#299 – Sobering Insights About E-commerce Sourcing & Logistics in 2022
In episode 299 of the AM/PM Podcast, Kevin and Steve discuss:
- 01:45 – Kevin and Steve Go Way Back
- 02:00 – What Is Product Savants? Plus Kevin and Steve’s Secret Skills
- 03:15 – When Did Steve Start Going To China?
- 06:00 – How Did China Become The World’s Manufacturing Hub?
- 09:20 – A Book To Understand The Mentality, Psychology, and Processes Of Sourcing In China
- 11:50 – Lessons On How To Protect Your Intellectual Property
- 16:20 – Understanding The Culture Differences
- 19:00 – The Biggest Problem With Amazon Sellers
- 20:00 – Visiting Factories And How To Respectfully Decline Requests
- 21:15 – Cultivating Relationships While Not Being Able To Travel To China
- 26:25 – Steve’s Take On All The Events That Disrupted The Supply Chain
- 28:45 – What You Should Be On The Lookout For
- 30:00 – Should We Consider Nearshoring Our Product Manufacturing?
- 31:25 – Is It Easy To Shift Your Manufacturing To Other Places?
- 37:07 – Steve’s Tip On What E-commerce Sellers Should Do At This Time
- 37:40 – Are Factories Moving To Vietnam?
- 39:00 – The Italy Side Story By Kevin
- 40:00 – The Belt Road Initiative And What’s Going On Around The World
- 41:45 – Steve Shared His Predictions At The Billion Dollar Seller Summit
- 43:00 – Steve’s Advice For The Smaller Sellers
- 46:00 – Advantages Of Having A Pre-Approved Rate From Sinosure
- 49:00 – Build Long-Term Sustainable Relationships With Your Factories
- 50:22 – Why Are They Going Bridezilla On Everyone?
- 52:10 – What Does The Future Look Like For Steve?
- 54:00 – How To Get In Touch With Steve
- 54:49 – Steve’s Advice For Entrepreneurs
- 56:00 – This Week’s Golden Nugget
Transcript
Kevin King:
Welcome to episode 299 of the AM/PM Podcast. My guest this week is Steve Simonson. Steve is one of the smartest guys I know when it comes to sourcing and logistics management. And in this episode, he’s gonna share some pretty insightful and honestly quite sobering thoughts about what’s happening in China, sourcing outside of China, and a lot of other really fascinating things about where we’re going in the future. What’s up everybody say hello to our good friend, Steve Simonson. Steve, how are you doing?
Steve:
I’m well and happy to be here on the AM/PM Podcast. Yeah. Congratulations on taking the heavy mantle that is the AM/PM Podcast, but I’m very confident in your ability to keep it moving.
Kevin King:
I appreciate that. You’ve got a podcast of your own, so you know how much work this actually is and what goes into it. And I think you’ve maybe been on the AM/PM Podcast before when Manny was the host. Is that not true?
Steve:
Gosh, it’s certainly possible. I’ve done so many podcasts over the years. It’s hard for me to keep track, but definitely have been a fan of the show since kind of the golden days when Manny started it and continued on in the second phase with Tim and now I’m pleased to be here in gen three with Kevin King.
Kevin King:
That’s right. We’ve known each other for a day or two in this business. And actually, just full disclosure, we have a little venture that we do together called Product Savants where we actually help large sellers and aggregators actually find new product opportunities. One of my secret skills is actually finding good opportunities. And one is Steve’s secret skills is, well not so secret anymore is actually sourcing those opportunities and dealing with all the supply chain and everything. So we put our two heads together and formed Product Savants a few years ago to actually help large sellers and aggregators. And we help them create brands through our brand Genesis program. And so I know Steve knows what he’s talking about and what we’re gonna be talking about today is dealing with, with all these sourcing logistics and nightmare, and dealing with China, or maybe not dealing with China and all the things that you need to be thinking about going forward as you’re building your Amazon business or your e-commerce business, there’s a lot of stuff that is going on out there economically, politically, logistically that a lot of sellers just probably aren’t in tune with and, you know, Steve studies, this stuff, he’s been doing this for a long time 20-25 years, or maybe, even more, bringing stuff over from China.
Kevin King:
He’s, you know, he’s involved in several different businesses, not just Amazon, but several different businesses where they bring in hundreds of containers. I think monthly in fact for some of these businesses. So he’s very in tune with what the situation is, and that’s what we’re gonna be talking about today. So, Steve, you’ve been going to China for when’s the first time you actually went over to China personally?
Steve:
I think it’s it’s around 20 years ago. So it was either 2001 or 2002. I went over for the very first time and I have to say, I was terrified of buying my first container which had happened just before the trip. And when I went over there, it was just a crazy, interesting, wonderful place to learn and to be exposed to so many things. But I definitely got a dose early on of what a fresh new idea buying from overseas was at that time back then, people thought I was nuts for going to China to buy stuff. And today, when I talk about some of the geopolitical challenges and supply chain issues, people think I’m nuts for recognizing, or at least calling out some of the challenges and then trying to, to divert myself from some of those challenges. But I’m always trying to think about where the path is headed so that I can react and maybe even anticipate that path and reduce the pain.
Kevin King:
So when you first went to China, it wasn’t like it is now where it was like really the back roads and little small airplanes at airports. And just, it was nothing like what we know if you’ve been over to Yiwu or to Canton fair. Maybe some of you listening have actually taken a trip to visit your factory. It’s totally different now than what it was 20 years ago when you first went, correct?
Steve:
Oh my gosh. Yeah, it’s night and day different. So one of the things that China has done is they put literally trillions of dollars, the equivalent of dollars into their infrastructure. So when I started going there to my very first factory, it would take eight to nine hours by road. There were no planes, there were no trains, it was eight to nine hours by road. And today I can do like a 40 minute train and another half an hour drive on beautiful six lane freeways that no other cars were on. I mean, it’s, it’s truly night and day there. It’s impossible to understand just how backwards it was. And I remember looking at one of my sourcing colleagues at the time, as we were bouncing through these crazy roads and just nightmare. I mean, the conditions were just nightmares and going, yeah, here we are. We’re living the dream. Everybody thinks we’re, you know, going to China and traveling to Asia. It’s so sexy and so exciting, but we were just bumping our heads for six to eight hours a day in roads that were not really roads. They were just kind of trails. It’s terrible.
Kevin King:
I’m old enough to remember when I was growing up and all the toys that I bought, I would look on the back and they would say like made in Taiwan. I seem to remember that, but now when you buy something on Amazon or almost anywhere, a lot of times it says made in China. So what happened, where was the shift where basically China became the world’s factory? How did that evolve? Or how did that come to be?
Steve:
It’s a very interesting point. So actually in the ’80s, when I was growing up like made in Japan, made in Taiwan, that was the thing. And everybody kept saying in the eighties, oh, Japan’s taken over the world and this and that. But basically at the point that China was admitted into the WTO, the World Trade Organization had a kind of preferential status that really opened up the entire Chinese economy to becoming an exporter to the most voracious appetite country, which is the United States, other countries of course benefited. And in fact, they took that ability to export and turned it into a skill and they would do just about anything you ask them to do in terms of small lot sizes, and multiple colors, very flexible. They would say yes to almost anything. Right. And we always used to joke when we would go over for sourcing that you will always hear a factory owner say, “kěyǐ”, “kěyǐ”, that’s Mandarin for yes, we can, yes we can.
Steve:
And when you hear “keyi”, that could mean, yes, we can. No problem. We’ve done it a thousand times from that all the way to the other extreme of there is no way hail that I can do that. But I’m gonna say yes, so that you are happy and we have a nice meal together, but I really mean no. And I hope you leave here immediately. Right? So it’s kind of a crazy experience when you’re there, but fundamentally the WTO entry gave China all of the war chests that it needed to kind of get really big and becoming that world’s factory you just described.
Kevin King:
And the government subsidized a lot of this, right? They’ve actually been very instrumental. The Chinese government has been very instrumental in like really propelling their economy forward by becoming this big industrial type of factory nation. Right.
Steve:
Well, for sure, there’s a lot of subsidization, there’s a lot of like export tax credits in many industries in China, they have been, let’s say investigated or called out as being dumping the term in trade when you’re producing products really below any economic viability is called dumping. So there’s been industries. I was in the, for example, furniture, the bedroom furniture business, and China got so aggressive with their low pricing and their subsidization that the United States declared them a dumper and put in a 400% anti-dumping duty. Wow. So just do the math on that. So it used to cost us a hundred. Now it’s a hundred plus the 400 and we can buy it in Vietnam for 200, you know, or whatever. So the truth is they have done a very good job at promoting their industry and keeping the entrepreneurial spirit going.
Steve:
I think that was true right up until the point of COVID, there are some shifts happening, maybe we’ll get to them, but their strength was, you know, came on the back of we’re. We have really low labor costs. So when I started going there, the labor costs were between 12 and 15 times lower than they are today. So they had low-cost labor. And if you had a labor-intensive product, you mentioned toys earlier, it’s a really good way to take advantage of, you know, low cost, labor, and low-cost freight mean you can deliver products at a per unit economic that is viable.
Kevin King:
Now, I’ve heard you on some other podcasts and stuff always and at events, you always recommend this one book called Poorly Made in China, that you suggest that anybody that really wants to get their head around how the whole mentality and the whole psychology and the whole process of how everything works there to take a look and you can get that on Amazon, but can you just give us the really fast cliff notes version of what that book really explains?
Steve:
Yeah. So Paul Midler wrote that book poorly made in China. And I don’t even know how old it is. It’s probably 15 years old or maybe longer, but the truth is it tells you a common set of experiences. I think he’s the first one who developed the term Product Fade. So the Product Fade is when you start with a product you go to the factory, and the samples look good. The first order looks good. And the next order it’s, it’s fine. You didn’t notice anything, third order, fourth order. And by the time you’re the fifth or sixth order, now you’re getting claims and you’re having problems, but you don’t understand how you got there, because now you look at the six order and you’re like, well, this is clearly thinner material than our master sample or our specification or our first shipment. However, your point of comparison is done.
Steve:
And then you say to the factory, “Hey, how did this get thinner?” And they’re like, “oh, sorry, we’ll fix it on the next shipment.” They just kind of play it off. But the truth is they’re in a constant state of profit engineering and optimization, just like we, as Amazon sellers wanna optimize our listing, they wanna optimize their product margin or, production margin, which is fair enough. We want them to be efficient. We want them to make money. We just can’t do it in opposition with one another. So by reading that book, you can at least become prepared and know who you’re dealing with on the other side of the table, in terms of their absolute world-class skill and their breadth of understanding of the topics and the materials and all that. Like you are not prepared. If you don’t get aware of kind of your competition in that adversarial environment. They’re the seller, you’re the buyer. Everyone wants to use the word partnership, but it’s not a partnership. It’s, “I hope that I give you this money and you give me a good product.” And they are curious and worrisome that you’ll screw ’em on the money. And we get nervous and worrisome that we will get screwed on the quality. So both of you have to keep each other honest, that’s the way business works in a particular business, outta China.
Kevin King:
A lot of people, when they go into China, they’re concerned. China’s a lot of people say China’s really good at copying, but not good at innovating. And so a lot of people are worried about their IP and when they, when they go to China and what are some things that you’ve seen happen or, and some ways that you can protect yourself, if you’re concerned about being either copied or protecting yourself, you know, from what the big guys do from apple on down, cuz they manufacture lot China to the small guys that don’t have those kinds of budgets or that kind of infrastructure to really monitor it. What are your thoughts around IP and manufacturing in China or almost anywhere for that matter, but especially in China.
Steve:
Yeah. I think these lessons that I’ll share with you would apply to just about anywhere. But I think it’s of particular interest in China because there is really no–, well, I’ll just say respect for IP that the international norms of intellectual property protection are not being observed in China in a strong way. So you, you have a couple of things that it weighs differently depending on your manufacturing technique, but let’s say for example, you have a mold. If you paid to have that mold made, you should pay somebody else to store that mold when it’s not in production and to maintain control of that mold while it is in production. And because that’s a way to make sure your mold is not being used for other people’s production besides your own. So that’s one intellectual property, little best practice.
Steve:
And again, some of these molds that have different sizes, but typically you can pay a third party inspector type of company to take control and custody of that mold. And to look out for your interest in that way. Other methods that people use is if the product has multiple manufacturing steps, assembly, or you know, different parts of the manufacturing process is they will give let’s say you have five distinct manufacturing steps instead of giving it to one factory who subcontracts it out to others that you actually control those three or four sub components. And then you have one company assemble all those together. I know a number of people who do this very well to keep away some of the tiny little aspects that give ’em a competitive edge. You can set up agreements. There are, you know, things called triple net or three N agreements, not triple net, that’s for leasing, but tho those agreements have terms and conditions and so forth, but it’s really difficult to make those stick.
Steve:
It’s also difficult to make a patent stick or any of that. So I wouldn’t use that part of it as your I’d say, tip of the spear, I would use prevention as the tip of the spear, keep your mold to yourself, break up the process. And in some ways just telling them we’re signing a contract, this is mine exclusive. You can’t sell it to anybody else. And then monitoring that sometimes just the awareness that it’s important to you and the vigilance of you asking about it, maintaining it will keep them from straying from the straight and narrow path. Believe it or not, that prevention is often just a component of your vigilance to maintain and monitor it.
Kevin King:
Does that go to them? Just wanting to save face basically?
Steve:
Well, in part it’s like, well, how much trouble is this gonna be worth? Face is a huge part of the culture. But ultimately they just like, if it’s easy for them to get away with it, then they will. And if it’s not, then they won’t right. The juice and the squeeze are somehow calculated for any of these maneuvers. And I can tell you firsthand like we’ve come up with distinct and beautiful designs or colors or different types of things dating back to those early two thousands. And every factory I went to who that made that product, I would find my products in all of those factories. And so over time, we would get more and more careful about it, but no joke. There’s one bamboo product line. In particular, I went to 20 or 30 factories and every single on had a knock-off of that product that we created, which is a lesson learned and you try to get better, but inherently, you know, you can’t stop people from knocking your stuff off.
Kevin King:
Yeah. I’ve had the same problem where they took my images. I’ve always, I do my own packaging. I don’t, you know, the factory sometimes will say, Hey, we’ll design the pack. Just send us the pictures or we’ll take the pictures and we’ll design it for you. Like, no, no, no, I’m gonna handle my own. I’ll give it to you ready to go. And they actually lifted off the photos off of my box and actually started using that on all the Chinese-based sites thinking I would never see it, you know to sell the products into China. And I caught them red-handed, you know, they took it down right away and didn’t admit really any guilt, but you gotta be careful. They will take advantage if they see an opportunity.
Steve:
Yeah. It’s a cultural difference in the west. We see that as like theft and in the east, they’re like, yeah, I have it. Why wouldn’t I use it? That would be dumb not to use it. Look at how great these photos are that Kevin made. I love ’em. I think other people love ’em too. Of course, I want to use them, right. They don’t think about the property ownership of that being important. But I’m glad that they did respond to you. Generally, the power position comes. If you do volume with somebody, you’ll get ’em to do almost anything. And if you don’t do volume with them, they’re not gonna listen to you at all. And so that’s kind of how the power struggle goes down in China. If you do volume, you can get ’em to kind of comply and work with you. And if you don’t, then you’re just on the sidelines looking in.
Kevin King:
So what are some of the cultural fo pauses that you see sellers, especially smaller sellers make when they’re first venturing over, or maybe they’re not even, it’s not their first time, they’ve been selling for a while, but what are some of the big no-nos that you see Western people do that could be offensive to factories in Asia?
Steve:
Well, I do think that in many ways, factories have a more mature view of silly Western mistakes, right? So for example, the first time I went to China, we went to one of the big traditional dinners where they got the Lazy Susan in the middle and they just keep bringing out food. And my colleague and I, we just keep eating the food because in the west we gotta clean our plate, right? That’s polite. And so we just keep eating. And finally, I lean over to the translator we were with I’m like tell him to stop bringing fricking food. We can’t fit in another ounce of food. We’re dying here and she’s like, stop eating and they’ll stop bringing stuff. Right. And so I had to learn the lesson of, oh, so when I’m full, I stop eating and they want food on the table.
Steve:
That’s how they show good hospitality. And Chinese are extraordinarily wonderful hospitality, hosts, and so forth. So that was something that they weren’t offended by it, but they’re probably going, this guy can really put it away, right? I just kept eating and eating and eating. And the next night I’m like, you know, make sure they don’t bring out too much food. And she goes, no, no, you stop eating. When you’re full, then they’ll stop bringing out more food. But that was one, it’s a small lesson, but it tells you a lot that many things are different there. For example, in accounting, if a company in the west goes in the red that’s bad news, right. And if we’re in the green, that’s good news. Well, it’s exactly the opposite in China. So if you look at their stock market board and you see a bunch of red, you think people getting murdered over there on a stock market basis, but no, that’s everybody making money.
Steve:
The green is when it’s a problem. So those are again, subtle lessons. But to me, the biggest problem that I see particularly with Amazon sellers is they, they have this, I dunno, supposed relationship. It’s an imagined relationship where they’re like, no, no, Steve, I hear what you’re saying, but my factory’s different. We’re good friends. Their kids have come over to my house. They send me Christmas gifts. You know, we have this very personal relationship and this is special and unique. And I was really lucky to find them. I could never find anybody like this ever. And I had one of those. My very first supplier was like that. I went on a cruise with her and her family, and I just felt that we were just so lucky, but this is actually just a tactic of manipulation, right? There’s always another factory. The competition will ultimately give you better results than if you just stick with somebody who you think is taking good care of you. Now, I’m not saying relationships don’t matter. It’s quite the opposite they do. But don’t assume the one person you found early on is the only one who can do the job for you at the only price. That is a common mistake and it’s almost always wrong. Almost always.
Kevin King:
Now you don’t drink alcohol, but one of the big things is when you go and visit a factory, they like to take you out and wind you and dine you. So how do you weasel out that situation or ease that situation to not offend them when, when you’re out with the boss of the factory? And he’s really trying to have a good time and impress you.
Steve:
Well, first of all, I tell him early on, “Hey, listen, I don’t drink, this is not me not drinking with you. I never, drink ever.” Sometimes I’ll have somebody else from one of my companies with us and they can be my pinch drinker. Like they’ll do the drinks. Sometimes I’ll bring a Canadian, they’ll drink the Chinese under the table, believe me, they know how to get the job done, right? So, but if I just simply said, no, I will not drink with you. That is, that would be slight, and that would not be a professional, positive thing. So my actual countermeasure to that is, although I won’t drink, I will eat just about anything you put in front of me. And I don’t ask you what’s in it. And I’m not picky. I’ll try anything because I wanna show respect for the local culture traditions taste and cuisines. And there’s, there’s been a few times where I’ve had just terrible things. I hate stinky tofu, for example, but most of the time it’s delightful and some of the best meals I’ve ever had are in from China.
Kevin King:
So now, I mean, now it’s difficult to actually go and visit, China’s basically closed to the outside world right now and probably will be for quite some time. So how do you cultivate? In the past you would fly over and go to the Canton Fair, you’d go and visit the factors. You can go and hang out with them. Like we just talked about, what’s the substitute for that right now? How do you create those business bonds without being able to actually go there?
Steve:
Well, it is a really good question and it’s certainly harder than it was before COVID. So if people remember back when COVID first happened, like all of China shut down pretty hard and pretty fast and for, you know, a couple of months, and it was a lot of uncertainty. This is when a lot of the supply chain broke, but not long after that, it kind of opened up and the truth is they told everybody in Wuhan, Hey next Friday or this coming Friday, which is, you know, four or five days away, we’re gonna close the city, all the buses, and rail and roads are closed, but the airport’s open and about 5 million people left. So once the thing left, they’re like, all right, we’re, we’re probably okay now. And they, they really did have a, a pretty mellow time.
Steve:
So our substitute during most of the COVID time was our, my China team. And that the China team is engaged with Kevin and I at product bonds. We would go around to the factories and our, our team would be there sometimes we’ll zoom call with them, but we would really make extra efforts to have our team on the ground, in the factories, and maintaining those close relationships. Cuz that’s something that was unique to us or at least very few companies by comparison to the multitude of buyers can put company people in the building. But in the last, let’s say three months, since April, since the Shanghai lockdowns, now some of our people can’t even move city to city. Some of the third party inspection companies will use as backups. They don’t even have people in those various cities. So we’ve had to get really creative calling on some of the locals we know who used to work for that for a factory.
Steve:
For example, and having them go in paying them money and because they’re in the same town, they, they don’t have any border restrictions. And then doing video inspections and conferences with our, our team, all of this is to say that it’s way harder now. If you really do wanna have a good relationship with your supplier, I highly recommend doing a zoom. You know, it depends on your order volume once a month, once a quarter, you know, whatever makes sense for you, but send ’em a gift. If you can, it takes forever to get there. They may not actually arrive but take a picture of the gift as it goes. It’s going, but it’s much, much more difficult. And to be honest, I’m not going back to China, as long as they have a quarantine period right now, the quarantine period is 21 days and you have to get checked like every two days and you gotta wear a mask, you know, everywhere and in your sleep, it’s, it’s really quite a nightmare.
Steve:
And by the way, it’s not gonna go away. In my opinion, anytime soon, they have kind of a, a very difficult problem ahead of them. They can’t abandon COVID zero before the fall, which is when the next kind of election is to reaffirm president Xi so there’s no possible way to scrap the policy before then due to face, even though they’ve changed the name to dynamic zero and dynamic community zero, basically like, oh, if we want Shanghai to be zero, we just ship all the people who have COVID out of Shanghai. Now it’s community zero. All of those things are, are problems. And it’s having big effects on the supply chain and on trade globally.
Kevin King:
Yeah, that, that the quarantine, I was just speaking to a couple of friends of mine that are, are in Hong Kong and a lot of Westerners are bailing on Hong Kong right now because it’s just changing with everything that’s going on there. And they said that they don’t wanna leave, if they leave, they don’t ever wanna go back because of this 21-day quarantine, they said, it’s actually, it’s not like you’re going to stay in a, a nice hotel, you know, for 21 days and get room service. They say, they show me some pictures and some video it’s, it’s pretty bad. So yeah, the quarantine you don’t wanna visit right now, but speaking of the Coronavirus when that happened and all the, it really disrupted the supply chain, you know, container prices went into the $30,000 plus range.
Kevin King:
They come back down right now for a container from China to LA somewhere in the 10,000 ish range right now, pretty much there was a huge backlog at one point of 130 plus ships outside the LA ports. I think I just read that’s down to, in the twenties right now. So they’ve kind of worked through some of that. And I think I saw St. Stat. I think it might have been, you put it out at the Billion Dollar Seller Summit that there are like 55,000 ships that are transporting goods around the world. 1.6 billion sailors Manning these ships, and about 50 to 70 million containers that are out there. And when COVID hit this whole supply chain worldwide, completely got disrupted and it really hasn’t recovered. And then there’s been some additional issues that have happened since then with the war in Ukraine and with additional lockdowns in China. I don’t think we’ve actually felt the repercussions of that fully yet. And what, what’s your take on all, Kapani prices are going up, you know, steel and everything. It’s a mess right now. So what’s your take on what’s happened and where it’s going?
Steve:
Well, it’s, it’s a very complex problem. So the reality is everything comes down to a supply demand issue, right? So when you’re out of containers, all the containers are either unaccounted for or stranded somewhere. And then you’re out of ships to move those containers because they’re missing sailings be stopped up in LA and other places. Now the supply is way down and demand is as higher. And so the prices get out of whack ISIS, get outta whack. This will balance itself over time. You know, we could probably get a container on a typical, let’s say Shanghai LA route. Now, maybe just under $8,000 which is an outrage to me, right? Cuz we were doing it for, you know, three, four, maybe four and a half on a regular basis for a 40 foot, by the way. And now it’s still in that kind of 8,000 range and the same problem.
Steve:
So the Shanghai lockdown, which you talked about, the repercussions will be still weeks and months away. So Rotterdam right now is, has a similar situation in LA. They’re stacked with containers running outta space and a dozen or two dozen ships out there waiting to be offloaded. This is not unique just to LA, although it’s particularly problematic because it’s a very, very busy port. It’s going to take many, many more months, maybe, you know, a year or two for things to settle down. And unless demand goes down, which it’s starting to, in some cases, copper, for example, has entered a bear market. This time last year copper was run away high prices. And now coppers in a bear market. Steel is slowing down because the demand for steel is slowing incredibly. And one thing we alluded to earlier is one of the ways China has really driven their economy is by real estate and by infrastructure investment and both of those sectors under incredible stress right now.
Steve:
And that can cause a very deep contraction or, or problem within not just the Chinese economy, but the global economy, because if they have a glut of steel, then the steel price will drop. That might sound good for some of us, but there are challenges with, you know, wild swings in any of these markets. So my number one, I suppose, be on the lookout for advice is be on the lookout for change, right? Track your commodities, understand the impact of oil transportation, timing, and the risk of those timings really stretching out. You know, we used to get stuff. I switched a bunch of containers from China to Germany about 20 a month. And by the way, it was around a six-week lead time. And so, you know what six weeks is what, 40 days, 50 days, something like that, maybe yeah. 50 days let’s call oh,
Kevin King:
42 days, six weeks
Steve:
Yeah. And now it’s, it’s 85 days from Germany. Right? For, for no real reason. But I say no real reason, but clearly, there are reasons, right? It’s, it’s upstream supply issues and these things are happening all over the world. And I think that the whole point, I guess, I’m getting to, is what we became accustomed to in the globalized world is starting to break apart. And I actually believe that deglobalization is happening where more and more large companies especially, but smaller folks like us, we need to start looking at nearshoring or reassuring as they call it to try to figure out how do we get great products at, you know, competitive prices as close to our target market sales market as we can. And it’s not easy and it’s gonna take time, but it’s a reality that’s coming because whether we like it or not, there are aspects of these supply chains that are not super sustainable.
Kevin King:
It’s a problem though. I mean, a lot of people are looking at you know, India or Vietnam or Thailand, I know you took a trip and ventured around both of the Vietnam and India to scout out some stuff. You know, Thailand, Malaysia, a lot of people are looking at Mexico and Columbia. There’s just, I think a group of Amazon sellers put on Tim and some others, Amy, we put on the thing called the Mexico trip and took a group of people down to Mexico for sourcing there. But there are still a lot of problems. I mean, because what you’re finding is, yeah, they may be able to do certain things, well, you know, maybe textiles or certain things, but still a lot of the raw materials are still coming from China. So you really have to plan, even if you’re trying to move your stuff out, you gotta plan your supply train around the raw materials almost. And, and then you have tariffs, you know, you have the 25% tariff that people call it. The Trump tariff that he, he slapped on China that, you know, Biden is saying that he may take that back off temporarily or on certain goods because of the inflation, but that plays a role and tariff engineering plays a role. It gets really complex, really fast when you’re looking outside of China. Can you talk about that a little bit?
Steve:
It totally does. So the first problem is, you know, listen, it would be great if we could just go, I don’t wanna wait on a ship from China. I’ll just buy it from some guy down in Mexico or Canada or down the street from me in Seattle, but that’s not how it is, right. There’s not enough of a manufacturing base in North America from the raw materials, which you eloquently and rightly talked about all the way up through finished assembly or finished processing, but it’s getting better. So I can say that we’re talking about in the next five years, I think the world will change in global trade more than it has in the last 20. So, many of the things that became a common practice in the last 20 years are going to be different in some cases non-existent
Kevin King:
What are some of those things?
Steve:
Well, I can’t tell you down to the wire, but like there are some things that you will find that China simply will not be competitive. So China, as I mentioned earlier, their wages are up by 12 to 15 times, depending on the region, Mexico has cheaper labor than China does. So all you have to do now is go well, let’s solve the raw materials problem. Where can we get the raw materials besides China, many times, China’s not the source of the raw material, it’s the raw materials sub-processing plant. But I quite agree, just subbing in a Mexican finishing factory for a Chinese raw material is not solving the problem. So then you go, well, what is that raw material for cotton or textiles or things like that? The US and Mexico will solve it through automation and, and high yield farming within the next three, four, or five years for sure.
Steve:
So anything apparel, canvas, anything that could be fabricated out of those types of textiles can absolutely be done in America or Mexico together. Same thing with wooden based products, same things with oil-based products, which many of which are plastics, plastic injected, molds, those types of things. Many of those can move. Columbia also has upsides, but I suppose my point is, think about your product and think about in a perfect world, how would I do this closest to my target sales market? So if it’s in the UK or if it’s in France or, Australia or US wherever, how would I source the raw materials and how do I understand each component of that manufacturing process? Because the more you learn about it, the more you may realize, oh gosh, I’ll give you an example of a product that I’m looking at right now, so I wanna make these cool advent calendars, very nice wooden advent calendars, hand carved.
Steve:
And I could certainly make those in China. I could make ’em in India. I could make ’em in many, many places, but I wanna make ’em in America. So I’m figuring out what raw materials can I get in America. And that means I have to change the wood specification. Then it’s like, well, what automation tools can we use to carve this instead of hands? And we’re gonna have a US-made hand-carved wooden high-end product that most people would look at and go that does look hand carved, but it’s really machining. That’s making it. And there will be some, some hand assembly, but it will maximize the machinery and the automation to the grace extent we can. And then it’ll marry it up with labor for the parts that are absolutely required. But that’s me leaning into wanting it to be made in America. I could still do it cheaper offshore, but I don’t want the problems. I don’t want the headaches. And I do want the made America and that goes for the UK, by the way, if you’re in the UK, you wanna buy made in the UK, if you can, or at least closer to home.
Kevin King:
You have other issues. I mean, in China, you alluded to it, they have a massive debt problem right now. And then you talked about, you know, the labor cost going up 12 to 15 times, it’s still relatively cheap compared to like the US or somewhere, but the 9-9-6 work ethic is, you know, there’s a lot of pushback right now. That was the work 9:00 AM to 9:00 PM, six days a week that they had, they’re having trouble in China. You know, that’s an aging population. They’re having trouble getting workers. So we’re still reliant on ’em. It’s not like you can shift everything away, so fast, but how are we gonna solve this problem? I mean, how long is it gonna take for, you know, to get ramped up in the us or to get ramped up in Mexico or Vietnam or wherever it is to where we can just sub them in you can’t really just sub in another place right now, very easily.
Steve:
No, it is not a copy and paste operation. That’s for sure. I would say it depends on the scale of the operation. So first of all, I would say maybe the tariffs will be rolled back by Biden. Let’s just say so by the way, Katherine Ty, the head of the United States trade delegation says no way we should roll these back. This is a bad idea. Like she’s talking like Trump, right? And she’s operationalized all of those tariffs in high, high effect ways, a very smart trade lawyer, Katherine Ty, that’s our person. But she’s totally against rolling back those tariffs where Janet yelling and others are like, no, no, that’s not our problem. Just give us lower importing rates. And what I would say is, even if they’re rolled back, I think the next administration will go back hard at China.
Steve:
So that uncertainty of, well, how long is this benefit gonna last makes players who think about the long term more skittish about just jumping right back into China. We’ve moved 60% of our stuff in the last five years from China to other countries. That’s not insubstantial. You know, if just average 150 containers a month and then move 60% of that, it’s hard. But what I would suggest to anybody out there is to look at your product or products, and figure out alternative supply lines, whether it’s India or Thailand, Vietnam actually is probably one of the best places to look. And I’ve been to Vietnam. We’ve been buying in Vietnam for a little more than five years now. I’ll probably be going to Vietnam again, this fall because for certain products, they have a lot of advantages, not the least of which is the raw material components coming from China, roll in trucks, right across the border or short haul container vessels, the point being it’s much more close and they don’t have any tariffs at the present time.
Kevin King:
And a lot of the Vietnamese factories are owned by Chinese companies as well, right?
Steve:
Some of them, the interesting thing is so China, the most aggressive folks in China have found Vietnam or other places to kind of plan a flag and go, I’m gonna have to have to get creative here, but China, because of that economic issue that you talked about, some of those benefits of moving factories are trying to get money out of the country is not working anymore. They’re really reducing the ability for people to take money out of China. And what that means is by the way, in large part, so let’s say Saigon on the south, most of the factories are owned by Vietnam or Korean factory owners. And then in the north, it’s a third, maybe Korean Vietnamese and Chinese ownership, and like anything it’s just about learning. So you gotta be a little bit more prepared to talk with countries other than China. Like I highly recommend a text package that shows the specs and the drawings and all the little details, instead of just sending a picture from Amazon and going, can you make this that easy button while it’s nice and I certainly, I still use China regularly. I just would tell you, that you have a backup plan.
Kevin King:
Yeah. I always remember when COVID hit, you know, Wuhan was ground zero, and then it was Italy that seemed to be hit next. You know, Italy had a big problem. And I started looking into that and I saw an interesting story that came out just a little side here that there’s a region in Italy. I think it’s Northeast Italy. That’s basically where all these Chinese factories came and set up shop and imported and brought in a lot of labor from China. You know, a lot of Chinese immigrants are making a lot of these leather goods and high-end goods for all these luxury designers that everybody says made in Italy and everything. Everybody thinks it’s some little man, a co you know, in his cobblestone, you know, making this thing and made in Italy. When’s actually these, these Chinese factory operators with, with inexpensive immigrant labor making the stuff. There are a lot of people, you said 5 million people left. A lot of them went to Italy. So who knows if that’s where it came from, but I just found that interesting,
Steve:
There are, you know, those types of factories a lot of the belt and road initiatives, so-called BRI big promises of huge investment. And the implication was, oh, well, if you put in a billion dollars to build our port, then that, you know, a lot of our people are working on that port. And, you know, even though there might be some heavy loans or heavy fees and penalties and interest and so forth versus the IMF, the International Monetary Fund we’ve put a bunch of people to work, but in almost every case, any of the work that pays money goes to–, imported Chinese folks and the locals get to do any of the stuff that is like the worst work, moving rocks, or literally pounding rocks. So it’s, you know, it’s a weird thing, but what I just point people to is, you know, I said the world was changing.
Steve:
You can see the signs of that with Sri Lanka, basically being outta money. Pakistan just about ran outta money in the last 10 days and was wired some money, billions of dollars to kind of keep it afloat. And Turkey’s kind of outta money. Like there is a lot of this monetary crash happening and it’s going to have impacts. I can’t predict all of ’em, but I just know uncertainty and chaos are a likely results. And so even though I hate geopolitics and I hate supply chain nightmares, like all of this stuff I dislike, but for the last two years, I’ve had to spend enormous amounts of time trying to solve these things. And then think about what does the next five years look like? And I’m convinced that maximizing what you can in China, whether it’s design or fast entry to the market, and then thinking about how can I be redundant in other countries, or if I need to switch, how would I do that? I guarantee the Shanghai lockdown is not the last one. And as a matter of fact, Kevin, at the Billion Dollar Seller summit, I put a series of predictions on one of my slides and I haven’t done a, a full analysis, but most of those predictions are already happening or on schedule. And it’s not because I have a crystal ball it’s because I use logic. It’s like, if you do this, then that happens. Right. If then this, you know and that’s what’s happening.
Kevin King:
Yeah. A lot of those, I remember when you made that presentation, a lot of people sat up in their chair and like, ah, Steve’s he’s just being a, a Debbie downer here. And then as these things started coming true, and one of ’em came to a couple it was shortly after like a week later, you’re like, see, I told you, and then another one and then another one. And it’s true. I mean, you’re on top of this stuff. And I mean, what’s someone to do right now. You know, someone’s in this they’re dealing with China and they just don’t have the resources to go change everything to Mexico or to go somewhere, what should they should get some, maybe some supplier support, you know, maybe work on the terms or ask ’em to help pay for the shipping or Hey, can you let me slide right now on this 30% deposit, or maybe try to lock in the price for a longer period time. What are some things that they can do right now that are actionable to the audience that’s listing that they’re a smaller seller? What can they do to just try to alleviate some of the pain?
Steve:
Yeah. There are a few things that I recommend people do as almost like a health checkup, almost anytime, but in particular, in these kinds of turmoil field times. So one of them is to see if you can get a better price, go shop that product, even in China, around to other suppliers and try to get a better price, right. I wanna make sure that I have the best price possible on that product. And by the way, your current factor’s unlikely to go, oh yeah, I was glad you called please let me give you a 20% discount. That’s not how it works, right? So you should assume that that’s not going to be a call that’s inbound to you. So that means you have to go find the market price. And by the way, due to supply-demand, and supply chain, not everything’s going down, some things are going up, but maybe it goes up less than you thought if you find the market price.
Steve:
The second thing is currency. I guarantee your currency is being overlooked. And it’s always a funny fascination of mine. If the currency, like let’s say the US dollar is weakening. And if they find that it’s a negative impact to the factory, they’re on the phone almost immediately. But if it’s in my favor they never pick up the phone. And my point is, that the currency has changed quite substantially this year. We’re talking about more than 10% sometimes 15%. And so you should index that price, the FX rate at the time you had a pricing agreement, and then 5% changes, whichever way they go, you should be encouraging your factory to do the right thing for you. And you should do the right thing for them. I do think that if you ask them to give you a quote, make it effective for a longer duration. That’s something that Kevin and I do with Products Savants, and customers. It’s like, you gotta hold this, this pricing longer than you would normally because of commodities and everything. And most often we’ll get a, a yes, as Kevin probably knows the HTC, and HTS codes. However, you refer to them. They updated. I think they actually updated earlier this year.
Steve:
Yes, it wasn’t January 1st. Like sometimes those things change. Oh, there you go. Sometimes those details change. In other words, the duty might change or the Trump tariffs, for example, there’s 500 products that we’re taking off of tariffs taken out of the tariff scheme three or four months ago. Maybe you were paying it last year and you don’t have to pay it this year, knowing those and understanding it very, very important. I always monitor margins, right? Job costing is something that I call it. But every product, every import has a landed cost. And we calculate, you know, what’s the contribution margin, what’s the shipping, what are all these margins? I really encourage you to know those numbers, top line midline, which is gross margin, the second line, which is contribution margin, and then your bottom line, obviously after operation expense.
Steve:
So there are a lot of things you could do Sinosure is a company it’s actually a government state-backed company in China that keeps a file on every Chinese company that exports out of China. And that means if you’ve exported out of China from a Chinese factory, they know your name and you probably already have a credit file with them. And in almost every case, if you’ve been doing business longer than a year, and you’ve done more than 50,000 US dollars of export, you probably have a preapproved rate that they will back your credit with the factory. And the way we do it is we say, we’ll give you 0% down and we’ll pay you in 60 days. And the factories, in our case will say yes to that, by the way, I’ll come back and tell you where they shouldn’t be asked to do that. But if you’re doing it a reasonable volume, then they’ll say yes, and then they have Sinosure to back them up in case Steve decides not to pay them. And they go get, they make an insurance claim and they get 80% of their money. And then Sinosure will chase me for the rest of my life to get the money. But the truth is that might cost you one or 2% to get those added terms. But in terms of cash flow, it’s highly advantageous really, really something that I like.
Kevin King:
And that’s not something that you can apply for that you don’t go and apply to this Sinosure. That’s something your factory does just to be clear. So you would, that’s something the factory has to go and get that insurance, basically, it’s not something you apply for.
Steve:
Very important point. Yeah. So your mission is to go to the factory and go, Hey, I’ve been a good customer. I would like to move to 0% down and 60-day terms from the bill of lading shipping date. And to do that, I encourage you to go to Sinosure And get credit insurance on our account. And you know what, for the first six months I’ll split the increase of cost that that Sinosure surcharges you, right? So let’s just say it’s 1% a month that they’re charging. You take half the cost, and have the factory bear, half the cost. Then six months later, you can have them take the whole cost. My main point is to have conversations with them, and let ’em know the truth. This is harder for you. Costs are squeezing. You have candid conversations. Many times they will come back and go, well, you know, if this thing was a quarter inch smaller, I wouldn’t be wasting 12% of my material, cutting it off the edge.
Steve:
And you’re like, well, make it a quarter inch smaller. I don’t care, right? I didn’t even know that was a thing. But if you work with them, you can engineer ways of not just beating down the factory. I really do think that’s another common mistake you asked for big mistakes earlier, Kevin, the idea that we’re there to beat them down and win. That is a transactional way of thinking. We wanna be even with them, we want fair value. I give you the money, you give me quality products and we can do that forever. But if I beat you down and I win, then eventually that factory will go out of business or stop doing business with me or vice versa. If they could be bad products, I won’t keep using that factory. We want long-term sustainable relationships. And they do believe in a principle called Guangqi, right?
Steve:
This is basically what relationships matter in China. And having that mentality of how do I let them know what’s important to me. I’m not yelling at them. I’m not rude. I certainly don’t use slang with them, right? Let ‘s be professional. Let’s be respectful and show like, I have a philosophy that we try to use in our company that says, I put my name on it. When I speak to a factory, it’s very rare for me to lose my patients. It’s not that it’s never happened, but it’s extraordinarily rare. And it’s usually multimillion-dollar problems. But even then I’m, I’m not screaming and yelling and swearing. I’m just like, this is really, really important. Let’s get to the bottom as quickly as we can having a good relationship and a good rapport based on professionalism or respect. That’s a trust, but verify relationship by the way. That’s how you get things done over the long haul. And it doesn’t matter what country you’re dealing in that works everywhere. Our stuffs in India, that works. Our stuff in Malaysia, you know, Germany, Poland, it doesn’t matter where it all has a place.
Kevin King:
Just before we wrap up. I just want to cover one or two other little things really quickly. I saw you make a presentation where you said, Hey listen, China knows they’ve got some issues here and they’re going bridezilla on everyone. What did you mean by that?
Steve:
So it is really weird. All, the things that got China to its extraordinarily positive and competitive position that you talked about 9-9-6 earlier that extraordinarily over-the-board work ethic, by the way, it’s not good for people to work 9-9-6. And it’s also, they paid them for a 40-hour work week. So it’s like getting 50% more output for no extra wages, right? And that’s hard to compete with, but all those things, 9-9-6, the education, they’ve outlawed tutoring, that that entire industry is dead. The video games they’ve taken the ability for kids to play video games, like the sports teams. You can’t have tattoos. If you’re on a sports team they’ve gotten rid of something that they called sissy boy culture, or sissy boy or sissy pants culture. I don’t remember exactly what it is. But it’s like boy bands to them.
Steve:
Like, especially the ones from Korea. They’re like, Nope, they’re out. They’re blocked from all that. Like all of these things on a social basis, that’s the bridezilla’s actions. They’re, acting nutty. And you know, they’re beaten down Alibaba. They’ve beaten down the equivalent of Uber over there called Didi. They’re doing lots of things that are like all the things that got you the success, you’re now beating down. This doesn’t make sense from a practical picture. And so all the achievers, all the people who’ve done really well are kind of nervous and scared. And, and that’s, that’s creating I guess, turmoil within the country of China. So it’s that turmoil should play out or at least settle down by the end of this year, but who knows, if Xi will presume that everybody presumes that she will stay in power, but it’s a big struggle right now based on the COVID lockdown problem.
Kevin King:
So where do you think we’re gonna be? You know, if we do this podcast again in two years, what are we gonna look back on? Where are we gonna be compared to where we are right now?
Steve:
Well, China’s financial condition will worsen dramatically. They’re running outta workers. We didn’t talk about the demography, but they probably by 2050 or 2060, they’ll have half as many people as they have. Now. They’re the oldest population on earth they’re the fastest aging population on earth. What that means is fewer, you know, workers in the factories, for example, which means wages go up, even the massive amount of, they have 11 million people graduating from college, they made a new requirement, says, oh, by the way, you don’t graduate officially until you have a job this way. They don’t have to show college, graduate unemployment rates so you did all the schooling, but, and you don’t have a job. You don’t have a certificate of graduation. So I think the financial condition will be much, much worse. The real estate was gonna drag a lot of things down.
Steve:
And by the way, that puts our deposits for products at more risk than they’ve ever been. I still will send it positively if the order’s small and it’s an infrequent order, you know, let’s say less than 25,000, we’ll probably still just pay on you know, 30% down, 70% on bill of lading, but that’s getting more and more risky. And, you know, China’s super, they have a bunch of smart people. If the entrepreneurial spirit is allowed to unleash, it’ll probably all smooth out. And the trade situation will probably get worse in the next two years. So I would, you know, I would just be prepared for a little bit of chaos. Don’t assume the easy button will always work. And, you know I say hope for the best plan for the worst. That’s a good strategy.
Kevin King:
Steve, this has been awesome is very enlightening. I’m sure. Everybody out there has got something to think about right now. If people wanna reach out to you if they wanna learn about empowering or listen to some of the Awesomers Podcasters, and some other things, how can they learn more about the world of Steve?
Steve:
Yeah. well, first of all, I’ll just give you a warning. It ain’t always pretty no, you can go over the awesome.com/podcast and really I do most of my interaction with the community in a volunteer capacity empower.com, which is a, a trade association and co-op buying group style. And I answer questions and I regularly do masterminds and other free meetups. There, I’m a volunteer there and Awesomers, I’m not very regulated in my publishing, but I’ve published 250-plus episodes. And people can listen to my rants and raves, including a four-part China series that is still relevant today. So I love entrepreneurs and every entrepreneur can do anything they want in terms of building their business and growing it, nothing changes, nothing stops. It’s just, that we can’t assume that the past will be the same as the future and or the future will be the same as the past. It’s just, things are gonna be different and that’s okay. The people who are adapting and persistent will win.
Kevin King:
Awesome. As you just learn from Steve and I’s conversation, there are a lot of ducks you need to get in order to really protect yourself and make sure you’re prepared for a lot of changes that are coming on the horizon when it comes to sourcing and logistics. And if you wanna stay on top of everything, Amazon, one of the best places to do that is in the Helium 10 Elite, every month we bring in three guests and I do a presentation. So make sure you check out Helium 10 elite. You can upgrade your Helium 10 membership to the Elite plan. You get a lot of extra features and benefits with some of the software tools and you get monthly training where we keep you up to date on the latest tactics and strategies for selling on Amazon. I’ll be back again next week with another episode. But before we go, we have another golden nugget for you. “It’s not what you don’t know, that will hurt you most. It’s what you think, you know, but you don’t, that will really hurt you.” Think about that when it comes to logistics and sourcing, it’s not what you don’t know, that will hurt you most. It’s what you think, you know, but don’t, that will really hurt you. See you again next week. Take care.
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