Perhaps China’s centralised supply chain won’t last forever

20.42, Wednesday 1 Apr 2020 Link to this post

If I was in charge of industrial policy, I’d be betting against the hegemony of the centralised supply chain. That is: no more getting everything manufactured in China; instead, move to local manufacture and many more, smaller, networked factories. I’m talking over a couple of decades.

It’s worth thinking about why centralised supply chains exist.

Here’s an interview with Liam Casey, founder of contract manufacturer PCH International (and who is, by the way, a good egg) – which means you probably have stuff in your house that they’ve made, but it’ll never say that on the label. I can take a product from the production line in China to a consumer in San Francisco in 4 days, 5 hours, 14 minutes. We’re 3 hours from all the factories we work with, and we’re 3 days from 90 percent of the consumers around the planet that buy our products.

I can’t remember where I heard this observation, but these timings means the entire transaction is entirely inside the credit window: a consumer can order something on a website, then the material is ordered, the item is manufactured, packaged, shipped, landed, and paid for, all before the invoices from the suppliers become due. That’s the reverse of how inventory usually works, where material sits on your balance sheet – and both loses value as it ages, and adds risk because demand might change.

A manufacturing cluster gives you that economic advantage, plus optionality over suppliers (reduces risk and cost), easy access to expertise, etc.


BUT.

Shipping costs are increasing. Shipping is a carbon nightmare, and fuel rules are changing which will hike costs hugely. As we get more serious about climate change, that trajectory will continue. So how does that change the economics? And what other numbers are changing that I haven’t run across?

Maybe - just maybe - local manufacturing is on the verge of making sense. From this article about Arrival, the new(ish) UK electric van startup: Electric van maker Arrival has secured a €400m (£339m) order for 10,000 vehicles from United Parcel Service (UPS) … The purpose-built electric vans will be rolled out in the UK, Europe and North America starting this year and continuing until 2024.

And:

The first vans have been built at the company’s first “microfactory” in Banbury, Oxfordshire, but others will be made close to their end markets, likely near major markets such as New York and Los Angeles.

The UPS deal implies that the base price of an Arrival van will be about £34,000, compared to a £27,900 sticker price for a new Ford Transit with an internal combustion engine – although with lower maintenance and fuel costs the total cost of ownership for electric vans could be lower.

So for at least one product - this electric van - the calculus has changed enough such that it’s worth manufacturing locally.


The hegemony of manufacturing in China is assumed. But my feeling is that the threshold between centralised and local is a fine line, and it’s closer than it looks.

I was reading recently about loo paper, because of course I was. Apparently it’s always made close to the place of sale because it’s cheap and not very dense and so disproportionately expensive to ship. So where else are these fine lines, and how quickly could we tip over them?


Another interesting data point: Ocado investing in vertical farms. That is, Ocado (massive UK grocery delivery firm, and now a platform supplying software and fulfilment centres to other territories) is investing in herbs and produce that can be grown in racks, indoors, right in the delivery depot.


I imagine the reasons for an economic cluster existing are similar to the reasons for a firm existing. As explained by Ronald Coase: Firms exist to economize on the cost of coordinating economic activity. That is: finding people to buy shit from costs money. If all the stuff to buy is in one place, it’s cheaper.

But at a certain point, coordinating activity can be automated. That’s the internet. That’s machine learning. Routing supplies between factories, that’s packet switching and it was invented in 1931.

So imagine the numbers in the equation change… long-haul shipping gets more expensive; the internet means it’s easier to have lots of smaller factories that supply interchangeable parts to the bigger ones; the drivers of mass production diminish…

Hang on, mass production? Well mass production is tied to mass consumption is tied to mass marketing. None of the three precedes the other. But the logic of it all comes from a very particular era of distribution: physical shops, and awareness built using broadcast media (TV, newspapers). Think department stores. Brand is key.

But now we’ve got micro-targeted advertising and e-commerce. It’s absurd to stock physical stores with items that probably won’t be bought, just to make a particular size and colour available. And there’s no ABC1 sociodemographic group now, people form their own communities. You can launch a micro-brand on Instagram in an instant (and either keep it niche or scale it to billions). Where’s the requirement for mass anything? The logic collapses.

So maybe the logic supporting centralised supply chains has collapsed too.


Let’s not even get into (gestures ineffectually) the current situation. It’s clear now that every country needs its own manufacturing base so that - when push comes to shove - it can be redirected to make what needs to be made.

Expect government incentives to support local (or at least national) manufacture in the coming years.


I don’t know what this future world of local manufacturing looks like. Not 3D printing, that’s too far. But maybe final assembly happening in many, many towns, each local to a handful of markets in a hub and spoke model? Maybe more shared components to allow that… what if all shampoos, cleaning products, fruit juice, etc came in standardised bottles, so packaging could happen in the supermarket warehouse? How would you industrialise packaging-free zero waste shops?

But yeah, if I was in charge of the UK’s industrial policy, I would assume this was the destination for 2040, and then invest to build towards that future.

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