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What event in 2001 fueled China's economy, its exports, and US/Western outsourcing to China?

Click to find the answer below
China: Supply Chain Friend or Foe?

Is China a supply chain friend or foe? It is actually a very interesting and complex question.


I will also note, given our growing international audience, that I am writing this from a largely US point of view, though much of it is relevant no matter what country you live in. Some is US specific, however.


I have been preparing to write this column for some time - clipping articles, saving web links – but am moving it up in the schedule due to the “Google event” of last week.


I suspect many of you heard that headline, but did not dig too deep into the details. It is actually quite a story. Last week, Google said it had discovered a cyber attack that happened in December, in which the “hackers” were trying to access the Google email accounts of hundreds of Chinese activists. That’s what most of us heard in the headline.


That’s bad enough, but t turns out, there was more. The attacks targeted at least 20 other companies and maybe as many as 34. That included companies like Dow Chemical and defense contractor Northrup Grumman – the hackers apparently hunting for trade secrets and software “source code.”


The attacks nominally came from Taiwan, but “that are thought to be linked in some fashion to the Chinese government or proxies,” the Washington Post reported.


Gilmore Says:

"The migration of sourcing by US companies from the US or other countries to China has been breathtaking."

What do you say?

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your Feedback here

How nice. And this is just one of a series of such cyber spying incidents by China over the past few years.


I am generally a free trader, though I think the loss of US industrial capacity is reaching the point of long-term danger to the country’s interests, as I have discussed before. My focus today is not so much on global trade generally, but specifically on China itself.


Unfortunately, in a sense, “demography is destiny,” and the reality is that a country of $1.3+ billion people is at some point going to exceed economically and perhaps most other areas a country with some 330 million people, which is about where the US is. (The population of European Union countries in total is about 500 million).


The migration of sourcing by US companies from the US or other countries to China has been breathtaking. As we noted last week in our review of the Decade in Supply Chain, Chinese imports were $100 billion in 2000, and $338 billion by 2008 – that’s an astounding 238% gain in just eight years. Incredible, when you think about it.


And those flows were mostly one way: the US trade deficit with China in 2008 was $268 billion – meaning only some $70 billion of goods were exported from the US to China.


That fact alone obviously concerns many business, political, and labor leaders, on many levels. To cite one of the most prominent, China now owns more than $1 trillion (with a “T”) in US government bonds, on which the US is dependent to fund its huge budget deficits. That gives China quite a bit of clout regarding US economic policy – a direct result of soaring US trade deficits with the country.


But in the end, here is my point: some of this would be worrisome enough if it were occurring with a solid “friend” – let’s say Japan. But does it not often look like China, despite our clear economic integration – is also about as much a “foe” as friend? And does this change about how you think might think about these trade issues?


From pure economic and trade perspective, China is rising rapidly by every measure. In 2009, it surpassed Germany as the world’s largest exporter, and the US as the world’s largest automobile market. The researchers at Global Insight last year predicted that China might surpass the US as the world’s largest manufacturer in 2010, though the National Association of Manufacturers disputed those figures and made a strong case the US lead would be maintained for some time. But certainly not forever.


The Google incident, says the respected Financial Times, “is a harbinger of increasingly stormy relations between the US and China.” FT columnist Gideon Rachman adds: “Welcoming the rise of a giant Asian economy that is also turning into a liberal democracy is one thing. Sponsoring the rise of a Leninist one-party state, that is America’s only plausible geopolitical rival, is a different proposition.”


That, I guess, is my point. Regardless of how generally you feel about global trade, offshoring, etc., (I mostly favor it), wouldn’t the US overall be better off if much of that $338 billion imported from China was spread around to a mix of other countries?


One challenge, of course, is that while perhaps the dynamics with China overall are not good for the US, they may be just right any individual company, given China’s mix of labor costs, labor skill, logistics infrastructure, etc. But in total, those individual company decisions may not be in the country’s overall interests.


Then, of course, there is the attraction – and maybe necessity – of penetrating China’s already large and someday enormous market. The move to China for sourcing is often as much about tapping into the market there as it is about low cost country sourcing. I don’t have a good answer on that one.


But consider: 

  • China is making massive investments in its military and weapons systems (15% growth last year) – much of which seems targeted at the US, the chairman of the U.S. Joint Chiefs of Staff said in 2009.
  • In my research, I found a little reported story from 2008 in which the US discovered several military groups had acquired hundreds of counterfeit Cisco routers, which highlighted not only the overall issue of counterfeits from China, but concerns the goal was to use hidden software in the units for cyber espionage.
  • China is using its huge trade surpluses and foreign reserves to buy or invest significantly in commodity resources in Africa and South America.
  • Pair that fact with the news last fall that China was hoarding a number of critical “rare earth” metals used in manufacturing (e.g., lanthanum, cobalt) – little known by most, a lack of access to these metals would create havoc for Western manufacturers.
  • We reported last year on the brutal treatment of the local employees of many of these mining and commodity foreign Chinese interests in those developing countries by Chinese managers. Scary, if accurate.
  • Last year, while in negotiations with mining giant Rio Tinto over pricing over iron ore to feed its steel industry, China jailed four company executives in China over “industrial espionage,” a move that should send a chill down the backs of foreign managers there. They are awaiting trial.
  • The country routinely executes government officials and business managers over charges of corruption and even incompetence.
  • Several years ago, Westinghouse won a contact to build nuclear power plants in China – with the condition that the company turn over its nuclear technology to China a few years after that.

Does none of this matter? Should we continue to move sourcing to a country that repeatedly hacks the systems of our country and companies, that is making moves to get a scary advantage/lock in many commodity areas (mostly metals/minerals), that forces Western companies to turn over their technology know how, that jails a company’s executives in the middle of tense price negotiations, etc?


I know there are 1.3 billion potential customers there, but think we may be hastening our own demise. Let’s rethink the China game – or is it too late?.

What are your reactions to Gilmore's thoughts on China? On the mark - or are the concerns overblown? Is it too late to change course? What do you think companies or the country should do? Let us know your thoughts at the Feedback button below.

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We received some great letters on our First Thoughts piece on RFID Six Years Later, which looked at the trajectory of RFID since the launch of the EPCglobal organization in October, 2003.

That includes our Feedback of the Week on this topic from Peter Grimlund, CEO of Seeonic, Inc., who says the bigger issue is what can be done with accurate, real-time information, whether its source is RFID or otherwise.

Curt Carrender of Thinkify says tag costs should not be an issue for deployment, Belgium's Roger Bouvrie offers his company's experience with bar coding and RFID, and Code 3's Ray Scott says we all need to look more closely at what the DoD is doing with RFID.

All these great letters below.

Feedback of the Week: On RFID Six Years Later:

I have been reading your editorial pieces, listening to your industry observations, and learning from your web presentations for several years.  I have learned a great deal in that time both from you and from prospective customers of Seeonic about where the application of RFID Technology can deliver the greatest value.  Earlier this week I sat in on the “New Ways of Working Together Part 2” webinar.   My principle take away was that all of the players in a supply chain continue to struggle with the issue of data sharing and interpretation.  This is where we believe RFID based solutions will have their greatest impact.  We believe that the key to moving forward with any RFID solution must begin and end with how the application of the technology allows all of the players in a vertical, from retailers all the way through to manufacturers, to satisfy consumer demand.  To truly satisfy consumer demand, one must have product that the consumer wishes to purchase available at the location, (POP display, permanent fixture, etc.) when the consumer decides to reach out, remove it from the shelf and stuff it into their shopping cart.  When the product is not on the shelf, from a consumers perspective, things go off the tracks pretty quickly. 

I believe you mentioned in the last webinar that the industry has been attempting to solve the out-of-stock problem for decades and can’t seem to get fixed.  And they won’t do long as point of sale systems and WMS systems are the data proxies for what is available for sale on the sales floor.  What all of the industry needs is the ability to automate inventory counts of items on the retail shelf and to communicate that “one version of the truth” data to all stakeholders in the supply chain.  Knowing on hand inventory available for sale where the consumer expects to physically see it and sampled frequently enough to see fluctuations in demand, will allow all players to generate better forecasts of demand and improve on their business processes.  Consumers will be satisfied because when they walk into a store to purchase something, they actually get to buy it.  Retailers and their suppliers will be pleased because they can increase their sales by decreasing OOS and they can lower their merchandising expense because they are substituting technology for manual inventory systems.

So for me, it is not about whether RFID technology has or has not lived up to its early billing, but rather it is about what business can do with accurate, near real-time, item level information, one version of the truth if you will, served up to all partners in the supply chain. Can they collaborate to satisfy me as a consumer.  I will spend my money where I know that product is available for me to purchase when and where I chose to buy it.  The retailers who figure out how to use RFID technology to get just in time replenishment merchandise into the store for me and their consumers to buy will have a competitive advantage over others in their space.

And that is the opportunity that Seeonic addressing.  Using perpetual inventory counts of RFID tagged items on a retail display to drive better replenishment processes and more accurate demand forecasts.

Thank you for your insights.  I look forward to continuing my learning at SCD.


Peter H. Grimlund


Seeonic, Inc.

More on RFID Six Years Later:

I enjoyed reading your article. Thanks. I have a slightly different take on your statement:

"We need to find a way to get the cost of tags down another ratchet from current prices, and think we will."

I tend to think of the value proposition more than the actual cost. If a tag doesn't offer value at even 2 cents it will still be too expensive. Many manufacturers now offer tags at less than 10 cents with a few offering inlays at less than 7 cents in low volume.  If the manufacturer, the retailer, the supply chain, (or the end user for that matter), can't find 10 cents of value it may be highly possible that they can't find 5 cents of value as well.

The industry's almost sole focus on tag cost has been a double edged sword. On the positive side for cost, it has caused a few manufacturers to participate in a slow march toward zero in hope of becoming the sole survivor and tag commodity king. This march has been brutal for the suppliers but has resulted in an amazing price drop. Whether the industry has a 5 cent tag or not the price of a single chip based UHF tag has gone from over a dollar in 1999 to under a dime in 2009. That's pretty spectacular whether you consider inflation or not. Most of these tag manufacturers are now attempting to use additional features like extra security or memory to differentiate themselves rather than price. Their margins are that thin if positive at all. So anyway, we do have cheap tags, and I acknowledge that you and others want them even cheaper.

I think the negative side of all this focus on tag cost was that too few focused on real tag value. The thinking was, "When tags cost 5 cents then everything will be wonderful." without a lot of thought about what that meant as far as added utility. After all, let's assume that a tag cost a dollar and gave you $1.50 worth of value. That's kind of extreme I know, but imagine this $1.00 tag is authenticating your kids flu shot and a lot of fake ones are out there. The $1 tag might be OK for that example. On the other hand, let's imagine that we do have an internet of things. If someone doesn't get 2 cents worth of value by knowing that their tomatoes are in Toronto right now then the tag is not worth 2 cents to them. Real and returned value is the key.

My CFO likes to always pose a question when dealing with potential customers. He says, "Lets imagine that tags and readers are free. What would you do and what would that be worth to you? " This often helps us evaluate the effort and both of us focus on the solution. So I would propose the same question to you Dan. How many tags would be fielded if they were free in 2009? I would guess that the number wouldn't be a lot bigger. Anyway, I think it is an interesting question and points out both value and the many other costs in the equation.

Your comments on Wal*Mart are also interesting and I agree. Wal*Mart is another a fine example of the double edged sword that seems to hang over RFID. On one hand they completely accelerated the whole industry with their early mandates. We would not have the EPC Gen 2 or the ISO-18000 6C standard at all if it weren't for Wal*Mart. On the other hand, these same mandates caused a lot of resentment to the suppliers I know. "We tag it and you get the value?" seemed to be a pretty common sentiment in the early days. People forced to do something will take the cheapest possible route. As such the focus on tag cost, (and slap and ship), as opposed to real value discovery on the supplier's part. Of course this has all changed somewhat but the same supply chain managers are in place and it may take a while to get that taste out of their mouth.

So again thanks for the article and keep up the great work.

Curt Carrender

I have being following very closely the RFID programs at the APICs exhibitions and presentations in the past with lots of presentations from Edmund W. Schuster at Auto ID Labs.

In our company we have applied auto ID, but at the barcode level and it already meant a lot to us. At last we knew – cross company – were all our goods went.

Although we run a multiple instance ERP application, we made the bar-coding information – cross company, so that the identifiers can be used wherever in the group, whatever legal company you are. This was the most profitable approach. Puratos counts some 70 legal companies in about the same amount of countries and in more than 120 locations. We produce in 47 factories and we still deliver the goods ourselves at the customer’s doorstep.

The RFID stayed in my head, but the RFID price compared to the SKU price was too high to implement it. On average, close to 1% cost increase per SKU and about the same amount per Sales$.

In my opinion, RFID becomes interesting, when you are handling goods were the importance of:

  • theft is high
  • location is essential
  • cost is relatively low compared to the SKU
  • the customer drives it

Till there my personal comments.

Roger Bouvrie

Chief Technological Advisor

Puratos HQ Belgium


You need another column - this one addressing the Department of Defense use. 

I have met a number of USTRANSCOM people from Scott Air Force Base near St. Louis, and they are "true believers" in RFID.  Check it out - Dr. Ike Kwon at Saint Louis University would be a good contact.  

Ray Scott
VP-Supply Chain Management
Code 3, Inc.



What event in 2001 fueled China's economy, its exports, and US/Western outsourcing to China?


China was admitted to the World Trade Organization (WTO).