Steve and Chris

click here for larger imageWell, “the boys” are off again – heading to the other side of the world (click on map at right showing our flight plan). I will be there for just 8 days, while Steve will be in China through August. As always, the purpose of this trip is to purchase for ourselves and our discerning clients. We will be visiting factories every day – the very ones that we’ve developed a relationship with over the past 10 years.

What we’ve learned in a decade.

The Chinese market continues to develop in interesting ways. More and more material is shipped from around the world to China for processing, as China continues to be the world’s largest finisher of dimensional stone. These international stones are specified for local buildings by international architects who are all doing work in China (see article). This means, the availability of material increases every time we go there – good news for our stone clients.

But costs are going up. Labor rates in China are rising; from 1998 through 2010, the average annual growth rate of real wages was 13.8%.  And there is considerable domestic inflation adding to costs of production and overhead. In addition, the fluid exchange rate alone has subtracted more than 25% from American buying power in the past decade. All this makes buying in China a harder challenge – no longer do you go to China just for cheap prices (I’ve been talking about this for several years – see my 2010 Newsletter “China Trade going the wrong way?“). Yet Steve & I continue to find niche materials and quality production which make China an essential part of your buying mix. And for cut-to-size, where there is a high labor content, China remains an excellent source.

Most purchasing in China remains a cash market.  So last week’s cash crunch is something we are watching closely.  Customers of some of China’s largest banks were not able to withdraw cash at ATMs in cities across China or use online banking platforms to transfer currency.  This recent cash squeeze in China’s interbank market was caused by rapid loan expansion at some banks.  To rein it in, the central bank refused to inject liquidity into the market despite a surge in interbank rates because it wanted the banks to adjust their practices.  Apparently the market got the message and they’ve already scaled back their balance sheets.  So, as of this morning (July 1st), interbank rates are falling.  But it still means borrowing costs for Chinese businesses will increase as tighter central bank policy designed to arrest the rapid growth of credit and crack down on shadow banking will further rein in aggressive lending (see article).  We’ll keep monitoring it to facilitate our client’s transfers and assure order processing in a timely manner.

The majority of China’s factories in the building supply business focus solely on the domestic market, and most don’t even have an export license.  That’s where the trading companies come in. If you just dealt with the few factories who can export directly, you’d eliminate 95% of Chinese production capacity. We act as an American owned trading company, with close contacts in China yet an intimate understanding of the needs of Western clients. This allows us to work with companies not able to export directly, yet who are producing much needed materials.

For those of you planning on visiting Xiamen this summer, please note that a large-scale road renovation project began on the busy Haicang Bridge on Tuesday, and is scheduled to continue until September 1st.  Most of the lanes will be closed for construction and traffic is advised to bypass the bridge or take public buses.  Plan lots of extra time and patience!

If we can help you include China in your purchasing plans, please let us know. You can always contact me at cjohnson@linley.com or by cell phone at 917-679-0073.

 Chris Johnson's signature

All too often, what looks good and what is good are not the same things.  On that rare occasion, however, that you find both qualities in the same activity you should grab it with both hands.  Sustainability – meeting current needs without compromising the ability of future generations to meet their own needs – is one of those rare activities that both looks good and is good – for business. 

Here are just some of sustainability’s business advantages;

Advantage 1:  ACCESS TO MORE CAPITAL:

I first learned about this one when serving as Treasurer of a non-profit who was trying to bring best practices to the management of its endowment.  Our Investment Policy Statement directs our investment advisor toward Socially Responsible Investing & Ethical Practice in Corporate Governance.  Many non-profits do this in keeping with their goals.  Investment Advisors increasingly respond to these kinds of directives with their own socially responsible investing policies, trying to influence management practices of the companies they invest in and to select for investment the most transparent and sustainable companies from among their peers.   Says Roger W. Ferguson, Jr., CEO of TIAA-CREF, “We believe that, when companies focus on being socially responsible and having good governance practices, they may be exposed to lower risk and thereby achieve better financial performance.”

So, the practice of sustainability and the transparency of sustainability reports gives you access to investment monies you might not otherwise have available to you, thereby expanding your access while lowering your cost of capital.  Certainly, that’s good for business!

Advantage 2: ACCESS TO NEW CUSTOMERS

Top companies take all this very seriously.  Wal-Mart for example has made sustainability a part of every one of their buyer’s performance evaluation. “There will be rewards for buyers who focus on increasing sustainable sourcing” says Jeff Rice, Wal-Mart’s director of sustainability.  Why do they do this?  A supplier that observes sustainable business practices and is transparent in their reporting is less likely to embarrass their company.  Major public brands like Apple, GE or Wal-Mart are tired of apologizing for the actions of others.  So if you are trying to get your products into one of these marquee brands, an active program on sustainability will tell them you are a worthy supplier.  Paul Appelbaum, president of Partner Pak, knows CostCo identifies preferred, sustainable suppliers.  He describes his company’s recent positive experience as a supplier to Costco as an example of how sustainability has enabled his company to compete successfully. “Costco wanted to go green by eliminating PVC [polyvinyl chloride] and replacing it with maximally sustainable RPET [recycled polyethylene terephthalate].” Partner Pak provided Costco with a solution that satisfied environmental and economic concerns. “The energy savings actually reduced Costco’s carbon footprint, when compared to other sealing methods.”

So the practice of sustainability will open doors to more customers and get you selected over your peers as a supplier of choice.  And that’s good for business too!

Advantage 3: ACCESS TO QUALIFIED EMPLOYEES

Despite today’s high unemployment, the best qualified workers are still hard to find.  The number one candidates still have their pick of jobs, and increasingly they are interested in working for companies that match their own personal values.  Employees whose goals are consistent with a company’s goals are less likely to leave and more happy in the workplace.  And if that company’s goals include transparent attention to sustainable practices and ethical corporate governance, then the employees attracted to such a work place will have those qualities too, creating the ideal ethical workforce.  What’s more, this convergence in values creates a higher return.  Ricardo Lange, CEO of the Great Place to Work Institute, reports that companies in their list of “100 Best to work for” have “consistently outperformed the stock market returns of the S&P 500 and the Russell 3000, achieving a three times greater return.”

So, sustainability practices yield access to a larger and more ethical pool of employees with fewer turnovers while yielding higher overall returns for the company.  And surely that’s also good for business.

Conclusions:

In addition to offering obvious benefits to our planet, sustainability can provide measurable and concrete benefits to the company itself.  It has become senior management’s overarching strategy to reduce business risk, increase overall return, expand the customer base, access more and cheaper capital, and assure a continued flow of quality and ethical employees. 

This is why Sustainability is starting to take the lead among industry best practices and you should consider it for your company. 

For first time companies just considering sustainability, we can assist in preparing a Sustainability Strategy, helping to set targets for a multi-year horizon, and establishing metrics to measure their achievement.  It is the earliest steps toward full reporting.  If you already have some history with sustainable practices, and would like to examine the next steps toward full GRI report compliance, we can help with that too.  Either way, let us have a conversation.   Contact Us Here

When they try to explain how historic Hurricane Sandy just was – like the closing of the stock market for two days – they always say that hasn’t happened in more than a century. What they are referring to is the Blizzard of 1888.  That’s the big one and it motivated the city to change its infrastructure.  

I think the past is repeating itself.

Over the course of two days in March of 1888, a blizzard dumped up to 50 inches of snow across the northeast.  Sustained heavy winds created massive snow drifts – up to 52 feet in Brooklyn.  Citizens were stranded in their homes for more than a week.  Power lines (see photo) were broken and posed a hazard to anyone trying to walk in the street.  City workers were impeded by wires while trying to clear the snow.  The city had been brought to a halt and something had to be done.

After such an experience, City and State leadership were finally motivated to change our infrastructure.  New York began placing its telegraph and telephone lines underground.  And more than a generation after London had proven the technology viable; New York undertook an underground subway to replace the elevated trains.  “There is no overstating the significant impact this tragedy had on the metropolis, especially on transportation. The resulting standstill on the elevated lines resulted in the city adopting a plan to build subways. This plan was formulated in 1894 and eventually construction on the subway began in 1900.” G. J. Christiano, nycsubway.org

Today we face a similar scenario.  Changing weather patterns are once again making our old infrastructure obsolete.  Two hurricanes in as many years?  Rising sea levels?  A city of 32 islands needs a better plan on how to protect ourselves from the water that surrounds us.  Perhaps, once again, we are New Amsterdam?!?

As Governor Cuomo said today, “Anyone who thinks that there is not a dramatic change in weather patterns is denying reality.”   “Going forward, I think we do have to anticipate these extreme types of weather patterns. And we have to start to think about how do we redesign the (infrastructure) system so this doesn’t happen again.”

I couldn’t agree more.  A system designed for the horse and buggy age doesn’t match our contemporary needs in a information age with global weather change.  The task ahead is enormous.  But the possibilities that come with it are as great.  Our old infrastructure helped to make New York City the economic power house of the world.  What can our new infrastructure achieve?

Changing patterns in business seem to come faster these days. It took Japan 40 years to go from being a producer of cheap goods to becoming the guys who make Lexus and robots. By contrast, China seems to have accelerated that transition.  Perhaps the original reason many companies began buying direct in China was because of price. But I suggest that this paradigm is already changing.

At first, China was just a source for cheap goods. However, much has been written recently about The Growing Cost of Doing Business in China (see article in this month’s Inc. Magazine). These changes make us rethink why we went to China in the first place, and how it affects our purchases there in future. I was just telling a customer earlier this week about the rising costs in China. He had approached me, as so many do, thinking about China as a source of nearly free material. But I think that is soon to be dated thinking, not only because of the exchange rate story (five years ago, the dollar bought more than 8 Yuan, six months ago 6.83 Yuan, and now it’s 6.67), but there is an increasingly serious labor shortage along the coastal cities, causing upward pressure on wages. China’s labor rates have been considered by many to be artificially low anyway, depressing domestic demand – something the government there wants to change. Harvard Business Review reports that “Workers’ wages are bound to go up in future; the Chinese government wants consumption at home to rise.” see article

To be sure, China is still a relatively economical source, just not as much as it once was. And it will take a lot of price increase to get companies to move their purchases elsewhere, “especially for companies that have spent years and untold sums fine-tuning a network of Chinese suppliers”. Therefore, it will be a long time before China loses its premier role as the world’s dimensional stone producer.

But the nature of trading with China is bound to change.

In a country that has put two men and one women in space, launches their own communication satellites, builds the world’s fastest super computer and of course makes my beloved iPhone, their intended future of high end, quality products seems self evident. Yet we continue to think of them as a source for cheap goods. So what does this mean for us? I suggest we need to revisit our thinking.

With soon to be the largest middle class in world history and rapidly rising wages, China offers the US the opportunity to become our customer, not our supplier.

As I mentioned in my Spring Newsletter, one of the key factors affecting our domestic markets are the eroding profit margins. I believe this is partially self-inflicted. During this bad economic period, downward pressure on prices has caused everyone to operate at minimum or zero profit levels. This means companies are living off of resources from previously better times. At a Distributors Forum this spring at Coverings, everyone agreed, operating like this could only last so long, and that the US market would not really recover until profit margins could get back to positive levels.

I believe the only way we can do this is alter our focus from import to export.  Already, old China hands have discovered this, and several product categories see China now as one of their primary markets – cars, scotch, and jets.

As most of my regular followers know, my business partner Steve Thoner leaves for China today for one of his many regular trips – see article . He is there every other month, for a month at a time. He has an American’s perspective on the market, with unsurpassed understanding of the Chinese market and just which factories to work with. And he keeps a seasoned eye out for materials of value that can be profitable for all concerned. He will be busy selecting materials and controlling orders for our discerning clients. What can we select for you?

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