rates get higher, or health insurance prices rise, or material prices rise, I would have to beg them to let me, and such increases are often permitted in the agreements to still be less than all the rebates and such. There is zero consideration that your product actually saved them money in the first place, if not on the build then on long-term maintenance (some of our goods come a premium compared to the competition, but are massively more reliable). The more stratified the corporate structure, the worse such agreements actually are.
And it is by and large the publicly-traded or investment-group owned American-owned businesses that act this way. The German and Japanese owned business rarely have such poison pills. I had a friend who worked for years in General Motors, and he had horror stories of how GM would abuse suppliers into selling some products at steep losses while stringing them along with promises of profitable lines, and then wonder why the QC on such goods ended up being so terrible. Short-term “profits” constantly win out over long-term thinking, again and again and again, with incentives for thinking this way strung all throughout their bureaucracies in the forms of “savings bonuses” and such.
I’ve been reading a history of fur trading in North America (one of the unsung factors in the Revolution). American traders even then had a reputation for abusing their Native American counterparts, such that the Native American tribes preferred doing business with the Canadiens, who in turn had better long-term profits because their suppliers were all the more willing for being better treated.
Honestly, there are times I feel like I’m Lando and dealing with Darth Vader when it comes to supplier agreements. No wonder companies offshore – they’re pressured into doing so.
I did have one potential customer turn me down because he had no interest in solving his reliability issues – he saw aftermarket parts as a profit center.
And then people became accustomed to that situation, and some began to view any significant change as certain disaster. Evolution has wired us such that humans are far more attuned to avoid loss than investigate new behaviors.
Do it now while people are awake.
Additive manufacturing is a terrific tool, but it’s important to remember that it is, as its core, just one more tool among many, and like any tool it is at its best only when used for the right sort of work. Yes, you can use your claw hammer to remove screws, or to drive them (it had been a frustrating day, and the effect was more therapeutic than practical…), but the hammer is better suited to nails, and drivers are better suited to screws.
What additive manufacturing excels at is in making parts where hard tooling is either prohibitively expensive for the job (due to very low production volumes or custom work), or actually impossible (where the structure of the part is complicated), or where machining processes are likewise stymied.
We have a couple of 3D printers at work, and have used them to make production parts for low-volume product lines, and even to make production tooling and specialized fixtures, including parts trays for our PNP machines for really odd form-factor stuff. I’m personally waiting for metal printers to come down more in price, and then we’ll probably invest in one of those systems too.
BUT: as always you have to match the process with the tools. Additive manufacturing will not replace more traditional techniques, but it will be symbiotic with them, each expanding the capabilities of the other. I don’t ever expect to see anything like a Star Trek food replicator for the industrial world, but I do expect to see an expansion in rather more wild and creative endeavors.
Oh, and there is a house printer. Uses concrete.
For example…
One of the major US distributors of electronic components is a company called Digi-Key. They carry over 10 million products. And they’re seriously automated and they’ve got the logistics nailed.
And they now support an API. (Applications Programming Interface) This means that any software program can make an http request to the company’s site and get live data in response. Say, for a particular component, pricing, availability, number in stock. Or check on a shipment. Or shoot of an order.
So it’s entirely possible for a manufacturer to have a software program regularly monitor the availability of all the components in all the BOMs (bill of materials) of all the products they’re building, warn if there are upcoming supply issues, find alternate sources, automatically order more, and so forth.
It’s also possible to keep around all the data of all the parts that went into each manufactured unit for forensic study. Software can correlate field failures to a particular supplier of a particular component.
It’s all pretty exciting.
Avnet, Arrow, Future, TTI, and Mouser all have better pricing support at volume over Digikey, but they still haven’t brought their systems up to par. I like Digikey for small volume stuff, and that API can be useful for budgetary pricing on BOMs, but for serious costing it’s right now little more than a gimick.
I once heard someone give a little presentation where he declared that in the future we won’t go to stores for anything anymore, we’ll print everything we need around the house on our own 3D printers. What nonsense. There is a pretty good analogy between 3D printers and 2D printers. Having a printer connected to my PC allows me to print all sorts of one-off things in small quantities. But if I needed ten thousand copies of a flyer, it’s cheaper per page to have that batch printed at an old-fashioned print shop. I’m not going to be able to make a wristwatch cheaper on a 3D printer than Timex can make one in a factory.
And the materials and sub-components that go into that microcontroller and MOSFET are almost certainly sourced from many other countries, too. When people say that the iPhone is made in China, what they really mean is that the final assembly is done there. I wouldn’t be surprised if the supply chain for iPhone components and materials branches out to over 50 countries, including the U.S.
Exactly.
SE Asia in general is the worldwide assembly hub in no small part because as slick as that iPhone may be, the labor component of assembling them is surprisingly high (as anyone who has ever replaced a screen or a battery will attest). SE Asia has lots of labor to throw at assembly. I should add that the labor is skilled.
Not so much with textiles – looms and sewing machines do require skilled labor (Juki, one of the top OEMs for PNP machines, got its start in automation with looms, and looms are still a big part of their business) – but the skills are far more easily taught than electrical assembly skills and so don’t need the predicate of a reasonably educated population base. It’s something of a truism now with worldwide manufacturing that countries making their first steps into modernizing their economy start, therefore, with textiles. Colombia got a lot of the textile work we lost, but then South Korea nicked it from them, and China and Bangladesh in turn took it from Korea. Now African nations are starting to undercut them.
Watch for Africa to start doing more sophisticated manufacturing in about a decade.