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Guess Who's Friendshoring In Our Backyard?

Guess Who's Friendshoring In Our Backyard?

The Supply Times Issue #45

Naseem Malik
November 30, 2023

Welcome back, fellow readers!

Strap yourselves in for this news-packed edition of The Supply Times!

Sneaky foreign companies using a trade backdoor into the US! Warehouses brimming with armies of next-generation robots! Soap-opera drama at the world’s most influential tech company!

If that isn’t enough, we have plenty of other bits and pieces, including recommendations for podcasts, books, shows, charts and tweets of the week, before finishing with a final chuckle.

Let’s go!

Industry Highlights: Chinese Companies With A Mexican Address

So, China has been dropping some serious cash in Mexico lately.

Just last month, the government of Nuevo León announced that China's Lingong Machinery Group is setting up a factory for construction gear, eyeing $5 billion in investments. Meanwhile, Trina Solar chimed in with a pledge to drop up to $1 billion in the same state. Vast Chinese industrial parks near the US border are now a common sight, while real estate billboards in the manufacturing hub of Monterrey increasingly feature Mandarin translations.

What’s going on? In a nutshell, Chinese firms are taking advantage of the USMCA to avoid crippling tariffs and find a backdoor into the US. Speaking to The Economist, Chinese-Mexican trade expert Enrique Dussel Peters said: “The irony is that the first to react positively to an explicit policy against China are Chinese firms”.

This situation is playing out against a sharp uptick in growth for Mexico, which has surged from less than 1% to 3.3% in 2023 as reported by The Financial Times. The peso has strengthened 15% against the US dollar, and Mexico has become the US’s largest trading partner. At first glance, it appears Mexico is scooping up the ground lost by China. But a closer look reveals that much of this market share is being held by Chinese companies who have simply shifted their operations to a Mexican address.

Depending on what parts they use, Chinese companies in Mexico might miss out on all the perks of the trading bloc. Still, Peters points out that the average tariff on goods from Mexico to the U.S. in 2021 was a tiny 0.2%, way less than the hefty trade-war tariffs leveled on direct trade with China.

Lawmakers in the US are side-eyeing Chinese carmakers in Mexico, worried they're trying to dodge tariffs and slide into the U.S. market on the sly. Four members of Congress recently warned the US Trade Representative that Chinese companies are trying to take “advantage of preferential access to the US market through our free-trade agreements and circumvent any [China-specific] tariffs”.

This reshuffling of supply chains is a direct consequence of US companies reducing one-step sourcing from China. You might expect that we would see shorter, simpler supply chains and more “friendshoring” among Western-focused trade networks - but the new situation is a little more complicated.

The Financial Times reports that US companies are sourcing from China via intermediaries like Vietnam. The result is a stark “increase in the indirect cross-country links, as new firm nodes interpose themselves into existing supply chains …. For American and European end users, however, it means that supply chains have become increasingly complex. What is emerging is not so much reshoring as reshuffling — a rising level of complexity.”

In other words, we’ve swapped one-step trade with China for something that is just as geopolitically risky, less efficient, more layered, and more expensive. But there are undeniable benefits in terms of increased flexibility: nearshoring allows companies like Mattel to shorten supply chains and be more responsive to changes in consumer demand. Barbie’s Monterrey-made Dreamhouse, for example, is only 48 hours from Amazon, Target, and Walmart in the US. Mattel has the luxury of waiting until it is nearly Christmas to gauge customer demand, then to take advantage of lower transport costs and reduced emissions.

The Future of Work: Robots Increasingly Outnumbering People In Big Brand Warehouses

Historically, state and local governments have offered billions in fiscal incentives (cash grants, tax credits, and rebates) to entice companies to open warehouses and other facilities in their area.

Why? For the jobs, of course. But what happens when more of those jobs are going to robots than humans?

Bloomberg reports that UPS just made a big move with the opening of its colossal 20-acre warehouse on the outskirts of Louisville, Kentucky. This warehouse is set to become a haven for over 3,000 robots by the end of the next year.

Building a robot army is all about efficiency and staying ahead of the game. The likes of UPS and GXO Logistics Inc. are turning to automation to outpace competitors relying more on human workers in older facilities. These robots promise increased speed and accuracy in processing orders, efficient inventory management, and optimized use of warehouse space.

Sales in UPS's logistics business have surged by 11% in the first nine months of the year, despite an overall 22% fall in sales for Supply Chain Solutions. Seward mentioned that the logistics business boasts double the operating margin compared to its typical competitors.

While UPS didn't disclose the exact reduction in the workforce due to automation, the facility in Kentucky is expected to generate around 500 distribution and logistics jobs, according to the Governor's office. The introduction of robots is not just about the numbers; it's reportedly contributing to a 40% reduction in injuries and a 30% increase in worker retention.

With rising competition in the delivery business, Amazon is stepping up its game with a fresh injection of artificial intelligence and robotics into its warehouse operations.

According to the WSJ, Amazon’s new “Sequoia” system boasts AI-equipped sortation machines and robotic arms to streamline processes. The Sequoia system reduces order fulfillment time by up to 25% and can identify and store inventory up to 75% faster, while the company is also talking up safety gains.

Tote containers now move products to a sortation machine with robotic arms, reducing the need for employees to reach high shelves and minimizing injuries. This transformation aligns with Amazon's pursuit of the "holy grail" of robotics, making machines as dexterous and adaptable as human hands.

And what’s Walmart up to? Reuters reports the company’s plans to have about 65% of its stores serviced by automation by the end of fiscal year 2026. This announcement follows recent news of laying off over 2,000 workers from online order fulfillment facilities. Walmart is leveraging its extensive network of stores to handle online order deliveries and investing heavily in automation to streamline e-commerce order processing. By January 2026, about 55% of packages processed through fulfillment centers will go through automated facilities, improving unit cost averages by approximately 20%.

For now, the retail giant, with over 5,000 U.S. stores, hasn't provided immediate details on potential layoffs. While the impact on employment is unclear, Walmart suggests that the changes will lead to roles requiring less physical labor but with higher pay rates. Observers may be a little sceptical of the company’s claim that it will “maintain or even increase its number of associates as new roles are created”. That’s not how automation efficiency works.

Despite these big-brand moves to build more robots, it’s the contrary opinion of The Economist that we don’t need to fear an AI jobpocalypse just yet. In fact, we’re moving too slowly in the light of tight labor markets around the world. Improved technology and lower costs have boosted the global stock of industrial robots, but obstacles like legacy equipment and versatile human tasks slow down widespread implementation. While innovations are underway, the transition to widespread automation is gradual.

Image: The New Yorker

AI Insights: Tech Soap Opera at OpenAI

Drama much? Sam Altman is back at OpenAI as the CEO. The board that gave him the boot last week has been dissolved and replaced with an interim board.

The tech soap opera unfolded as Altman's sacking led to mass staff resignations and chaos. The board's decision, made by three non-employee members and the chief scientist, Ilya Sutskever, prompted an apology from Sutskever and a plea for Altman's reinstatement. Microsoft, OpenAI's major investor, then offered Altman a role leading a new advanced AI research team. The saga culminated in Altman's return and a partial reshuffling of the board, with former Salesforce co-CEO Bret Taylor and ex-US treasury secretary Larry Summers joining.

Amid enthusiastic staff reactions and declarations of unity, concerns linger about potential damage to OpenAI's reputation and recruitment challenges. The unusual structure and purpose of OpenAI, originally a non-profit with a “mission for safe AI benefiting humanity”, now face scrutiny. The story raises questions about how decisions by a small group could impact a multi-billion dollar tech business. The future direction of OpenAI remains unclear, leaving observers, including Elon Musk, calling for greater clarity and communication from the board.

The Supply Aside

📕 Read - How To Know A Person by David Brooks

I was lucky enough to have a front-row seat in Dallas at my first-ever book signing featuring author David Brooks. His book, How To Know A Person, explores the importance of seeing others deeply and being deeply seen - including in your professional life. Humans, says Brooks, don’t do this particularly well. Sprinkled with plenty of anecdotes, this book is packed with advice for being more human such as being present, being curious, bringing back the art of small talk, conflict resolution, and much more.

What Else I’m Reading

Federal Reserve not ready to start talking about interest rate cuts: Policymakers are wary of calling time on tightening campaign prematurely even as data suggests the work may be nearly done.
LinkedIn used AI to enhance profiles. It made some sound robotic: LinkedIn’s new AI feature aims to help users market themselves better on the job website by offering profile recommendations.
Big Companies Find a Way to Identify A.I. Data They Can Trust: Mainstream companies have concerns about the lineage of the data that powers A.I. applications. An industry group is addressing that challenge.

📺 Watch - 4.5 Billion Years In One Hour

Sure, you may know all about the Triassic, Jurassic, and Cretaceous eras, but they’re positively modern in the context of the vastly ancient history of our planet. Available on Kurzgesagt’s “In a Nutshell” channel on YouTube, this animated movie scales the complete timeline of Earth’s history into one hour. Every second shows about 1.5 million years of the planet’s evolution to help grasp how long 4.5 billion years really is. Super educational, colorfully animated, and kind of hypnotic.

👂 Listen - Acquired Interviews: Charlie Munger

When any 99-year-old offers to share their wisdom on a podcast, it’s worth a listen. If that near-centenarian happens to be the late and legendary Berkshire Hathaway Vice Chairman Charlie Munger, it should definitely not be missed. In this episode of Acquired, Munger (who died this week) talked about his 50-year partnership with Warren Buffet, offered lessons and up-to-the-minute advice for investors, and spoke about his party plans for the day he turned 100, which sadly never came. I’ll share more on Munger and an impactful book about him in the next issue.

💡 Think - The Number 1 Risk For Humanity

I recently delved into The World Ahead 2024 from The Economist. It's packed with thought-provoking forecasts, starting with escalating geopolitical tensions involving China, Taiwan, and Ukraine — like a complex drama with no clear end.

On the environmental front, the ongoing shift to clean energy is poised to dramatically reshape global energy politics. Economically, we're at a pivotal moment with potential recessions looming, presenting a challenging scenario for Western economies. In technology, AI continues to revolutionize work but brings the challenge of combating misinformation.

Here's what I found fascinating – for the first time in history, half the people in the world will live in countries holding elections. Based on recent voter turnout patterns, almost 2 billion people in 70+ countries, from Britain to Bangladesh and India to Indonesia, will head to the polls. And yes, the most consequential will still be the US of A.

But here's something that's got me pondering: The Economist's pick for the biggest threat of 2024 – the 'Orange Theory.' Hint: it was a top 10 geopolitical risk eight years ago, but now it is flagged as the number 1 risk for humanity. It's a bold claim and quite the conversation starter.