Supply Chain, China, Immigration and Investors
The binocular through which this is written
I am the founder and CEO of a startup that provides solutions in the supply chain sector and recently a Senior Associate of a leading venture capital firm interviewed me after having had a chance to have reviewed my company’s pitch deck. For me there were two important take aways from the conversation
(a) it didn’t take him long to pull the customary euphemism “ I do not think you are a fit.
(b) his conclusion that his venture firm do not generally invest in asset heavy-manufactured product dependent companies.
I am not going to elaborate and or dissect the euphemism here, but I want to zero in on his statement “we do not generally invest in asset heavy-manufactured product dependent companies”. However, before I do, let me take you back in time a little.
History Provides Perspective
In the early 90s I had earned a master’s degree in Computer Integrated Manufacturing (CIM) Engineering from one of the leading universities in the UK. At the core of this degree was the concept of applying systems and software (including Artificial Intelligence) to improve manufacturing to gain industrialized competitive advantage.
Prior to going to the UK to pursue the CIM degree I had worked as an engineer in Jamaica for one of the largest mining companies in the world at the time. One of my jobs during my tenure at the company was a plant mechanical engineer, overseeing the mechanical systems used in the manufacturing process of converting bauxite ore to Alumina (the primary raw material for Aluminum).
From my role as a plant mechanical engineer, I had a front row seat to the full understanding of some of the physical mechanical assets that were needed in the manufacturing processes and some of these assets were, valves, pumps, and fittings. At the time, there were four large alumina manufacturing plants in Jamaica, as Jamaica was perhaps then the third largest bauxite producing country in the world. Each manufacturing plant used many thousands of these assets in the manufacturing processes and they were all imported items. Therefore, this created a manufacturing opportunity for Jamaica to have capitalized on at the time.
Upon returning to Jamaica from the UK with my CIM degree and with my foreknowledge of the manufacturing opportunity for valves, pumps, and fittings and my entrepreneurial pull, I developed a business plan, enlisted the government’s development arm of Jamaica (JAMPRO) to have helped me find foreign investors. I knew most Jamaican potential investors would not have had an interest, because of the lack of expertise and understanding in manufacturing.
With the help of JAMPRO the Chinese took a strong interest in my project and flew a delegate from China of at least 20 people to Jamaica to have met with me to advance the project. At the time the Chinese were willing to have become a 50:50 partner in the project. I couldn’t secure the other 50% investment needed so the project never took off. However, there are some lessons I want to talk about with regards to current affairs, about Supply Chain, China, Immigration, and Investors.
The China Problem
China did not by accident become the manufacturing country of the world and upon which the world’s supply chain has now been built. Additionally, China’s ascent to become one of the world’s leading software and particular artificial intelligence applying countries is not disconnected from its leading role as the manufacturing country in the world today. As implied in my story above, China took deliberate steps and invested not only money, but manpower into becoming the lead manufacturing country in the world upon which the world’s supply chain has been built and on which we are now trying to dismantle.
Software on its own is no good if there is no physical asset and or systems upon which the software may be applied. The analogy that may be quickly understood is “blood” is essential for the body to function, however, without the body (the physical asset) blood is no good because it has nothing to apply its “good” to. China advanced in software and systems, including artificial intelligence, because China now has the physical manufacturing processes upon which to apply software and systems. The presence of the manufacturing systems across China led to the buildup of an elaborate supply chain system.
Thirty or so years ago, American investors and leading manufacturing companies thought it was a good idea to outsource manufacturing and to have outsourced particularly to China. This was done in pursuit of short term profit maximization through cheap labor, of which there were plenty at the time in China. China was more than happy to oblige to become the “cheap” manufacturer and manufacturing labor pool for the world, because China was interested in the “long game”. That long game by China has now caught up with us Americans, because now we are trying to slow China down, through tactics that may come back to haunt us much sooner than later.
The Immigration Problem
On the subject of cheap labor, today, we are grappling with an “immigration crisis” and many who take a myopic fear mongering approach to solving the problem, think that for example, bussing people from the borders to the doorsteps of political foes is an answer.
Perhaps another view of this immigration crisis, is one from an opportunistic point of view. Bring back manufacturing to the USA and spread it out through the nooks and crannies of America, then create “economic” manufacturing zones, where these immigrants should be directed and would then become the “cheap” labor force to build back America. These immigrants would not only solve our “cheap” labor supply problem, but they would in tern create down stream supply chain product demands for the goods manufactured here in the USA. These immigrants are not only going to be direct consumers of the products they are keenly involved in manufacturing, but they are going to send back remittances (yes, money earn from their cheap labor) to their countries and the recipients within their countries of these remittance flows will in-turn use the money to buy made in America products, thus feeding the circle of live.
How solving the China and Immigration problems enhances supply chain resiliency
China has a 1.3 billion population, so there is an intrinsic demand, within China, for Chinese manufactured goods. The USA has less than 25% of the population of China, so we do not of our own have a demand advantage, from a population point of view. Therefore, we need to extend our population, through proxy, and this is where the immigrants solve another part of our supply chain needs. They will create the demand (outside of the USA) for our products. This will create a comparative advantage from a transportation point of view to that of China. Most of these immigrants are from neighboring countries that we can use land, water, and air to transport products to and from. China only has water and air access to these countries, so we have a land (road network) comparative advantage as well as closer proximity to give us air and water transportation cost competitive advantage.
As to supplying the rest of the world, the USA would have a volume competitive advantage in producing at a lower cost, so that we may absorb higher air and sea transport cost selling to countries outside of our immediate land reach radius of our neighbors, allowing us to competitively compete better with China. At the end of the day, both the USA and China would need to compete on products and services quality, rather than employing tactics now that will only backfire on us later.
The idea that investment should be made only on “asset light/manufacturing” opportunities is not only myopic but is not value accretive. Software as a Service can only go so far. Without the manufacturing rails upon which Software as a Service is going to reside, there will be little to no value in the Software. The enhancing value of software must be derived from the manufacturing data on which it will learn. However, manufacturing should not be looked at here as just the creation of physical goods. Rather, the concept of manufacturing, should extend to processes that efficiently integrates the movement of and creation of physical goods and the visibility to manage the processes. This in very basic terms, is supply chain defined.
Investors should also learn to pick and support the innocuous valve, pumps, and fitting subcomponent manufacturers. It is too often the focus of investors to only target and support startups that have large companies as their customers. Investors should keep in mind that large companies consume the essential components/service offerings of the small manufacturers/providers, and in many instances the sum of the parts (small customers) is greater than the whole (one large customer). It is by supporting and building these subcomponents providers that we build resilient value chain and the network to support the new industrialization necessary for the decades ahead.