I observe too many people relying on a single factory when it comes to overseas sourcing. That factory is in China, and China isn’t an easy thing to understand, even if you’re Chinese. Americans try to do business with the Chinese in the same way they do business with Americans. That is doomed to failure and extraordinarily disrespectful.
I’ve been doing business with Asia for over 30 years. I know the people, cultures, and customs of those I deal with. I have family who are Chinese nationals and friends and colleagues scattered throughout China, Taiwan, and Hong Kong. I have spent weeks at a time over there dealing with the people on a personal level and have come to know them and have formed the intangible bond called guanxi. I have something few Americans have with this region: true perspective. I read (or watch) the news and like most of you, the reports are (at best) conflicting. And more importantly, they’re grossly inaccurate at times.
It irks me when someone who’s never been to China and interacted with the people and their government makes statements with no basis in reality. Americans want this to be about politics, but it isn’t. It’s about culture and history. The only extent to which politics enters the supply chain crisis is how our sitting president at any point in time will or won’t react to a particular action by China. The least biased reporting I can find on the topic is the Economist (print), BBC (television and radio), and Reuters (print and online) and if you want solid news on this topic, I’d recommend you start there.
One thing that every knowledgeable person agrees on: President Xi wants Taiwan back in the fold, and sooner than later. He’s said so directly and clearly. The Chinese are famous for beating around the bush, so when they’re direct: watch out. His saber rattling has reached fever pitch and involved extensive military maneuvering. Xi has taken his cue from the world’s weak reaction to Putin and he expects the same: sanctions. And he’s taken steps to insulate China to reduce any effect of sanctions.
China is a patient country with a very long-term view, but it doesn’t have unlimited patience and Xi, while patient to our eyes, is not patient as far as the Chinese go. On October 6th, 2021 the BBC reported “China-Taiwan military tensions 'worst in 40 years'” and that has only gone straight downhill since. Until a few days ago, the US wasn’t even willing to say they’d support the Taiwanese on a military level which has helped fuel the uncertainty in the supply chain. There was no check on Taiwan at all.
Many don’t think the Chinese people have the stomach for massive casualties, world disapproval, and loss of trade income. They certainly won't go back to being a country of farmers willingly. But let’s define “massive.” For the United States, 3 million people is about 1% of our adult population. For China, 3 million people is a rounding error (0.002% of their population). For China a 1% loss might not be acceptable but that 1% would be 14 million people – the population of New York City. We don’t look at 3 million potential casualties the same. Lots of the Chinese army (PLA) folks are people who lost their agricultural jobs and had no skills to get new jobs. They’re (to the Chinese point of view) expendable to some extent. Look at Stalin’s army in WW2. The USA Army is all volunteer. If our army believes in the war they are fighting, they’re fierce. But you still have raw numbers to contend with and America doesn’t win on math.
China (18.3%) and Taiwan (2.6%) account for around 30% of all US imports – what countries have been most impacted by the supply chain crisis, especially in the fastener industry? China and Taiwan.
A war with China will destroy the world’s economy. The supply chain will be the least of our worries. Japan makes fasteners but not low-cost ones. Taiwan has been slowly getting out of the low-end fastener business forcing companies to look elsewhere, sometimes at the expense of quality. Europe (and Canada) makes fasteners but they’re as much as made in America parts. Vietnam, Thailand, and Cambodia make limited amounts of fasteners, but they haven’t quite got the hang of it yet.
Speaking of China, let’s talk tariffs.
When President Trump imposed the tariffs against China on March 22, 2018 saying, “China’s paying for those tariffs. Until such time as there is a deal, we will be taxing the hell out of China.” That’s from his speech – the only thing I added is the underline. This is not a political statement: presidents from every party have imposed tariffs on any number of products for both valid and invalid reasons. This is a math discussion, not political.
In all of American history, it has been shown that long-term, punitive tariffs do not work. Look up long-term tariffs that have been successful. You won’t find any. More importantly, who pays the tariff? The purchaser of the item who brings it in from the foreign country. If we buy a $5 item with a 25% tariff (as is now imposed on Chinese goods), we have to pay $1.25 to the US government. China doesn’t pay it, we do. And then we pass it right along to the customer in the selling price of the goods. The current tariff has raised almost $100,000,000,000 ($100 billion) so far out of your pocket: the GSA kindly publishes this information for all American citizens to look up. The net result of a long-term tariff is an indirect tax on the citizens of the United States.
Is the supply chain a political issue? It shouldn’t be, but it has been made into one on all sides. If you’re a Chinese company selling to a “favored” country, your material moves through the Chinese port system far more quickly than a container destined for the United States. And if you used Russian ships for your cargo (they don’t move fasteners) – you’ll never see it as it will be impounded. Does your insurance cover this? Nope. Acts of war, acts of God, acts of piracy, and acts of terrorism are excluded from insurance policies. As China inches towards war with Taiwan, American companies will look to buy elsewhere and create a worse problem. Even if Vietnam could handle more orders (it can’t) there is almost no container service from Vietnam to the United States – that cargo goes to Hong Kong (China!) or Singapore before being transshipped to the United States. (Transshipment is just like when you fly an airline – you change planes in another city on your way to where you really want to go.)
Wow, that’s a lot to absorb. Is it ever going to get better? The port complex at Los Angeles and Long Beach processed more than 19 million containers in 2021, which is 16% higher than 2020; they are forecasting a modest growth of 4% this year and will break the record again. This complex is the nation’s busiest with regards to containerized cargo. As of May 2021, there are at least 55 container ships sitting off the coast of Los Angeles (and another 70 at ports throughout the nation) however this pales in comparison to the backlog of 270 ships sitting idle off the costal ports in China. Sadly, in July 2022, the dockworkers in California are expected to go on strike (industrial action to you British English speakers) for no reason other than holding the American economy hostage. (In Mar 1, 2015 it was reported that about half of West Coast union longshoremen already make more than $100,000 a year — some much more, according to the shipping industry). As our economy tries to recover, a strike will devastate the American economy, and short of sending in the National Guard to run the ports, I see no solution.
Most banks around the world see a global recession in the fourth quarter which will help dry up demand a bit. That will help the supply chain issue but won’t help citizens of any country who will suffer.
There’s more, too. How about the exchange rate between the renminbi and the dollar? We are required to pay in dollars which are subsequently converted to renminbi. When the exchange rate changes, we can lose money. We are tied into a price when the order is placed. As currency fluctuates, we may have to pay the difference.
When China announced a minimum wage in 1994, we all knew it was the end of China as a low-cost leader. Vietnam was expected to be the go-to place. But their quality, quite frankly, still isn’t so good, though most expect they’ll probably get there one day. Right now, they’re like China back in the 1980s – their heat-treated product was horrible, and you couldn’t buy anything but low carbon nuts and bolts at first. Meanwhile Vietnamese capacity is way overbooked, just like China and Taiwan.
China has boomed. I have dear friend in China; she started off as an entry-level sales agent for a trading company in southern China making minimum Chinese wage (it’s still under US$3/hr.) in 2005 now owns a Mercedes, two houses, and owns a factory that’s bigger than Hardware Everywhere and is part-owner of a heat-treat plant. That progress has a price: your pocket, literally.
This is just a rough look at the many problems facing the worldwide fastener supply chain.
We at Hardware Everywhere, as an online fastener supplier, feel we are better positioned than most of our competitors to supply all your industrial fastening needs. One thing I do want to remind you, we are a complete source – and just because it’s not listed on our website yet, doesn’t mean we don’t have it in stock. Just ask your friendly Hardware Everywhere sales representative.
This post is the third in a series. Be sure to read our first two to get a wholistic picture of the fastener supply chain crisis:
The Fastener Supply Chain Crisis: How Fastener Suppliers Are Regaining Control