My eye was caught by a recent article in the WSJ that suggests that currency volatility presents companies with an additional type of supply chain risk when they fail to localize their supply chains within the EU. The story cites the case of Mazda, which, despite slashing "procurement and production costs and localizing more manufacturing" like other global automotive OEMs, is still struggling to overcome the hurdle that a strong yen creates in the EU. The main challenge for Mazda is that when compared with competitors such as Nissan, which claims that "87% of its cars sold in Europe will be manufactured there this year … [and which will feel] no impact from the weak euro on operating profit … Mazda has no production in Europe." The euro has steadily declined over the past two months, and the depreciation will further "highlight the weak spots" between those OEMs that have localized procurement and production, and those that have not.

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Corporate scandals and arrests in the West often skirt the business headlines, making news one hour and quickly getting buried the next. The case is a bit different in China, however, which appears constantly ready to point a figurative finger at the corrupt practices of a certain class of executive: the entrepreneur. Given this, when it comes to supply risk management in China, it's important to do your homework around the ownership structure of the companies with which you work. More on this in a minute.

First, the news. From a Wall Street Journal article we learned that "Huang Guangyu, once China's richest man, has been formally indicted on charges of insider trading, illegal business dealings and bribery." While this is unremarkable on the surface, the piece quickly digs deeper into the matter.

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If we did not already have enough to worry about when it comes to global sourcing supply risk, we can now add a new -- well, old, but that's another story -- category into the mix: six figure strikers. That's right -- the California dockworkers are once again flexing their six-figure muscle. According to a recent story in The Trucker (hat-tip World Trade), "West Coast shippers said … that dockworkers at three California ports are intentionally slowing cargo movement and causing shipping delays as the two sides continue to negotiate a new contract. For nearly two weeks, workers at the ports of Los Angeles and Long Beach have been taking coordinated breaks and working slower." For those who are not familiar with the dockworkers this article, now six years old, has got some great facts and figures lest you begin to sympathize with these slowdown actions.

Just to name a few: Last time there was a strike, the dockworkers refused average salary increases to $114,500 and $137,500 depending on role. And in 2002, the cost of benefits was in excess of $40,000 per dockworker per year. Today, I'm estimating that the total compensation and benefits package for a dockworker is close to $200,000 per year -- maybe more. Of course there’s a great irony in this. And that’s that the workers across the Pacific in China are making 1/20th of this amount to do the same job. A metaphor for how union muscle has made the US uncompetitive in the world market for all but the highest value-added goods? I think so.

- Jason Busch

Over on All Roads, Richard Brubaker has the scoop that the Chinese government is considering seriously curtailing factory production between July 17th and September 20th of this year. This is not an April Fools joke (like my post about quitting this blog yesterday). According to Richard, the Chinese government is mandating certain businesses "to cease all manufacturing efforts near the large cities of Beijing, Tianjin, and even Shanghai due to serious pollution problems they are facing. Shut down will occur between July 17th though September 20, 2008 ... Now, before everyone freaks out, this is still very much speculation and I have been unable to confirm the scope of the shut down." Richard notes that his contacts in Beijing suggested that there are two manufacturing areas likely to be most impacted: "coal and raw material exploitation industries are expected to see shut downs (again, not sure of scope) [and] high energy users and heavy polluters". Stay tuned as this story develops. I'll keep Spend Matters readers in the loop as I learn more about what is going on. A final note: these rumored shutdowns are far more severe and widespread than what everyone expected from the factory closures due to the 2008 Summer Olympics in Beijing.

- Jason Busch

Compared with India, China often comes out looking like the far more advanced country from an infrastructure perspective. But looks can be deceiving, especially when available demand outstrips capacity the energy sector. After all, without power, you don't have the means to operate a production line for any type of continuous period (generators are too expensive in China for most factories to have them as a back-up option). I recently learned of the current energy crisis from a few sources including this Industry Week article as well as this post from Lisa over on MetalMiner. According to Lisa, "I received a phone call last evening from a friend in Shanghai. He had asked me if I heard about the power shortages and energy crisis in China ... Well, according to my friend, plants throughout the country (even in provinces not greatly affected by the shortages) are having to curb production. A mattress innerspring manufacturer that was scheduled to ship seven containers this month informed their customer it would only be filling six, because it didn't have enough electricity to complete the full order."

Clearly, this is not an isolated example. Supply disruptions are occurring across the manufacturing sector thanks to an acute shortage of power in key areas. But where can we trace the shortage back to? The combination of communism conflicting with the free market, that's where. Lisa writes, "At issue is a change in government policy, essentially allowing coal prices (which generates 80% of China’s electric supply) to float freely on the market according to this Reuters article whereas power tariffs are fixed. Power plants then make the decision to shut down capacity as opposed to producing at a loss." And that, my friends, is one example of the many growing pains which we'll continue to see as China transitions to a truly market-based economy. And we'll all end of paying for it either in higher inventory levels -- as we create buffer stock to guard against future disruptions -- or through the added costs of creating alternative supply options.

- Jason Busch

Even though I'm still skeptical of Africa as a key developing market from a sourcing perspective relative to China and India in the short-term, the region absolutely holds significant promise for the future. But given the extreme poverty in parts of the continent, should we apply the same ethical sourcing standards (e.g., no child labor) that we do to other developing markets? A recent op/ed in Supply Management challenges this notion. The author, who writes from Africa, questions whether it is "morally 'wrong' to give dignity to such people through outsourcing production to their countries and allowing them to earn a small wage? Or would the world rather western companies watch children suffer continued impoverishment than risk violating ethical trading codes?"

On the contrary, the author suggests, "Isn't it morally wrong for established businesses to implement 'no sourcing' policies for countries in Indo-Asia, China or Africa because for them it's 'ethically wrong'; when people in abject poverty would resort to the most drastic actions just to earn enough to provide a day's meal ... It's absurd that the western world is waiting to enforce workers' rights by its standards before extending its supply chains into Indo-Asia, China and Africa. A worker's basic right is the ability to afford food, clothing and shelter from their labour/earnings." Statements like this are further proof in my book that the "fair trade" price should be the market clearing price, at least when it comes to parts of the world which need an initial push to get their export markets going. What do you think? Should we apply the same "ethical" standards to regions of the world which have significant export promise, but a severely impoverished population who would be happy just to have any work at any wage, just as we do to regions like China and India that have at least a couple of decades head start with their export economies?

- Jason Busch

One Wall Street Journal blog that I've enjoyed reading of late is titled Real Time Economics. In a recent post, the authors show US manufacturing activity remaining above recessionary levels for now. Citing recently released ISM data showing a negligible drop from October to November, the authors quote an ISM representative noting that "current recession fears -- the credit crunch, subprime-mortgage meltdown, and housing market distress -- have less to do with manufacturing and more to do with the services industry." This means that the ISM non-manufacturing report due out Wednesday will be all the more interesting -- especially as a basis for comparison with the manufacturing one. Still, the US can't permanently export its way out of a manufacturing downturn. According to one analyst who examined the recent ISM data, manufacturing "backlogs are declining" and "export growth alone [cannot] prevent an overall decline in manufacturing output in the current quarter." Still, with the Euro only a couple of cents off its all time high against the dollar -- which occurred in late November -- all things are possible if the United States can become Europe's low cost country sourcing market of choice.

- Jason Busch

Last week, Cessna announced that it would bring to market a new entry-level airplane at a market leading price point. The new single-engine plane, the 162 SkyCatcher, is not remarkable for its speed or agility, or even its low price point: $109,500 -- an amount nearly 50% cheaper than their current entry level plane. No, the plane is remarkable because Cessna is not only working with global suppliers to source parts and assemblies for the plane, but is assembling the plane entirely in China, working with a joint venture partner. Cessna's entire strategy, in fact, is based on a low price point which it hopes "will help keep the price of the plane low enough to attract new pilots to counter the dwindling ranks of U.S. recreational fliers. It also could lower the cost barrier for training new pilots amid surging demand for airline pilots world-wide."

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If you read this post, you already know my views on Alibaba as a global sourcing resource. But now that they're finally public as of today and trading at 155 times next years earnings, perhaps they will have raised enough capital to actually build something useful for global sourcing professionals (or they could just buy Ariba which trades at 3-4% of their valuation).

BTW ... does anyone else think that it's an absolute joke that the Bloomberg positioned them as a "B2B Market Leader"? Seriously, their coverage notes that "in the quarter ended June 30, Alibaba accounted for 43 percent of total transactions in the so-called business-to- business e-commerce market in China, more than triple its nearest rival, Global Sources Ltd., according to estimates by Analysis International ... The company charges suppliers from China and Hong Kong an annual fee to become so-called premium members, which enables them to gain preferential access to buyers." Fast Spend Matters poll: is there anyone in the Spend Matters community who actually looks to Alibaba as a critical piece of their China supplier identification and sourcing strategy?

- Jason Busch

My Shanghai-based colleague Richard Brubaker, who pens the well-known China business and supply chain blog All Roads Lead to China, has been quite busy of late offering up his prognostications on everything from the future of China quality to inland logistics in his adopted country. But he recently took a few minutes away from the blogging world to author a short piece in Industry Week about how the Internet has changed global sourcing, supplier identification, and relationship management.

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