How to Navigate the Chinese Supply Chain Post Covid-19: Ioterra Webinar Series

by | Jun 10, 2020

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Full transcript below

Daniel DeLaveaga: Alright. I think we’re on. My name is Danny. I’m one of the founders of Ioterra. I’m really excited to be here today. This is a new video series that we’re just starting up, where we’re gonna be talking to industry experts all about product development issues and topics. And today, we’ve got a fun one, manufacturing in China, post COVID-19. And so, here with Robert Welt, from A-One Group Holdings, and thank you so much for jumping on, Robert.

Robert Welt: Thank you, Danny. Good morning.

Daniel DeLaveaga: Morning. Before we get started, I’d like to go ahead and introduce you. Robert has a unique understanding of doing business in China, over 30 years of experience working in Taiwan, as well as mainland China, you’ve strong background in sales and finance. And actually, you’ve lived in China for 17 years now, is that correct?

Robert Welt: I’ve lived in China… I went to Taiwan in 1989, and I was there until 1999. And I have been in China, basically, since then. So, almost 30 years in Asia.

Daniel DeLaveaga: Awesome. So… And actually, I think it’s been a little over two and a half years or three years since I was actually there, and you showed me around Guangdong and Shenzhen, toured me all over the place. Yeah, I had my [01:38] ____ hat on. I was working on the target projects and yeah, thank you so much. That was an experience I’m never gonna forget, actually.

Robert Welt: We had a good time.

Daniel DeLaveaga: So just to get this kicked off, I’ll give a little bit of background on A-One Group Holdings, your company, and then, which is a local company actually, here in Reno, as well as an office in Guangdong. And then, in general, just A-One is a full service… Is a contract manufacturing company, a sourcing project management firm, and it does everything from quick turn prototyping, which we worked with you guys in the past on, as well as long-term production and tooling and… I’m gonna go ahead and get this started off with just quick run down on how things have been going. Can you tell us, in light of COVID-19, when you started realizing that this was a big deal and how things have changed, just a quick background? And actually, I’m gonna pause you before you get in there, I wanted to ask the audience and let the audience know that, feel free to ask questions anytime on the right here, and actually, if you’d like to ask it in person, you can just let us know and we can pull you on stage to ask. Other than that, we have a couple of polls and we’re really interested to hear about your thoughts on the socioeconomic climate right now. So, back to you, Robert. Maybe give me a quick run down on how corona’s affected business.

Robert Welt: Sure, so today, China is in a post-COVID world. From all that we can tell, everything’s back to normal. In terms of our life, we’re not locked down, gyms are open, restaurants are open, businesses are functioning, and as you can see, everyone in the office is wearing a mask, but this is more or less just a reminder that we have to be vigilant, but all in all, we’ve gotten past the hump. In terms of business during the crisis, it hit us at a bad time, which is right before Chinese New Year. And Chinese New Year for us is typically the most chaotic, difficult time of the year. Everyone wants to get everything out at once, and we had customers in town, our resources were stretched, and we didn’t really pay attention to the ambiguous reporting from the government at that time. So, it really was during Chinese New Year that we realized there was a big problem, and so, we cut all of our plans out and came back home and locked down, because we didn’t know if we would be like Wuhan, and no one can leave their home, no one could go shopping, no one could go anywhere, and most of our employees were also locked down.

Robert Welt: So, we have 20 employees here, most of whom don’t live in Guangdong, and they went back home for Chinese New Year, and eventually they were all in lockdown. So we were supposed to come back on the 8th of February, that got delayed by a week, then another week, and then we had to jump through lots and lots of hoops to prove to the government that we were ready to open up again and allow our people to come back. During this time, there were a lot of questions. We didn’t know what would happen, and we really didn’t get a complete understanding of the gravity, and or what our plans going forward would be, until maybe the beginning of March or maybe the first week of March. Ultimately, people came streaming in throughout the month of March. We had a skeleton staff, we were working, but we were definitely undermanned.

Daniel DeLaveaga: It sounds like a mirror of what’s been happening over here, actually. You were saying…

Robert Welt: Yeah. I would guess that we’re about two months ahead of the US right now, two or three months.

Daniel DeLaveaga: And so, in terms of the supply chain, and you said that your employees, you can see, are in the office. Is that pretty normal, across the board?

Robert Welt: Yeah, everybody’s back to work. The months of March and April were tough. A lot of factories did not have employees. We had to kick in and help out too. We’ve been working with our supply base for well over 12 years, most of the people we work with. So, we’re very close to them and when they need help, we reach out, and there was a lot of involvement with in-process QC and logistics, to try to help them get on their feet, but as of today, things are pretty much back to normal.

Daniel DeLaveaga: That’s really good to hear. I’ve got a couple of questions that people asked, as they registered for the event, that I’d like to hit up. One of them is, “Is the drop of the Chinese Yuan showing up in lower-cost in product quotes from China?” Are you seeing anything like that? Or do you have any anticipation of that happening?

Robert Welt: The devaluation of the renminbi definitely makes us more competitive. Sometimes it’s mitigated by higher material costs, so there are a number of base materials that we work with, ABS and aluminum, which have gone quite high. But overall, yes, it does put us in a more competitive position.

Daniel DeLaveaga: And actually, before the whole COVID thing, there was quite a lot of talk, at least in my circles, around capacitor shortages and things like that. Can you talk a little bit about that?

Robert Welt: Definitely on components, we’re facing challenges. Typically, when we do PCB assemblies in China, because we’re fighting with the really large contract manufacturers, we often find it cheaper and more efficient to purchase the components in the US or Europe and have them consigned out here. We are doing a project right now, which is a pretty well-populated board. We had one issue with components, but we mitigated that problem. So right now, it’s not drastic.

Daniel DeLaveaga: Okay. Great. And so a little bit on this note, will… A question asked by Steven here, will China primarily become a part supplier instead of a manufacturer for goods. This is considering the socio-economic climate, tariffs, things like that.

Robert Welt: China is a very resilient place, and the Chinese manufacturing sector is equally resilient. I think China will keep on… Keep the same pace it’s been going at right now. The benefit of China over other places in the world, is that everything is located here, the supply chain from beginning to end is complete. And in other places, you can get cheaper labor, maybe, and maybe there’ll be low tariffs, but overall, China has the ability to use its complex supply chain to mitigate those issues.

Daniel DeLaveaga: So talking supply chain actually, that drives right into this next question. When I was there, I was pretty blown away by the number of different suppliers of different components and things like that. Can you just paint a picture of what the supply chain looks like specifically in Shenzhen and Dongguan for consumer electronic products?

Robert Welt: Sure. So Dongguan and Shenzhen are very strong in electronics, plastics and the factories that we went to, when you came here, are all relatively small. These are people that we’ve been working with for many, many years, and we have contributed a great deal to supplier development and helping them improve processes and efficiency. Typically, the factories that we work with would be in the 150-300 people range. We do have factories that we’ll work with which are 3000 to 4000, but often you’ll find that they’re small to medium enterprises, and then the various components will go to a central location for assembly and testing. But most of the people we work with are a single product manufacturer.

Daniel DeLaveaga: Okay. And talking about companies that you guys work with in general, I guess the US companies and European companies, what’s the standard operating procedure for starting to do production in China?

Robert Welt: Well, if we have a new project, we elect a supplier or suppliers to be the key player, and we have a project review and we look at the needs of the customer in terms of material and testing. And we evaluate whether we can use Chinese equivalent product to reduce cost or whether we have China methods of production in terms of manufacturing to improve processes, also to make it more competitive, and we just move on. So I think when you were here, we visited one plastic injection factory that we’ve been working with for 15 years, and we visited a PCB assembly factory, and you… Did we see another factor together? I think that was it. And so ultimately, either these two components would be shipped to the US for assembly or we would nominate a third supplier to do the assembly and testing here.

Daniel DeLaveaga: Okay. Great. And so in your business model, are you generally the contract manufacturer of record or do you support customers as a consultant?

Robert Welt: Contract manufacturer. We do consulting, but not a lot. The consulting that we might contribute to a customer is improvements in design, proficiency or competitiveness, but we are a manufacturing sourcing unit.

Daniel DeLaveaga: Okay. Great. And then I’ve got a quick question about manufacturing capacity. What are you seeing right now compared to before this, before corona and…

Robert Welt: We’re back to 90%. There’s some material supply issues that we have, but overall, we’ve overcome them. So today, I would say, we’re pretty much where we were in December of 2019.

Daniel DeLaveaga: Okay. And I see that we have a question in the chat here. Actually, it looks like Daniel Price would like to come on and ask you a question, is that… So we’re gonna go ahead and invite him up real quick.

Robert Welt: Alright.

Daniel Price: I’m on stage. How spooky.

Robert Welt: Hi Daniel.

Daniel Price: I don’t know if it’s so much that I wanted to come on stage or that I was strong-armed into it, but really good to see you Bob and thanks so much for joining us.

Robert Welt: Good to see you.

Daniel Price: Yeah, I was thinking along the lines of, Danny’s questioning about how to kick off a project, I was curious as to your insight on when it makes sense to go and visit your contract manufacturer directly? What types of initiatives? What sizes of projects would dictate it being a good decision to go out and travel and get to know your suppliers.

Robert Welt: Okay, well, first of all, I don’t think people will be visiting China in the near term. So we’ll have to rely on our expertise here, and the fact that we have boots on the ground to mitigate that problem. Typically, people don’t really need to come. As long as they interface well with our US office, with Lauren and with our engineers here. There are certain projects where people are in the process of testing functionality and proving their engineering success. And often it is a benefit to be here and work with the tooling engineers, to work with the plastic injection shop, to work with the PCB people to work out the kinks. But that doesn’t happen that often. It’s not impressive in it, but typically we can handle problems through communication and through drawing and DSM.

Daniel DeLaveaga: Right. So that could very well be one of the differences though, in this post-COVID world, ’cause a few years ago, whenever someone was kicking off a large batch manufacturing, they tended to wanna go and visit their factory at least once, so that might put much more reliance on A-One and your types of services.

Robert Welt: Yeah, we’ve been here for a long time and so we can provide the scrutiny and due diligence that people need to do, they don’t necessarily have to come and do it on their own. We do have customers who are very large customers that work in the automotive space, and they have to come out and they have to audit and they have to put hands-on, but that’s more protocol than necessity.

Daniel Price: Awesome. Thank you.

Robert Welt: Thank you.

Daniel DeLaveaga: Alright. Thanks, Daniel. Hop you off here. So doing business in China, what are the differences that you’re seeing? Other than now, we’re not gonna be able to come as easily to visit the manufacturers there, what are the differences? Are there gonna be any major hurdles that you’re seeing with regards to shipping or the supply chain?

Robert Welt: Not really, we had issues in March and April, it was very difficult to make vessel booking airship, it was expensive. And that was a challenge, but it’s reverted by now. Look, we’ve been doing this since 2003 when we opened the company, ironically during the SARS epidemic. So to a certain degree, this COVID is not a total surprise to us, we had a little bit of experience based on that, but ultimately, our job is to stand to represent our clients in China and do the job for them. And try to make their lives as easy as possible. So especially now when people can’t come, then our performance is even that much important, more important to people, because we had boots on the ground and communication’s very easy these days.

Daniel DeLaveaga: And by boots on the ground, so you said you’ve got 20 employees there and you’re working with a myriad of different contract manufacturers, what does that mean? Does that your employees are going into the factories, they’re representing the clients, checking in on how manufacturing is going on, and can you talk a little bit about that? What kind of engineers you have on staff?

Robert Welt: We’re primarily a project management-based company. So we don’t have a “Procurement Department”, but we have project engineers who are responsible for managing from top-to-bottom. And the other key component to A-One is our quality team, so inspection for us is paramount. Quality is everything. And so we are intimately involved in the processes with our suppliers, our manufacturing partners to maintain vigilance during production, to ensure that the engineering requirements that we have promised to hold up are kept. We have two engineers who are primarily involved in mechanical engineering and plastics tooling design. But our QC team, so if you look in the office right now, there’s about 12 people here, which means eight of our employees today are out in factories as we speak. And that’s pretty typical for the way we work.

Daniel DeLaveaga: And so can you talk to me a little bit about the projects you guys work on and have specialized in? I know that you do a lot of work at the automotive industry, aluminum, as well as the type of work that we’ve worked with you in the past in consumer electronic product development, that kind of thing. But give me a quick breakdown about your business.

Robert Welt: Okay. Our portfolio is automotive, die-casts, plastics, PCB assemblies, and product assembly. So about 35% of our business is in the automotive world, so we do high-pressure die-casting valves for commercial vehicles primarily in Europe, and then we manufacture oil coolers for General Motors, commercial vehicles that goes to the states. And this is a pretty big part of our business. Plastics, which go into HVAC, medical, and IoT is also a big part of our business. So we do a lot of tooling, a lot of plastic injection. We manufacture software dongles for a company in Europe which is a PCB assembly with chips that they can assign to us. And then we do a myriad of different projects on… It could be consumer products, it could be an assembly of the devices that require lots and lots of components that we source locally here, and essentially, that’s what we’re here to do.

Daniel DeLaveaga: Awesome, and so we got a question from Leonard Zerman regarding what US-China caused issues and disruptions do you foresee, in terms of future tariffs, further restrictions, that kind of thing. Have you guys thought about that and…

Robert Welt: Yeah, we’ve thought about it. Look, when the tariffs first started, it was tough. But it seems to us that the overall effect on our customer base is not that intense. In terms of the future, I don’t have a crystal ball, but if you… I read the media, I see what people are saying about China and the US, and there seems to be this intense stand-off. My feeling as an American in China, is that it really doesn’t affect day-to-day activity here. So, I’m not challenged as an American by my Chinese counterparts. Quite the opposite, we have… That the relationships have not changed whatsoever. You have people complain about it, but I don’t see anything in the future that will make this more difficult than it has been over the last year and a half. And I think with COVID, and the inability for people to travel, if they allow us to maintain… Run their projects as they need it to be, we can try to mitigate these things through improved competitiveness.

Daniel DeLaveaga: Awesome, and so, in light of this, I’m getting requests or some of the conversations I’m hearing are about mitigating risk, and that’s part of the issue here, and it sounds like, things seem to be going pretty smoothly, despite a lot of the restrictions. There is an article I recently read on CNBC, about the increase of fragmentation of manufacturing, having different manufacturers doing different parts of an initiative, and then having a single manufacturer do the final assembly test pack. What are you seeing, in terms of projects right now? Are you seeing that happening or is it gonna be more of the one big factory manufacturing the entire product?

Robert Welt: With the exception of really big contract manufacturers like Foxconn or Sanmina, essentially, China is a collection of small factories, or medium-sized factories, contributing to one central assembly unit. So there’re not many companies in China that cover a complex range of different disciplines, and they rely on these smaller factories to provide to them. Number one, it’s more competitive, and number two, they don’t have to be… They don’t have to invest in machinery over a broad spectrum of disciplines, and they can focus on what they do, is assembly and engineering. But there are not many factories here that do everything.

Daniel DeLaveaga: So I guess like, let’s put the startup hat on. If a startup comes to work with you versus a large automotive manufacturer or something like that, now what would you recommend? When do you start? When can you start kinda looking at China as a viable option for either prototype development or production piloting? When is a good time to start the process?

Robert Welt: Well, we have representation both on a service-end, and engineering-end in the States. And so a lot of the initial discussion can be heard with the startups in the US, to determine what they need to get done, we can evaluate what we’re able to do for them in China, and then we create a template for design for manufacture, to show them what we plan to do with their product. And typically we’ll go through a prototyping stage, and try to prove out the engineering concept, and then tweak it to meet the needs of China for manufacturing and to improve the competitiveness of the product, and then we move into manufacturing. So a lot of it depends on the communication on the front end in the US before we move the bulk of the project to China. By the time it comes to China, it’s already been, worked out in terms of engineering, and the possibility of us manufacturing here.

Daniel DeLaveaga: So actually, on that point, we have a member who’s asked the question, but do you think you’ll offer engineering design services anytime in the future? For instance, plastic bottle threads, latches, enclosures, stress analysis. So you just mentioned that in most cases, the company has the engineering resources in-house, and brings you a design that’s ready for manufacturing. In the case that that’s not true, what do you say here?

Robert Welt: Well, we definitely wanna beef up our engineering expertise, and that’s something that we have a plan for, building an engineering team here in China. Right now, we do primarily rely on our suppliers to help us provide engineering solutions. And that’s worked out very well for us. So we have engineers in-house who can question or challenge what we’ve been provided or what’s been decided is the right way to go, but overall, yeah we do rely on the Chinese engineering support factor.

Daniel DeLaveaga: And that a lot of times comes in the form of a company sending you a product that they want to be made and then you getting back information, ’cause you’re connected to the manufacturer saying, “This is not possible. You need to change this. You need to do this.”

Robert Welt: Right.

Daniel DeLaveaga: Is that often what the ends up happening?

Robert Welt: Yeah, we typically end up manufacturing a product in a way that we did not expect to at the outset. So, for sure, we have to tweak something in the engineering space to make sure that we can actually use our talents in China to achieve it, but ultimately, fit, form and function would be the same.

Daniel DeLaveaga: Okay, great. We have another question from Christina regarding IoT and the changes we’re experiencing from Asia-Pacific supply chain, what could be some expected impacts for other players in the IoT stack that depend on this to some extent? So, for instance, a software provider, software services provider, solution provider, are you seeing any changes? You’re primarily on the hardware side, but you’re building a lot of connected products, have you seen any influence there?

Daniel DeLaveaga: No, we don’t do a lot in software. We’ll flash products for some customers. In terms of IoT, I would assume, I mentioned previously that there are some issues on supply chain challenges, especially on components. So for people who are building PCBs, there’s a potential that that would be impacted to a certain degree, but overall, no, I don’t see any changes to that.

Daniel DeLaveaga: Okay, and thank you Christina for the question. So I think this is a pretty great overview, I’m really glad to hear that things seem to be picking up back to normal or actually seem to be back to normal, completely. Though the one big, the one big stoppage here is, and actually Daniel has a question about when does it make sense to travel to China and if that does stop? So any opportunities you’re seeing for companies looking to get into production in the near future, specifically with working in the Chinese or Asia-Pacific area?

Robert Welt: Well, look, it’s up to people’s best judgment. From what we’ve been told, although COVID is over in China, we still can’t leave the country. We can’t go to Hong Kong, we can’t come back to China if we leave, so we’re still under a certain type of lockdown, and I don’t expect this lockdown in terms of overseas visitors to China to be improved until October. We do have some customers who would love to come back here despite the risk, and in some cases, it would help if they were able to come here. But I think, for the time being, realistically, I would say October would be when people can probably plan on coming back.

Daniel DeLaveaga: Okay, but in terms of standard operating procedure, it won’t change too much other than that. So new business oftentimes, it’s good to go in general and create relationships with the contract manufacturers that you’re working with and with your team, that’s just gonna be paused for a little while?

Robert Welt: Yeah, but of course, the point, the strength that A-ONE has is we do have a Western-managed team in China that’s been working together for almost 15 years now, and we can handle almost all the requirements, so you don’t really have to come. There are a lot of ways for us to scrutinize and prove and approve for our customers in the states and we can keep on providing that function. So I don’t think it’s a huge deficit that people can’t come right now, nor do I think it would be dangerous.

Daniel DeLaveaga: Yeah, yeah. Well, I really appreciate your time this afternoon and morning, and I’m looking forward to continuing this relationship. I think we have one more and before we end up here, but it has to do with prototyping, and you mentioned you had a little bit of shipping challenges, but that those are shaping up and getting more into a standard operating procedure. Can you talk about your prototyping business and how that’s different than the production business?

Robert Welt: Sure, the prototyping business it is beautiful. It includes a number of different disciplines under one roof, so we can… We primarily do aluminum and ABS, but we can do silicon molds, we have access to a wide range of different CNC milling facilities, and we can also anodize, paint, we can do 3D printing, we can do assembly. So this has been a really important part of our business over the last two years that we’ve seen growth significantly, and we have three excellent resources that employ a wide range of machinery. Did we visit one of our manufacturing?

Daniel DeLaveaga: Actually, we did. I was blown away by the one you brought me to, it was a CNC manufacturing facility, that did some finishing as well.

Robert Welt: So they have incredible engineering capability and they have rapid tooling capability. And most of the stuff that we’ve been doing is CNC aluminum, but again, there’re lots of different materials that we can use for that end.

Daniel DeLaveaga: That was… I actually used to be a machinist in California and that was very cool to see that job shop. [chuckle] So…

Robert Welt: Yeah, yeah, they’re amazing, they’re amazing.

Daniel DeLaveaga: Oh, we got one more and, so, Leonard’s asking what is your business process when engaging in a new customer for short-run or prototyping of PCB, PCBA injection molding silicon buttons?

Robert Welt: Well, like I just described, we can do a short-run for prototyping a lot of things. One of the challenges is PCB, we don’t do a lot of short-run PCB right now, but we’re looking at ways to improve that process. Injection molding, we typically use silicon tools, if we’re gonna look at injection molding prototyping, it’s far too expensive to open a tool for prototypes under normal circumstances. But the most efficient way to do that is to open a silicon tool and then you can challenge the design or approve it, and then it can move to injection after that for mass production.

Daniel DeLaveaga: Alright, well, I appreciate your time, Robert, and for all the audience members, if you’d like to check out A-ONE, please go to their website, as well as if you’d like a direct introduction, hit me up any time and we can get you connected, so any last comments or we’re off?

Robert Welt: Nope. No one asked me the one question most people ask, which is, have I ever been to a wet market?

Daniel DeLaveaga: [laughter] Well…

Robert Welt: Which I have.

Daniel DeLaveaga: Yeah, okay, and how was that? Actually, what is a wet market?

Robert Welt: A wet market is just a… It’s just a market. They sell fresh vegetables and meat and they’re great. I love them. They’ve gotten a bad rap, but the next time you’re here, I’ll take you to one, you’ll like it.

Daniel DeLaveaga: I’m excited. [chuckle] Actually, last time I was there, you had me try chicken feet, I think, that was interesting. [chuckle]

Robert Welt: Yes, I did.

Daniel DeLaveaga: Yeah.

Robert Welt: Staple of my diet.

Daniel DeLaveaga: Yeah. [chuckle] Well, hey, thanks so much Robert, and have a good one and looking forward to continue to work.

Robert Welt: Thank you.

Daniel DeLaveaga: So, thank you everybody.

Robert Welt: Thanks a lot.

Daniel DeLaveaga: Bye.

Robert Welt: Bye-bye.

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