In this Monday Morning Coffee, Granger Whitelaw sits down to discuss the Supply Chain Impacts from the Coronavirus outbreak with his guest, Keith Schulz. What Is the current status of Demand, Disruption and resolution – and what can we learn from history – to try and lessen the effects to our businesses, and perhaps create opportunities. Grab your coffee, sit back – and Let’s go.
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Below is a transcript of the episode, edited for readability.
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Granger Whitelaw: Good morning. This is Granger Whitelaw on the Lotus talks Monday morning. I hope you guys are all doing well today, February 17th, 2020. Wow. The time is flying already. So today, for Monday morning coffee, I want to talk about something affecting everybody in Southeast Asia and certainly here in Vietnam. I have not wanted to touch this subject – the Coronavirus, but it’s definitely something that we need to talk about because it affects a business. This is a business podcast and it could have a great effect on all of us. the coronavirus as everybody knows, has been spreading since December. it started in China and when China gets a cold, everybody gets a cold. As my friend Keith says, Keith schulz is here with me today. Keith, good morning.
Keith Schulz: Hi Granger. Thanks for having me.
Granger Whitelaw: How are you today?
Keith Schulz: Great.
Granger Whitelaw: You, get your coffee, you’re ready to go. Keith Schulz: Ready.
Granger Whitelaw: So, you know, data shows that 90% of all the active businesses in China are located in the impacted region. So, 19 provinces, I guess Dun and Bradstreet says the, firmographic data, roughly 70% of those businesses in the impacted region are micro-businesses. those are with less than 10 employees and 19% are small businesses and the rest are larger businesses with a 100 or more employees. The interruptions are causing a tremendous amount of impact for China right now, as we all know. And it will impact our supply chain in Vietnam, which is kind of what I want to focus on today with you since you will you do a lot in supply chain in the region
Keith Schulz: Yeah, I do. we have a manufacturing plant just South of Ho Chi Minh city and, we export about 65% of our product to, 15 markets around Asia. you know, only sourcing a few materials, in China. And so the immediate and direct impact, won’t be so significant. but that’s different than a lot of Vietnamese manufacturers. I read that 46% of inputs for manufacturing in Vietnam are directly sourced from China. And so there’ll be a, an immediate and urgent requirement to address those with secondary sources or find backup supplies outside of China. And, you know, I can’t believe now that there are any unaffected provinces in China from a business perspective.
Granger Whitelaw: Yeah. Okay. They really, they say that a majority of all employment in sales volume, nearly 90% of the businesses are located in that area in China. And the extending areas now that are seeing the coronavirus. So it really is everywhere. And, and as we know, it’s been spreading to other parts of the region. Slowly. I mean, you know, Thailand has 50 cases, I think in South Korea, like 35 – and Japan – and, and so as you look at secondary markets, you know, you kinda want to keep an eye on that as well. But, it certainly is the vast majority concentrate in the impacted region. industries that are impacted. 80% of the businesses within the impacted province include services. So personal and business, wholesale, trade, manufacturing, retail, and of course financial services. As we saw Hong Kong shut down a whole building a bank last week, right Because somebody had some floor was infected. That’s a scary thing, right You’re, in you’re building. So had some floor gets effected and the whole building evacuated,
Keith Schulz: right It could have nothing to do with sourcing, or Chinese sales. But there you go. You’re out of business for the time being.
Granger Whitelaw: So there’s about 49,000 businesses operating in the region that are branches or subsidiaries of companies headquartered elsewhere. companies from USA, Japan, Germany, UK, Switzerland,… big impact globally. Right. It’s a big impact globally. And certainly, you know, the 17,000 corporate headquarters on the ground in ground zero – Hubei – have experienced huge disruptions in their business.
Keith Schulz: Yeah. Yeah. And we have sales operations in Shanghai, which are well outside of the impacted zone. But, our businesses, our business and our distributors across China are paralyzed. So even if we’re ready to open up, the supply routes are closed. distributors aren’t getting their employees back out of areas that are under quarantine. Sure. And so I think, you know, all of China, now is going to, experience a significantly increasing downturn.
Granger Whitelaw: Yeah. I mean, they did what, $27 trillion in 2019 in business, GDP $27 trillion. USA GDP was only 21. 4 trillion. I mean, massive market. Right. And you know, as you see, like you said, the disruption and secondary supply chains… recovery is going to be long and it’s going to be difficult, right So you have to look at the first things, right The first impact is the downturn in Chinese demand, right… You contain travel, you contain the implementation at quarantine zones. Trade is being disputed, normal demand patterns are disrupted and, and, disrupted completely. …So the first big thing is demand. Demand is going to be massively affected, which affects us all.
Keith Schulz: Yeah. it will, if your business is dependent on growth in China, which most are, but I think, where countries like Vietnam, are going to be impacted is really in that, sourcing function. because even if your are up and running and okay, today their employees and their productivity are certainly jeopardize even when they can start up plus… the inputs for those businesses, the raw materials are somehow impacted…. and so there’s the knock on effect that we’ll start to see in the second quarter.
Granger Whitelaw: Well, you know, you, you just got back from doing a Harvard, a week or two looking at business models and you study business models and you have a big responsibility. And…. if you look at supplier disruption, if you look back at the Thailand floods years ago and you lived in Bangkok, right?… And what Ford, you know, you’re taking a page from history… Ford really learned that they didn’t know who their suppliers were. So that at tier one and tier two suppliers, right If you don’t know who your suppliers are and your main supplier goes down, you have a problem, right?… So, you know, if I’m a business right now, I’m thinking I’m listening to this podcast. Yeah, okay, now I want to look at other suppliers, but do I even know who my suppliers Are? Do I know where to look for supply, right For my products Where are those secondary markets? Can my wholesaler fulfill or not? I mean, that’s a big issue that Ford learned critically years ago. Were you there during the time?
Keith Schulz: it’s funny you mentioned that because I was running an auto parts company making custom molded rubber for breaks. So this is a critical part, although it wasn’t a safety functional part, but we were the sole supplier on a 33% of all new car sales, the U S… and we were tier three or tier four, but ford, GM, Chrysler, they had no idea where we were or, had any ability to replace that custom molded rubber. And so when they did find out – days later, it came down the supply chain that they weren’t going to get these parts as our factory was two meters underwater for six weeks. And they rented helicopters and choppered out these big 400 kilogram rubber molds… big plates. So we could move that and our raw materials, to produce, in Thailand, but outside of our factory and Bend, some of the OE supply rules to keep the production in Detroit… you know, Matamoros South Carolina up and running because our little 6 cent rubber part would have shut down the whole thing.
Granger Whitelaw: Isn’t that amazing Yeah. And that’s exactly what ford experienced right there, the whole line went down like a whole one of their top selling brands stopped because of that to supply disruption.
Keith Schulz: Yeah. And I don’t think people really learned their lesson because it’s – first, it’s costly to dual source and to go to other, locations and retool. A lot of the money’s in the two tooling…, but they learned a lot more in Fukushima. And that’s where the automotive supply chain really got hit in Japan, but elsewhere as well… and so probably because of the shutdown in that province after the tsunami and the radioactive zone was enforced, the, idea of extra costs to bolster, you know the robust, amount of supply outside of a single low cost source was better established…. and so we’ll see with China, because this has never happened to this degree in China. When SARS came about, China was the source for tee shirts and tennis shoes and not much else. and now it’s a whole different game. Yeah,
Granger Whitelaw: it really is. Well, we’ll have to see. I mean, I know, I’m certainly, we were, I was at a meeting that you were attending, and I think Amanda Rasmussen – an AmCham event, she was chairing and doing a great job…. and talking about, we were talking about the ports, you know, I always say the ports, the port shut down. You can’t get stuff out of Vietnam, but you know, the ports were open then. Now the ports really are closed. So you have no rail, no bus, no truck, no, no, no boat… I mean it really is disruptive. And what was you or someone made a comment and the truck drivers won’t drive into China because they’re scared that they’re going to get key contaminated it or have to do an automatic 14 day quarantine… Oh, you were saying that. Yeah, I mean, that’s a great point. Right So the ripple effect of that from the economies is going to be, I think a dramatic over the next quarter.
Keith Schulz: Yeah. And I’m not sure we know yet how far the ripples extend and how many alternative sources would be available in the short run – given customized tooling and other intellectual property issues that now is captive in China often as a sole source – where this was difficult to anticipate. You know, if the premise is true that all provinces in China are indirectly impacted.
Granger Whitelaw: Yeah. IP tech transfer. Good point. Well, I don’t want to be doom and gloom on Monday morning, today. I think there is a, a lot of opportunity here for people, to think about how they can look to restructure their business now and really be thoughtful about it. maybe take a little bit of risk, but you know, an opportunity to be able to stretch your legs and figure out a way to grow your business in a different way than you hadn’t before. And, you know, I think out of a difficult time as great things come sometimes as well. So…
Keith Schulz: yeah. Yeah. We’re looking, at, markets that aren’t impacted on the demand side as much and accelerating our promotions and product launches that we have for that. If some of our bigger competitors are painting Asia with a broad brush, I think we can find some opportunities in that where, spending, will really be pulled back…. people regard their cashflow and a lot of marketing op ex across Asia would be treated with the same way. We’ll try to be a little bit more – pinpoint than that. Sure,
Granger Whitelaw: sure. Hey Keith, I’d love to have you back Friday for a Friday notes. I think it would be great to hear you talk about Motul and a Vilube and what you guys are doing, to kind of build your business here in Southeast Asia…. regardless of this, Coronavirus episode that we’re going through…in general.. if you’d like to come, I’d love to have you,
Keith Schulz: I’d love to come back. I will be one of the few people traveling around Asia this week… Thailand a little bit later in the week, but be happy to come back and join you.
Granger Whitelaw: Wash your hands as what I always say. Wash your hand and wear your mask.. Everybody out there. Thanks for listening. I hope you enjoyed Monday morning coffee. Think about — I know you’re all thinking about this, eh, kind of silly to even say…, but think about some of the things that Keith mentioned. Look at history, look at what happened with Ford and Keith, your story about your supply chain,… the tier three or four manufacturers. If you don’t know who they are, your suppliers– definitely, definitely put together a list and figure out who they are, and and try to figure out how you can apply some of this t0, to grow your business this next year. We’ll talk to you on Friday. This is Granger Whitelaw Lotus talks. Keith, thanks so much and I will see you Friday.
Keith Schulz: Thanks Granger
The Lotus Talks is produced by The Vietnam Group and Hosted by Granger Whitelaw.
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