March 19th, 2020Josh Scharf describes manufacturing in China and other countries

Richard and Elizabeth interviewed Josh Scharf, manufacturing expert, on Passage to Profit, The Inventors Show, at iHeart. It aired on iHeart radio station WOR 710 on Sunday, March 15th. For the full podcast of that night’s show, please visit the Passage to Profit Show YouTube channel or website.

If anybody wants to ask Josh questions about manufacturing, you can reach him through his email address: Josh@archetypeltd.com

Richard – We have Josh Scharf.  Josh is a client of ours, he’s been a client of Gearhart Law since 2007. Josh has been making consumer products forever and sourcing them out of China and so of course we’re all wondering what’s going on with the corona virus.

Josh – I’ve been manufacturing in Asia in general for well over 30 years and not only for my products but also for clients’ products, mostly fortune 100, so I’m kind of a bit of an expert in terms of how to produce, where to produce, and what the issues are.   What we’re facing here is really the perfect storm in China.  Under normal conditions every year there is Chinese New Year, typically the factories start closing down in mid to late January, they come back in mid to late February and they start up again.  In this particular year because of the slowdown in orders  from North America, factories started closing down earlier, like at the end of December.  Now what that means is that their workers who usually stay at the factory, and it’s not as bad as it sounds, they live in dormitories and on the factory grounds, go back to the provinces from wherever they came from all over China. If you’ve ever been to China before Chinese New Year it’s a horrifying vision because everything is travelling.  People are traveling by plane, by bus, by bicycle, by mule pack, any which way to get back to the provinces for Chinese New Year.  They stay there for a few weeks and then they head back to the factories.  This year, because of Chinese New Year, everybody is back home to diverse provinces and then this coronavirus thing started hitting, which meant that people were not traveling back.  Now the factories are usually in five or six eastern provinces in China, and depending on what you’re manufacturing, in different provinces. Without workers they can’t do anything.  So they’re not coming back as fast, and that there’s always some loss even on good years, they always have a certain percentage of employees that don’t come back, but this particular year it’s a real issue. 

Richard – So the factories are at a standstill?

Josh – Not completely.  We produce a number of products in factories in China, but their percentage of workers is down. One factory is about 40% staffed, somebody else’s is at 65%, or so they tell me, and who really knows the truth here. The other problem is that you have to know your product.  Now for every product or most products, certainly if they have electronics in them or certain components, everything is not manufactured under one roof.  And the factories that we contract with, they’ll finish a product, maybe doing injection molding, assemble it, pack it out and ship it, but a product might have multiple parts from different factories. So then we have to be concerned if the battery factory, if the PCB (the printed circuit board) factory, is producing.  Even if you pack it in cartons, if the carton factory is producing, if the little printed bags that you put the product in, or the printed instructions, if they’re up and running.  So without those component parts you’re stuck. Now the component part manufacturers also provide components to factories all over the world. So automobile factories in the United States and Mexico, if they’re not getting their wiring harnesses from the Chinese factory, they’re stuck.  So you can understand the rolling effect of having this problem. Now we’ve diversified and we’re opening up a factory or two in other countries.

Richard – But that’s for your products, right?

Josh – For a couple of my products right. But I’m always being approached by old clients, new clients, asking for advice as to what to do.  But the real issue is that even with factories in third countries you still have to get the sub-components from China because there’s nobody else who’s manufacturing them.

Richard – Wow that’s a really interesting twist and the scale of the problem is huge. You can understand why the market has been so choppy lately with respect to the virus because manufacturing could take a real hit here and there could be a real impact on the economy.

Josh – Well it is already having impact but yes, the potential is greater. Now, you know, retailers not having product on shelves, automobile manufacturers, it affects really every industry that deals with any kind of manufacturing in China.  We’re now finding out that pharmaceuticals, drugs, are being manufactured in, of all places, Hubei, the province where Wuhan is. 

Richard – So your drugs are covered with germs too? 

Josh – Hopefully that same drug cures whatever germs they’re sending.  It hasn’t really hit a crisis point but I think a lot of people are waking up here and saying, you know, we have to take these industries back.  Which is not necessarily a bad thing now. There already was an issue even before corona virus with the tariffs and the trade war, and I know that with some of our products where we would normally pay 1.3 percent tariff we’re getting hit with 15 percent tariff for things coming out of China.  So there’s an incentive to take it to other countries and manufacture in other factories but multiply that out and you can see how big of a problem this is.

Richard –  When I was at the Toy Fair last week, everybody is shipping from China, of course everybody was talking about the virus.  And the manufacturers that are usually just all over the vendors, they come every year, they’re trying to get more toys. Nobody showed up.  It was just like manufacturer wasteland and of course now is the time when all the toy makers are taking orders for the holiday season, this is when they’re setting up and they’re deciding what products they’re going to do and there’s no manufacturing.

Josh – There is no manufacturing and part of the problem is that they can’t get out of China.  There are no flights out of China, there are no flights into China.  I was going to miss your program because I was supposed to be in China, I don’t know how to tell you this, but I was supposed to go.  I had to cancel my flights about three and a half weeks ago.  I usually go after Chinese New Year, after the workers get back to the factories.  I’m usually there, I usually look for new factories, I’m developing new products as you know and you want to meet with the factories, with the factory engineers in terms of production, and nothing this year. 

Elizabeth – Josh since you’re in the heart of it, probably, I don’t know if you’re any more enlightened than any of the rest of us but… 

Josh – I think I am!  (laughter)

Elizabeth – Is anybody willing to even take a guess about how long this is going to last? 

Josh – You know if I had a crystal ball Liz I could probably tell you but I think it’s really anybody’s guess.  I know a lot of a lot of marketers, a lot of manufacturers, like for example Apple, have gotten into the manufacturing business recently. Now for an iPhone, for just an iPhone, it has 200 different parts to it that come from 40 to 43 different countries that all converge at the assembly factory in China. So the key is really for any kind of manufacturers, I don’t know when the coronavirus is going to end, but what I do know is that if you’re manufacturing or developing a product you better know what goes into your product, you better know how to manufacture your product. It’s no longer just a widget, you have to know every single component and have a deep understanding of that. 

Richard – So how fast are how fast can 10 products be switched from one factory to another?  How quickly could Apple move their manufacturing facilities?

Josh – I think with Apple that they’ve been working with their component manufacturers all along but they haven’t taken over the manufacturing. So they might just be changing seats at the factories.  But I could tell you for other manufacturers if they’re looking to move their manufacturing to a third country or fourth country or wherever, they have to be realistic in terms of timeline.  And it won’t happen tomorrow and you have to take a look in terms of anticipated volumes.  What you hope to produce, how the factory is going to be producing them when they’re going to ship them.

Richard – So it’s not just something that can happen overnight.  It’s really a process to plan the manufacturing. Could somebody like Apple just pay more for workers and get more, are these jobs specialized with trainings involved? I guess it depends on the job.

Josh – It depends on the job.  Manufacturing has everything to do with having a worker repeat exactly the same thing over and over again. So it’s not high-level skill, it’s just one guy is going to solder this point and then move it down the line. That’s what mass production is so it’s not a high skill thing, it’s just you need a volume of people depending on what you’re selling, what your manufacturing.  Understand that at a certain point we had much higher manufacturing capabilities in the United States.  In the early 90s a lot of the marketers moved down to Mexico, to Juarez, with the understanding that it was going to be less costly and they’ll be able to produce the same quality of product and they could leave the unions behind.  That was the incentive that and produced in North America and with NAFTA here was an advantage. There was a time when we used to manufacture TVs and radios and all kinds electronics here in the United States.  You can almost hear the sucking sound going down to Mexico. And when they realized they couldn’t manufacture down there they went to China. I was in China when that happened and the Chinese thought it was like manna from heaven. It was just unbelievable but they took it on.  And they had enough mass, there was enough investment from the government.  Now to the point about more workers going to the factory.  Actually I understand the PRC, People’s Republic of China, is actually incentivizing workers, giving them bonuses, helping them travel to the factory, because it’s to China’s interest to get manufacturing back up or else if it just keeps this way they’re going to lose a lot of business.  They have been already, and cutting and sewing operation, which is very low-tech, you know sewing sneakers, things like that, that’s been leaving, bleeding China for quite some time because you don’t need a lot of technology. You need fabric which unfortunately comes from China, you need sewing machines, you need relatively low skills and production. 

Richard – Somebody was telling me at the Toy Fair about how they could manufacture everything needed for their toy someplace other than China except for the box. The box was something that they had to have made in China. it was just a cardboard box with a label that was put over it and so when you put the label over the size of the box that’s what made the box.  You had this cutout and you put this label on. In order for them to buy a machine to do that automatically would be twenty million dollars and so for their small operation it was completely impractical to automate it. But, for the number of units that they were selling they were buying these boxes from China and somebody sits there and puts the label on the cutout and they make the box and that’s the only way the only economic way that they can get them. And it just kind of amazed me of the logic in that, that it’s cheaper to have somebody sitting there putting a label on cardboard to make a box than to have it automated.

Josh – Yes, but then they have to deal with issues about quality control, quality assurance, the box, a handmade box is never going to be the same as a manufactured box. What they’re dealing with is the printing presses, the large volume printing presses, the die-cutting, the folding machines, which are costly. I don’t know about twenty million but they are costly. And if you don’t have all that you know you might have heard the phrase supply chain. This is what we’re talking about. The supply chain, the ability to have all these sub factories produce the component that you need to complete the product.

Elizabeth – This has been awesome Josh thank you. 

Richard – Maybe at the end of the day it would be good for the United States at least maybe more jobs here I guess we just have to see how it all works out.

Josh – We do, you know what and it’ll hopefully deal with the theft of IP and all the problems that as you know my business has been plagued with. If anybody wants to get a hold of me probably the best way to reach me is through my email address which would be Josh@archetypeltd.com

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