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Slower US rate hikes could help ‘buy time’, allow businesses to plan better

This video interview is owned by Channel News Asia, and the original source can be found at https://youtu.be/U_Im05ClsN0

The United States Federal Reserve’s plan to ease its pace of interest rate hikes as soon as December would bring some relief for markets concerned about the central bank overtightening too quickly, Mr. Tony Nash, founder and chief executive of data analytics firm Complete Intelligence, told CNA’s Asia First.

Transcript

CNA: Federal Reserve chair Jerome Powell has signaled policymakers could slow interest rate increases starting this month. That sets the stage for a possible to downshift to a 50bps rate hike when Fed officials gather again in two weeks.

Powell: Monetary policy affects the economy and inflation with uncertain lags. And the full effects of our rapid tightening so far are yet to be felt.

Thus it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.

CNA: But it isn’t quite a dovish turn. The U.S Central Bank Chief also stressed that they have a long way to go in restoring price stability despite some promising developments.

Mr. Powell warns against reading too much into one month of inflation data saying that the FED has yet to see clear progress on that front. In order to gain control of inflation, the Fed chair says the American labor market also has to loosen up to reduce upward pressure on wages. Job gains in the country remain high at nearly 300,000 positions per month and borrowing costs are likely to remain restrictive for some time to tamp down rapid price surges.

This is where U.S interest rates stand after an unprecedented series of four 75 bps rate hikes. Policymakers projected earlier that this could go as high as 4.6 percent but Powell says they will likely need to keep lifting rates more and go beyond that level until the inflation fight is done.

The less hawkish tone from Powell Boyd U.S market stow and the S&P500 erased losses it searched three percent. The Dow gained two percent while the NASDAQ jumped more than 4.4 percent. the 10-year treasury yield also dipped as Bond Traders dialed back their expectations on how high the Fed may push interest rates while the U.S dollar retreated.

Tony Nash is founder and CEO of Complete Intelligence joining us from Houston, Texas for some analysis. Now Tony, just looking at Powell’s comments, the first differs in some way with what the Fed and its officials have been telling us earlier in the year and how we’ll get there fast to try to reach the terminal rate. But now it’s signaling that it will get there slower. What is this going to mean for businesses and consumers in the US?

Tony: I think what it means is we’re going to get to the same destination. It’s just going to take a little bit more time to get there. So the Fed has seen jobs turn around they’ve seen jobs aren’t necessarily slowing but the rate of rise in open jobs is slowing. We’ve seen mortgage rates go up. We’ve seen the rate of inflation rise slowly.

So the Fed is seeing some things that they want and they’re worried about over-tightening too quickly. Because what we’ve seen so far is really just interest rate rises. They really haven’t even started quantitative tightening yet. I mean they’ve done a little bit maybe a couple hundred billion dollars. But they have nine trillion dollars on their books give or take.

They haven’t even started QT yet. And they’re starting to see inflation and some of these pressures on markets at least slowed down a little bit. So I think they’re saying “hey guys we’re still going to get to a terminal rate of five percent or five and a half percent but we’re going gonna slow it down from here unless we see things accelerate again.”

CNA: When do you think we will actually see that five to five and a half percent?

Tony: You’ll see it in the first quarter. You know if we do say 50bps in December and maybe another 50 in January, we’ll see some 25bps hikes after that but I think what markets the cyber leaf that markets are giving right now is just saying. Okay, we’re not at 100 or 75 in December.

I think that’s a big size that you saw today and you know. It raising at 75bps per meeting just put some real planning challenges in front of operators people, who run companies. So if they slow down that pace and people know we’re still going to get to that 5 to 5.5%, it allows people to plan a little bit more thoughtfully, and a little bit more intelligently.

I think this does relieve some people of the worries of the Fed over-tightening too quickly and it also relieves worries that the Fed is only relying on monetary policy. They’re not relying on interest rates I’m sorry and they’re not relying on quantitative tightening. so the Federal balanced approach sometime in Q1.

CNA: Okay, you also mentioned before in our past conversations, the concern that the market has been having for this week especially since it’s China’s lockdowns and you see these restrictions ending gradually. What is that going to mean for Energy prices and inflation?

We see Energy prices say now they’re what high 70s low 80s somewhere in that range. We do see a rise of say crude oil prices by about 30 percent once China fully opens. We could easily be 110-120 a barrel once China fully opens. And so there will be pressure on global energy markets once China opens. Other commodity prices will see the same because we’re just not seeing the level of consumption in China that we expect.

What we also expect is for Equity markets to turn away from the U.S. and more toward Asia. So the US has attracted a lot of investment over the past year partly because of the strong dollar partly because of kind of a risk-off mentality consolidating in U.S markets. As China opens and there becomes more activity in Asia than we would expect, some of that money to draw down out of the US and go back to Asia.

CNA: Can you look at the jobs market in the US even as we expect this potential pivot towards Asia for stock market investors? The jobs market and the picture on wages there because the ADP data shows that there seems to be a cooling in demand for labor how soon do you think we can see a broadening out to the broader jobs market?

Tony: You would have broader cooling of demand in the jobs market I think, that’s definitely hidden tech. You’ve seen a lot of layoffs in technology over the past say three weeks. And that will cascade out. I don’t necessarily see think that you’ll see that in places like energy, but you will see that in maybe finance, some aspects of financial services. You’ve seen some of that and say mortgage brokers and this sort of thing so you’ll see that in some aspects of financial services. Some aspects of say manufacturing at the edges. but I do think there’s a lot of growth in U.S manufacturing as this reassuring narrative really takes uh gets momentum in North America. And so even though we may shed some manufacturing jobs in one area I think we’ll see growth in manufacturing jobs in other areas.

CNA: Okay, Tony. We’ll leave it there for today. Thanks for sharing your analysis with us. Tony Nash is founder and CEO of Complete Intelligence.

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QuickHit: “LUV in the Time of COVID”

Avalon Advisor’s chief economist and author of “After Normal: Making Sense of the Global Economy”, Sam Rines joins Tony Nash for the 14th episode of QuickHit, where we discussed the L, U, and V recoveries in different states and industries. He also shares some interesting data on traffic congestion, CPIs, car sales, and food prices — and what these data mean for investors, businesses, and people. And what trend is he seeing to pop back up in travel and leisure?

 

Don’t miss out some of our relevant QuickHit episodes:

Proactive companies use data to COVID-proof their supply chains

Manufacturers are bouncing back, but…

We’re not going to normalize

How do we use up all the corn now?

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

TN: I’m trying to figure out when and how do we come out of this? We have our models, we have our views on things. But I read your stuff every day and what are you thinking? Where are we right now? Are we early, mid, late? Where are we now and where do you think will go in the next few weeks or months?

 

SR: So I think the answer is all three. We call it LUV in the Time of COVID. There will be an L-shaped recovery, a U-shaped recovery, and a V-shaped recovery depending on whether you look at Texas or Florida or Kentucky. Whether its manufacturing or services. Everything has its own shape. So we’re early on some, middle on some, and late on others.

 

On the overall employment side, we’re probably past peak pain. At this point, you’re mostly having unemployment benefits a hindrance to bringing people back to work, not help people keep afloat. That’s not true everywhere. Certainly, there are places that are still shut down and those people still need those unemployment benefits. But places like Texas that are reopening to a certain degree like Florida and Georgia. It’s difficult to bring people back to jobs that pay less than the enhanced unemployment benefits.

 

One interesting piece of the puzzle though is the continuing unemployment claims and you’ve begun to see the states that open actually begin to roll those down. So people are coming off those unemployment slowly. It’s not happening quickly. Florida is one of the exceptions that Florida came off extremely fast. I think that’s going to be one of the stories that’ll pick up pace over the next three to four weeks. There’s a decent chance that if we’ll continue to have these types of numbers for continuing claims. There’s a decent chance that the May unemployment number will be the worst number we see this year. You begin to improve pretty quickly. The June number, we don’t take that survey for another few weeks. That’s more than likely going to be better than May in terms of unemployment beginning to come down. So we think it’s a mixed bag. But employments probably going to improve from here.

TN: That’s good news, I hope. There are a lot of service jobs and blue-collar jobs that were laid off in the first waves. Is that right?

SR: Yeah most of them. The interesting thing is it’s fairly easy to social distance within most manufacturing facilities. So manufacturing, theoretically, can snap back a little bit faster than the services side of the economy. The services industry is going to be the laggard here. But the service industry is also the majority employer, far more important on the employment side of manufacturing.

TN: You keep an eye on things like traffic patterns and restaurant usage. What are you seeing as the rate at coming back and then what does that say about things like food prices or gasoline consumption?

 

SR: It’s snapping back very quickly on the driving side of things. That’s snapping back much faster than public transit, airlines, etc. You have the U for airlines and mass transit. But you have what appears to be a pretty sharp V in driving. Congestion is almost back to normal levels in places like Houston during rush hour. Texas generally is back towards its baseline according to most of the metrics.

 

The RV sales are through the roof. People still want to go on vacation. And if you can’t and don’t want to get on a plane and go to Cabo, you get in an RV and go to the Grand Canyon. It’s just another way to get out of the house. I got to a little bit of trouble for saying it. But I’ll say it again, if you keep boomers off of cruise ships, they’ll find a way to still go places and still have fun in retirement. They’re not just gonna stay up. They’re not just going to stay cooped up in their house. And the interesting thing about that is an RV is not a small investment for most people. So I think that travel might have more legs than people are really giving credit for. Camping might actually make a come back here versus your more crowded areas, particularly within that boomer crowd.

 

TN: Back to the 70s for camping. We hear about food shortages with meat and we also hear about storage for crude oil. With more activity, are you seeing faster drawdown with crude oil? Are you seeing anything happening there in terms of food?

 

SR: So with crude, we’re beginning to see drawdowns and I’m not sure that it’s faster than we anticipated. But gasoline particularly has picked up much faster than people anticipated. That drawdown will be much faster, much stronger and have longer legs than was anticipated. On the overall demand side for oil, it’s a harder picture to paint. Aviation fuel is a significant driver on the margin of usage within the US. A lack of that is offsetting any bullishness on the gasoline side. Those will probably balance each other out for the most part as we move forward and you have a drawdown that’s relatively in line with what we were anticipating a few months ago.

 

On the food side, you’ve seen a snapback in restaurants for Texas in particular. We are back to, give or take 55 percent usage for restaurants. We have 50% occupancy allowed in Texas. That appears to be pretty close to maxed out. At least restaurants, we get reservations. We’ve seen some interesting things on the eat-at-home food side. We dug through the CPI, the inflation data pretty carefully and found that the food at home was getting increasingly expensive in a way that we hadn’t seen in a long time. Eggs were getting expensive. Meat was getting expensive. Fresh fruits and vegetables are getting expensive and they were accelerating at a pretty rapid pace.

 

It does look like we’re going to have some pretty good crops. It doesn’t look like we’re going to have trouble on that front. So we shouldn’t have the pricing pressure emanating from that side, which is good.

 

The critical aspect is going to be how do we get the beef demand back up to the point where you actually have cattle ranchers wanting to not cull their herds and therefore drive state prices higher. I think that’s going to take more states opening restaurants like New York, California, and other big steak consuming areas of the country reopening and really beginning to drive that incremental demand.

 

Another fun note is I grew up in New Hampshire. Lobster is an important part of eating there. And lobster prices plummeted to the point where lobstermen decided they probably shouldn’t even go out and they were selling for two to four dollars a pound on the side of the road.

 

TN: Let’s just take a minute and we’re sitting in October 1st. We’ve gone through Q2. It was carnage. We’ve gone through Q3 and we’re looking back on Q3 versus Q2. What are you thinking at that point, October 1st of this year? Help me understand a little bit of that based on your perspective today.

 

SR: Based on my perspective today, I’ll probably be sitting in Boston, hopefully having a client meeting at a lobster that’s more expensive than three bucks, looking back and wondering how we missed the pickup that was happening in June and July and how the pockets of things that were doing much better than anticipated.

 

It’s worth noting according to one of the data sources I used, auto sales are actually picking back up rapidly from down, north of 60% for new cars and used cars. New autos only down, I’d call it the high 20% range from a year ago. Used cars down single digits from a year ago, on a volume basis. That kind of snapback in different pockets of the economy is going to be what I’m looking back and wondering how I missed whatever it might be whether it was people wanting to get back on cruises. I don’t think they’re going to want to give back on cruises. I don’t think people are gonna jump back on planes very quickly.

 

I think we have a 911 type of recovery. Three years, give or take there. I think that’s the mindset to use. But there will be something that just completely catches me off guard in terms of the speed and rapidity that it comes back, or with the L-shaped, it’s just never coming back. One thing I think we’ll catch a lot of people off-guard is the pivot on the margin from hotels to homes. Renting at home instead of renting a hotel. Being spaced away from people, having the pool to yourself. I think there will be trends like that that have become pretty clear whether or not they have legs by October and I think that’s probably one of them.

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QuickHit: Proactive companies use data to COVID-proof their supply chains

Supply chain expert and SAP SCM/IBP Architect Odell Smith of My Supply Chain Group joins this week’s QuickHit to talk about how proactive companies will survive, how data helps them decide quickly on supply chain solutions, and what we can do to be better prepared next time. After a quick 5-year stint in engineering, Odell has been doing supply chain technologies for over 30 years. His company does mostly SAP products and advisory services and implementing technologies for the supply chain.

 

Don’t forget to subscribe to our Youtube channel and hit the bell icon to be notified when a new QuickHit goes live. If you missed some of our episodes, here are some of the lastest ones you’ll enjoy watching:

 

Manufacturers are bouncing back, but…

We’re not going to normalize

How do we use up all the corn now?

How ready is the military to face COVID-19 and its challenges?

Oil companies will either shut-in or cut back, layoffs not done yet

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: How are your clients looking at their supply chains? How do they use their data to better understand and plan their supply chains even with all the craziness and volatility? Can you give us an example?

 

OS: Our clients have had a variety of different issues. There are companies that even inside the same company, they’ve had one business unit with a huge spike in demand and another business unit will just drop off. One of our clients is one of the largest beer producers in the world. Their keg business that supports restaurants just evaporated all of a sudden. But their bottled beer just went through the roof.

 

So these companies are trying to see these demand patterns as they come in, but also be able to quickly respond to those. Everybody’s used to the monthly demand patterns. But being able to see such a rapid volatile change in these demand patterns and being able to see that with data in the systems, then being able to simulate how you’re going to respond and make intelligent decisions based on that data, has been a real game-changer. If this had happened 20 years ago, it would have been a much more difficult scenario to recover from.

 

TN: What kind of data are people using to make these decisions? Because we really don’t know what’s coming from the outside. All the governments say macroeconomic data. This hasn’t come in obviously. So how are people taking data in to understand how to adjust their manufacturing patterns?

 

OS: The operation’s focus is about trying to estimate what that demand pattern is going to look like and then be able to adjust from that, if you have a constant supply. But if you have an irregular supply, it’s also a problem.

 

Another huge issue here is we’ve off-shored so much stuff in the last 15 to 20 years. An example is one of our customers that is a large paper supplier. They bring in pulp from other suppliers. Everybody’s familiar with the toilet paper issues that we’ve had. These guys had all kinds of issues come up. They bring in product and then they manufacture that product. As they do that, their supply chains were disrupted by not being able to get their suppliers’ product through the ports. Their port activity was blocked. They knew that was going to be the case, and so they had to redirect some of that stuff that was coming in to run their manufacturing.

 

They also worked proactively with the ports. They knew that the port was going to be closed and they had to redirect that. We put in some cost optimization for them to be able to evaluate simulations to estimate where it looked like the best place to bring this raw material. And then of course, their manufacturing process itself had to change, because there’s a lot more demand now for toilet paper than there was for paper towels.

 

Nobody expected that demand shift. Everybody was unprepared for that. But being able to use data to make smart, intelligent, short-term decisions about how to correct for that new demand was something that they were able to put in place fairly quickly. For scenario planning, we were using SAP IBP to be able to make those right decisions.

 

TN: I started my career in a freight forwarder, customs broker, and all the physical logistics around it. And it was always interesting to me early in my career to see when people had cost-sensitive, time-sensitive, quality-based decisions, and you’re balancing all three. The types of decisions they made sounded like they didn’t really have any history to go by. They were just looking at expectations, and you’re just playing it day-by-day or week-by-week.

 

OS: If you have the tools and you have the data, then you can do that. Now, a lot of this data was manufactured data themselves because it was based on estimates. What are my options here? I’ve got three other ports to use, and there’s different costs of transportation going through those ports, plus there’s a risk. Will I be able to get the stuff processed through and time to be able to make it? And if I don’t, then what’s the downstream impact to me in my subsequent manufacturing process?

 

TN: All to get a roll of toilet paper to your corner store. What would you say manufacturing companies need to be thinking about? How can people be better prepared the next time this happens?

 

OS: One thing that came out of this is that this data is changing so rapidly. [Companies that can] access that data can see what worked, and what didn’t work from the last situation. There are going to be some things when you’re making these snap decisions, and you’re just trying to keep your business afloat. There are going to be some things that you learn in hindsight that were not the best thing to do. As long as you plan for that, and you know that that’s going to be the case, and you review that after the fact, and are prepared for that risk, know where that risk is, then it always helps you be able to respond better next time. If you don’t learn from those things, shame on you.

 

TN: Do most major manufacturing firms today have a good base of data and well-organized data to make some of those decisions? Or is it still kind of iffy?

 

OS: It depends. There are some that have really good data. But it has to be a decision by the company. The company has to decide to put the resources in place and to have that vision, that strategy of knowing that that data is important and that the data needs to be reviewed, audited, and cleansed.

 

Some companies are very proactive. Some companies are completely reactive. And when you get in a situation like this with this craziness, these [reactive] companies won’t make it. Proactive companies will make it. So it’s really a business mindset and putting a value on that data that makes it helpful.

 

TN: These major manufacturers that you work with, I think there’s a perception out there that a manufacturing firm has one ERP system. Do you work with any firms that have kind of one ERP system or are they dealing with half a dozen or more typically?

 

OS: There are companies that have been able to maintain that single ERP situation. But more than not, you wind up with mergers and acquisitions. And these M&A activity is just brutal on IT organizations because very seldom do you acquire somebody who has the very same ERP system and they are on the same version that you’re on. And then, there’s a product rationalization and a customer rationalization that has to take place. Those are all very difficult things to get past.

 

TN: Pointing out, so just people understand. It’s not as if you’re just taking data out, putting it in a big machine and then putting it out the other end to help make a decision. You’re taking data in from a lot of different sources. And you’re making sure that it’s somewhat normalized or understandable in the output. And then those managers within those companies are also seeing data in a number of different formats to make those decisions. So this isn’t linear. This looks more like a bunch of weeds over here and a bunch of mangled tree roots over there and you’re trying to make it as linear as possible. The complexity of these decisions, the complexity of these data, say logistics activities, are just fascinating.

 

So last question here Odell. You’ve seen these companies through the first phase or two phases of this. Do you see these companies back on a path to normalization now? Are there manufacturing and supply chain processes normalizing now?

 

OS: There are some that are beginning to get back on the horse and there are some that are just still severely impacted. Some of our customers are in the pharma industry. They’re just going nuts and they’re going to continue to go nuts for a while. It’s really a mixed bag of things. A lot of our customers manufacture products that are related to home. Everybody has been doing a lot more of that lately. Demands for those have still been really strong even though supply may have been impacted by some of the situations.

 

One of our clients is a company that has multiple legacy systems. One of the great things about these new cloud solutions is the ability to do that normalization, to be able to take data from multiple different ERPs, disparate ERPs, and bring it in for a total view for the executive team to make these quick decisions. A lot of our customers are doing really well, and so it’s great to see them coming out of this. It’s been a slow couple of months for people just to wrap their arms around the thing, and try to just fight fires. And then now we’re coming out of some of that and into recovery mode that looks good and strong.

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QuickHit: Manufacturers are bouncing back, but…

In this QuickHit episode, we are talking with Chad Moutray of the National Association of Manufacturers (NAM). Chad is the Chief Economist for NAM, and he talks with manufacturers across the U.S. every day, to understand their issues and informs them of the the overall economic landscape. NAM has about 14,000 members that includes state manufacturing associations. Tony Nash discussed with Moutray the state of manufacturing especially in this time of the pandemic. What are they doing, thinking, and what are their plans? 

 

You can revisit our previous QuickHit episodes here:

 

We’re not going to normalize
How do we use up all the corn now?
How ready is the military to face COVID-19 and its challenges?

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TN: Can you walk us through some of the manufacturing firms that you’ve been interacting with and how do they’ve come to understand the environment? What have they been thinking about? What have their priorities been? Because I think it’s been confusing for everybody. But from a manufacturing perspective, what have you been seeing?

 

CM: I’ll go through a couple of things here. Number one, just that dearth of data that we had early on, everyone was asking me, “What is the current capacity utilization for manufacturing right now in the State of Pennsylvania?” I don’t know. How would I know, right?

 

There was a lack of information early on, and the abruptness and the severity of this downturn just caught a lot of people [off guard]. The numbers are so heartbreaking and jaw-dropping. We’re starting to get a sense now of what those numbers really are, and the drastic-ness of these figures in terms of being the worst ever, or the worst since the Great Recession. But there was a lack of information early on that really just caught people by surprise.

 

Companies don’t know what to do. This is not just a business conversation. It’s also a life and death conversation. Do you keep operating? Do you not keep operating? Are you operating in a state where you’re forced to close? Are you deemed essential? A lot of those things early on really dominated manufacturers’ time in terms of whether to operate, what happens if someone gets sick in your facility? What do you do? Do you close everything down? There was a scramble early on just to figure out operationally “What am I doing?”.

 

It moved from there to the conversation about PPE, Personal Protective Equipment, masks or ventilators or whatever else.

 

One thing that really has dominated that manufacturing conversation over the last month has been the National Association of Manufacturers work with the administration [to understand] whether it’s FEMA or DOD or the Vice President’s Office to say, “Okay. What do we need in order for everything to come back to normal? How many masks do we need? How many ventilators do we need?” And then helping to identify manufacturers that can produce that. That really has dominated a lot of time for the NAM over the last month or so–getting a handle on what are those needs.

 

That has gravitated into the new normal. Everyone is [asking] what does manufacturing look like three months from now, six months from now, a year from now? How do you get back to a sense of normal, whether there’s a vaccine or not a vaccine?

 

Answering those questions will dominate much of my time from a research perspective. We asked on a survey “Are you re-engineering in your process to have social distancing in mind,” or “Are you going to let people work from home?” That’s not always possible on the shop floor. But in some cases it may be, right? So those types of questions are first and foremost.

 

We’re talking to a series of tire manufacturers. They have a huge retail operation and retail is just going to change dramatically. They not only look at the manufacturing side, but how retail is going to change, and then how they can react. It shows you just how dynamic this particular moment in time is in terms of dramatically changing the sector.

 

TN: I know you’re still in the process of doing your research but what’s your feeling now? Do you get the sense that people want to get back to kind of a normal-ish environment quickly? I know “there” is relative. But do you think there’s a desire to get back and get relatively normal business activity back say in Q2 or Q3? Do you get the sense that it’s going to be longer? What’s the drag? How long will this drag effect impact companies and impact manufacturers?

 

CM: I do think that we’ve passed the worst of it. I do think that in that late March, early April, that’s when things just really hit bottom. You’ve started to see a sense, especially from some of the more recent data, that things, while they’re still bad, are not as bad as they were several weeks ago. I do get a sense that you’re starting to see that bounce back in the marketplace, which is good.

 

In general, there is what we’ll call “quarantine fatigue” not just for consumers but for businesses as well. There is a sense that activity is going to start resuming.

 

The difference here is that yes people are going to come back to it but there’s still going to be some hesitance there. We don’t have a vaccine. So coming back to work is not the same as it was before. That’s true at the NAM, that’s true in every workplace in the country. People’s willingness to go out to restaurants and bars and go to Disney World has all changed a little bit.

 

I do think that we are bouncing back already. But in this new environment, there is still a little bit of hesitance about getting out in crowds and the workplace change. Yes, I can go back to the office maybe, but am I going to? Am I going to continue working from home? How much separation is there for me between me and my co-worker on the shop floor? We’ve already started to see that rebound. But it’s in a different place than it was two months ago.

 

TN: A lot of questions. Let me shift gears a little bit and ask you about trade. With COVID-19 and initially when this was hitting China hard, we saw a lot of supply chains stall out and slow down. We’ve been talking about the regionalization of supply chains for a few years at Complete Intelligence. Is that something that you’re seeing, and I know you’re not necessarily advocating a position. So I don’t expect you to be doing that. But are you seeing that happen or is that concept not seeing a lot of traction on yet?

 

CM: We were starting to see people re-evaluating their supply chains as a result of the Trade War. Last year, we were seeing a lot of that. It doesn’t mean all of it’s coming back to the U.S., but it certainly means production might be moving out of China and other places. This exacerbates that even more. There’s been this realization that we can’t depend on one country and one source to get all of our stuff anymore given the extremeness of this disaster economically.

 

People are going to be re-evaluating the supply chain. From the NAM point of view, we want as much of that to come back to the U.S. as possible so we’ll be advocating policies on on-shoring. Look for that coming from us. But the reality is, companies are going to locate where they locate. There’s a lot of reasons why companies locate wherever they do, and it’s where the customers are, that’s where their other suppliers are, that’s where the intelligence is. And some of it’s going to go to Mexico, or to the rest of Southeast Asia. There is definitely this understanding that we’ve got to re-evaluate that supply chain process in terms of who we’re buying from, making sure there’s duplication, and I think that’s a conversation that every firm is having right now.

 

TN: Very good. Chad, thank you so much for your time. I’d love to have you back in a few months to revisit some of these questions. As the unknowns dissipate, it’ll be very interesting to to look back and see what people did right, what mistakes people can avoid next time this happens.

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COVID-19: Towards the end of everything “made in China” for electronics manufacturers?

This post on Made in China first appeared in https://www.usine-digitale.fr/article/covid-19-vers-la-fin-du-tout-made-in-china-pour-les-fabricants-d-electronique.N950286. The copy posted below is originally in French and was Google-translated to English.

 

It is an old factory with a decrepit facade, on which climb some wild grasses. At the edge of this canal in the south of Taipei, only a watchman watches the ear. The plot has just been bought by the Taiwanese electronics manufacturer Pegatron to increase its production capacity in Taiwan. Reported by the financial media Bloomberg, the initiative is the latest in a series of investment projects outside of China announced by Taiwanese subcontractors.

 

From Apple to Samsung, these shadow firms manufacture, assemble and sometimes design products on behalf of major electronics brands. Most of these companies have their headquarters and a handful of factories in Taiwan. But the final assembly is mainly carried out on the other side of the strait. The Taiwanese giant Foxconn, the main assembler of the iPhone, thus employs more than a million workers in China, distributed in twelve giant factories.

 

“FACTORY CITIES” CHALLENGED BY THE PANDEMIC

 

This model, based on economies of scale, was severely tested by the COVID-19 crisis. Travel bans imposed by Chinese authorities have led to production delays, as evidenced by the shortage of Nintendo Switch, assembled by Foxconn. The firm also anticipates a 15% decrease in revenue for the first quarter of 2020.

 

“The ‘gigantic’ model takes a hell of a slap, straightforward analysis Pascal Viaud, managing director of UBIK, a company specializing in partnerships and industrial cooperation based in Taiwan. The sectors are aware of their dependence on China and the logistical risks that this implies. Some companies, especially the smaller ones, did not necessarily know this because it concerns their second or third level of subcontracting. ”

 

According to recent announcements from Taiwanese subcontractors, the COVID-19 epidemic would push major brands to rethink their production line. Wistron, another supplier to Apple, recently unveiled a budget of $ 1 billion for projects of new factories in India, Vietnam and Mexico. “Many signals from our customers let us think that’s what we need to do “, Wistron chief strategy officer Simon Lin said in a conference call reported by the Singaporean daily Straits Times. According to Bloomberg, Foxconn, for its part, planned an envelope of $ 17 billion for projects in India and Vietnam.

 


Foxconn’s headquarters in Taiwan

 

LOOKING FOR ALTERNATIVES TO CHINA

 

“China is becoming riskier for these companies, which may have felt that authorities withheld information during the epidemic, said Tony Nash, chief executive of Complete Intelligence, a business planning platform. costs and revenues of companies running on artificial intelligence. These companies are increasingly looking for alternatives to China. This is a classic risk reduction strategy already at work, but one that will seriously accelerate the next three years. ”

 

Kuan-lin (the first name has been changed) can testify to this. This salesperson works for a Taiwanese manufacturer whose client is a famous American brand of computers. For the past three weeks, the employee has been under constant pressure from his hierarchy and rarely leaves his office before 10 p.m. “Because of the epidemic, our client is asking us to speed up a project to build a factory in Mexico,” he explains, with dark circles and a pale complexion.

 

 

TRADE WAR WEIGHS ON SUBCONTRACTORS

 

The trend is not new. The trade war between China and the United States had already pushed part of the electronic production out of China. The manufacturers hoped to escape the sanctions of the Trump administration, applied to “Made in China” products. Depending on its Chinese factories, Foxconn had paid the price: according to calculations by the specialized media Bloomberg, the profits of the subcontractor fell by 24% for the period from October to December 2019.

 

“Competitors who did not have production lines in Taiwan have been disadvantaged by the trade war, confirms a manager of a Taiwanese electronics company which has a production tool on site. Thanks to our Taiwanese factory, we were able to reserve our products made in Taiwan for the American market. ”

 

With a skilled workforce and cutting-edge infrastructure, Taiwan is well placed to stand out. The Taiwanese government has elsewhere launched a vast plan to facilitate the return of factories to its soil. But the archipelago lacks space and has a limited comparative advantage. “Taiwan is suitable for high-end products, which can be sold more expensive, points out the same frame. For other products, manufacturing in Taiwan has an impact on profitability.”

 

 

TOWARDS REGIONALIZATION OF PRODUCTION

 

The most likely scenario seems to be that of a regionalization of production, which would jointly benefit several countries. “This is not going to be a massive departure from China, anticipates Tony Nash. For Asia, there will simply be more additional parts manufactured in Taiwan or Vietnam. For the American market, it could be Mexico.”

 

As a note from Deloitte suggests, this shift could also be accompanied by increased digitization of the production chain. Joined by L’Usine Digitale, Eddie Chang, head of finance at ASE Group, one of the Taiwanese behemoths for the assembly and testing of electronic circuits, confirms this future direction: “We are going to develop technologies enabling virtual teamwork and industrial automation. We also plan to increase the automation of our logistics to reduce human interactions”.

 

 

CHINA HAS NOT SAID ITS LAST WORD

 

However, the recent development of the epidemic calls for caution. In China, the main factories have returned to their pre-crisis operating level. Foxconn was able to restore production of the new iPhone SE with massive hires and inflated work premiums. “During the crisis in China, our factories were at 60% of their capacity, today we are not far from 100%”, confirms a sector executive whose factories are in Shenzhen.

 

At the same time, the countries presented as alternatives to China are in turn impacted by the epidemic. In India, where Apple produces its iPhones for the local market, Foxconn and Wistron have announced that they have suspended production until mid-April. The US state of Wisconsin, where a Foxconn factory is soon to come out of the ground, has seen in recent days a dizzying increase in the number of cases of contamination.

 

“The new turn that the COVID-19 crisis has taken is a game-changer,” says Aymeric Mariette, research officer at the France China Committee. The attitude [of electronics companies located in China] is now much more wait-and-see for relocations “. Apple CEO Tim Cook also defended himself at the end of February from any major movement, preferring to speak of “adjustment adjustments” linked to the crisis.

 

Especially since China will not let these companies slip through its fingers so easily. The strategic challenges are significant: the ecosystem of electronic suppliers has enabled Chinese brands, such as Huawei, to follow in the footsteps of American giants. “The Chinese authorities are carrying out charming offensives towards foreign investors in China, for example with the promise of equal treatment in access to financial aid, facilitation of investments or even the announcement of new reforms, analyzes Aymeric Mariette: China knows that it is now ahead of the other major world economies and intends to profit from it. ”

 

Categories
Podcasts

Business and Market Discussion Podcast: Coronavirus and its impact to economy

Tony Nash, founder, CEO and Chief Economist of Complete Intelligence is a guest in RTHK’s Business and Market Discussion podcast. He says that the lockdown of major Chinese cities could make foreign enterprises re-think their supply chain strategy.

 

Some notes below:

 

Do you see this in the US purely as a China problem or is it a global problem?

 

People here are taking precautions. A lot of airlines have stopped direct flights to China. People are concerned about it, but that’s not an overwhelming worry. The preparations that are happening around Asia, but we had this drill before. From a western perspective, it looks like these preparations are being mode and it’s a panic mode. I think Asian governments are doing the right thing by ramping up and preparing for the worst. Best case, it’s not really that bad, but we’ve done all these preparations just in case.

 

How this is hitting tourism, retail sales, trade, commerce because Wuhan is a logistics center. The whole country is virtually shut down. People are not traveling at the moment. You can imagine China will take a big economic hit. One think tank saying economic growth could drop below 5 percent.

 

I would argue that it’s already below 5% for about a year. The magnitude of the response is enough for anyone to get nervous. I think the response is the right response, but it has made people nervous. It’s a difficult balance to strike for the Chinese government. Yes, it will have a hit to the economy. But there may be a sharp rebound.

 

It’s happening over the new year season. But in terms of manufacturing and exports, if these things can be contained before the end of new year, it can be rebound.

 

And that’s because there will be a lot of demands once this is over.

 

How about the impacts on commodities? Copper? Ag products?

 

These are all the typical fear plays when people are worried or when China is in crisis. Traders are shorting because the trade deal may not be implemented. My hope is for the government to turn this around in a couple of weeks.

 

I think that it’s oversold like Gold is overplayed. People are still learning the magnitude of the impact.

 

Do you think this could derail the Phase 1 deal?

 

There are two years for that. This is a relatively short impact like 1 to 2 months. I don’t think the demands will change that much. Because there will be a spike on buying. If this is a medium impact, then this will change.

 

This maybe the event that pushes some manufacturers over the end, and may start moving their production capacity to other areas.

 

And that’s the thing that there’ll be a long impact on the Chinese economy.

 

Absolutely, and that’s where the economy will be stagnant. That’s the main worry.

 

Do you think there will be a big equities sell-off?

 

It’s possible but I don’t think it will happen until we have evidence about the cases or intensity of the impact. We have to wait a little bit of time to see if these are properly reported cases.

 

Listen to the podcast at RTHK.HK’s Money Talk Podcast. 

Categories
Visual (Videos)

Trump’s Tariffs & This US vs China Trade War Are Hurting Chinese Manufacturers A Lot More

Wall St for Main St

 

Jason Burack of Wall St for Main St interviews first time guest, the founder of AI firm Complete Intelligence, Tony Nash. Tony has lived and worked in Asia for over a decade and has extensive experience working in mainland China working with the Chinese government, The Economist and global manufacturers. Follow Tony on Twitter here. During this 50+ minute interview, Jason asks Tony about the state of the Chinese economy, Chinese manufacturing and if President Trump’s tariffs and trade war is hurting Chinese manufacturers more than the US.

 

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