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September 19, 2019

Razat Gaurav on BBC Radio

LLamasoft's CEO Razat Gaurav talks with BBC Radio about companies getting caught in the trade war.

See the transcript of this interview below.

Announcer: This is BBC Radio 5 Live, available on the BBC Sounds app. Up All Night, with Rhod Sharp.

Rhod Sharp: The trade war between the world's two economic giants goes on. But after a year of advance and retreat, American and Chinese deputy trade negotiators are due to meet, hopefully, in Washington later this week, for the first in-person meetings in nearly two months. Nobody is holding their breath, including President Trump, who has said that a new agreement may not happen until after the 2020 US Presidential Election.

Rhod Sharp: Companies are having to do some fancy footwork to cope. And for some, it's much more difficult than others. Razat Gaurav has a bird's eye view of this as the chief executive of LLamasoft, a company that helps other companies with their supply chain issues. I asked him to help us understand how businesses are coping.

Razat: Clearly, there are many discussions for the policymakers to have between the two countries, but as it relates to how this impacts our customers, and our customers tend to be large manufacturers, retailers, distributors, logistic service providers, I think everyone is looking for some level of clarity on where the policies will land. Right? Clearly they've been shifting stances in the last 12 months or so. And there have been some sectors where more concrete decisions have been made, but then, frankly, there's also been a lot of uncertainty in most other sectors.

Razat: So I think while it's difficult to tell if there'll be any level of definitive resolution on where the policies will land, ultimately, a lot of the companies we work with, a lot of our customers, are just looking for it to reach some level of conclusion so they know what policy framework they need to work under, what regulatory changes will be made on duties, taxes, tariffs and such, so they can go about making appropriate adjustments in the way they think about where they produce, where they source from, how they distribute their shipments and their orders. So I think, more than anything else, I think everyone in the commercial world, folks who run businesses, are just looking for some level of definition around the policies so some of the uncertainty can be removed.

Rhod Sharp: Right. Yeah, certainty, that marvelous word. So obviously we're not talking about farmers here who have taken a hit maybe because they sell soybeans to China or something like that, we're talking about manufacturing companies. Which sectors have so far managed to dodge the bullet? Are people managing to box clever here and do things that keep them out of reach of at least some of these tariffs?

Razat: Yeah. Look, there are different dynamics in different sectors. For example, if you think about the whole fashion apparel, soft line, shoe manufacturing industry, even prior to some of these tariff discussions and these policy debates taking place, there was already a movement and an exodus out of China into other parts of Southeast Asia, countries like Vietnam, Indonesia, Philippines, Bangladesh for example.

Rhod Sharp: Really, you're saying that even before this all erupted, people were moving production out of China.

Razat: Yes. Yeah, they were. And that was primarily driven by economics. Because of wage inflation in China, a lot of the advantage from the labor arbitrage was getting diluted. Right? So in these sectors, we were already seeing a movement out of China prior to these policy discussions taking place. And in fact, even in China today, for the Chinese consumer, a lot of the tennis shoes or the shoe manufacturers are importing from countries like Vietnam, as an example, right?

Razat: In other sectors, like automotive, we've seen that many companies, and these automotive companies could be OEMs or could be tier-one, tier-two suppliers, they've already been going about and looking at evaluating various options for nearshore and more domestic manufacturing, and making appropriate adjustments in terms of their nodes in the supply chain. Right? And again, some of that was happening prior to the tariff regime discussions, but a lot of it has, frankly, been accelerated since some of this uncertainty unfolded.

Razat: In some other sectors, like high-tech, thinking about mobile phones, PC manufacturers, laptop manufacturers, China just has a disproportionately very large percentage of the global capacity for manufacturing and production.

Rhod Sharp: And that's really hard isn't it? Because you've set up your line, all your suppliers are sending this stuff to that particular factory. You can't just turn on a proverbial dime there, can you?

Razat: That's exactly right. And frankly, you'd require very significant capital investments to replicate the sort of capacity and the infrastructure that China has, because, frankly, no other country in the world has anything remotely close to that sort of infrastructure. And so, there has been more of a wait and watch approach to really see how these policies will unravel before any large big capital investments have to be made.

Razat: To give you an example, to open up a semi-conductor fab plant, so a fabrication plant, it costs anywhere from $2 billion to $4 billion each. Right? So these are very significant investments. And there, companies have been on a wait and watch mode. They've been analyzing options, they've been analyzing scenarios in discussions with suppliers, with other countries, and modeling those scenarios, but no significant change in volume of production has taken place in those sort of sectors.

Razat: So each industry sector has a different dynamic to it, but regardless, I think it's safe to say that there's a lot of uncertainty. There's a lot of anxiety across the customer base we work with. And there's a lot of scenario modeling happening because everyone is in speculation mode at this stage.

Rhod Sharp: Right. And a lot of pressure then on the negotiators from this sector in particular. I mean, we know that the tariffs on mobile phones, for example, were delayed. And that was very important to people like Apple.

Razat: Yeah, and again, like I said, in the mobile phone sector, China just has a very high percentage of the global manufacturing capacity, and whether it's for the components, what goes into the mobile phones, or the finished product, to replicate that sort of an infrastructure will require massive investments.

Rhod Sharp: So what about cars? Yeah, what about the car manufacturers?

Razat: The car manufacturers, it's interesting because if you look at the evolution, for example, in countries like Mexico, which is more of a nearshore center for the North American markets, there has been a build-up in manufacturing capacity. Right? Also, there's been changing demand patterns. In fact, we work with large OEM companies, and we're projecting, using artificial intelligence to project the demand for various categories of passenger cars, between SUV, sedan, sports cars, etc.

Rhod Sharp: And when you say "OEM," by the way, that's talk for, what is it, original equipment manufacturer?

Razat: Yes. Original equipment manufacturer. So manufacturers of cars, like General Motors, Honda, Toyota, Ford. Those are, in general, referred to as OEMs. Right? And there, they've already been making adjustments in what volumes they need to produce of what cars in the future. And because of some of the changes in preferences, because of some of the changes happening with the adoption of electrical vehicles, and some of the changing travel patterns of the next generation of consumers of cars, there are more and more people that are going down the path of using Uber or Lyft as opposed to owning a car. Right? Particularly in urban areas.

Razat: So there's major shifts happening in demand patterns. And based on that, they are reconfiguring their production and their sourcing strategies. And there, we have seen a movement already more towards nearshore, in countries like Mexico, as well as more towards domestic manufacturing. And the same goes with the tier-one, tier-two manufacturers because, in some ways, they follow these automotive companies.

Rhod Sharp: Right. So you can argue that, in a way, these trade tariffs, which we've been told are going to hurt the consumers at the end, where people actually buy this stuff, are helping the countries which make it. I mean, they're helping the United States because they're bringing home the industries. They're returning them to the mainland, if you like.

Razat: Yeah. Unfortunately, the implications are very nuanced, complex, and very specific and different for each industry. Because in some industries, yes, it brings back manufacturing and creates jobs. In other product categories, it actually creates inflationary pressure. Because, remember, I mean, dues and tariffs can be anywhere from 10% to 25% of the total cost of goods sold for some of these products. And so, if you're the manufacturer of the product and you're trying to retain the same margin, you've got to increase your price by the gross margin to be able to just keep a flat margin. So that means that there's going to be inflationary pressure in certain product categories. Right? So the implications on the economy are actually very complex to unravel. And they're very specific, and they're very different for each product category.

Rhod Sharp: And there, from the company LLamasoft, was an expert on how you figure out the trade war these days. Razat Gaurav, their chief executive.

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