All right, have a seat. So welcome to this panel about supply chains. Sorry, hear me now, right? I think I didn't follow instructions properly. I should have waited. So supply chains have had a very interesting development in the last few years, especially a lot of disruptions happening, especially with the pandemic, but also the wars that are happening. And that has led to, in part, was one of the main reasons actually for the surge in inflation. So supply chains are very much front and center. This comes at a time now also when you have regional blocks now redeveloping, if you want, and there's a lot of discussion about what that means for global trade and supply chains in particular. So I have with me on the panel, I'd like to introduce first, I have, she's the chair of Baker Hughes, Alex, co-founder and CEO of Tuya Smart, and Ryan Peterson, founder and CEO of Flexport. So I have really two people who are very much on the ground, impacted very directly by what's happening, by the changes and the pressures that supply chains are witnessing, using technology to try and deal with some of these challenges. But I'd like to start, ask you about, you know, how globalization was kind of unstoppable, right? Free trade, and there was benefits that were derived from that. You had mentioned to me earlier that about a billion people were lifted out of poverty because of... How have the changes, how have the disruptions impacted your business in recent years?
Hello everybody, it's a pleasure to be here. It's an honor to be in this panel. So let's talk about disruption. So today when you think about disruption, it's become a constant. And on the back of that, trade has reconfigured. Just look at the past five years. You had the geopolitical impact with the Israel war and the Red Sea crisis. On the back of that, you also have the Russia-Ukraine war with the fuel impact. Not just that, you have the pandemics. The pandemics pretty much grounded a lot of airlines. Climate change, the example is the Panama Canal. And then not just that, with the trade restrictions, you know, they've grown fivefold in the past seven years. So it definitely has impacted trade. It's definitely reconfigured trade. Today you have countries traveling longer distance than they would have. So you look at the trade between Brazil and Mexico taking a lot longer. You have connector countries, countries like Vietnam, Indonesia, and Mexico where trade is booming. That is definitely impacted. And I think what's quite relevant for all of us sitting here today is when we think about running our businesses and managing our businesses, disruption to the supply chain now happens every three and a half years. And within that supply chain, within a 10-year span, every company will go through a 40% loss in profitability within one year. So if you think about it from a CEO perspective with an average global span of around eight years, you have to face a supply chain disruption at least two years in your career. So I think my colleagues over here on the panel have some important lessons to learn from that.
Lorenzo, let me ask you about Baker Hughes and how your company has handled the disruptions. How has it impacted you and what are the changes that you've had to make in response to that?
Definitely, and it's wonderful to be here and also on this esteemed panel. And I think resilience is really what comes to mind. If you think about global supply chains, they've been very much disrupted as you've looked at globalization being a theme that is hampered by tariffs, by geopolitical constraints, as well as the necessity to localize. And so at Baker Hughes, what we've taken on board is an approach of regionalization and also resilience. You can never be dependent just on one supply source, and you also have to look to be capable within a global and local capacity. And so as we look at our manufacturing footprint, we're in 120 countries, in which we have facilities in over 50 of those. When we look at our span of supply base, we've got over 2,500 suppliers that on an annual basis we're procuring over $50 billion worth of materials and products and services. So it really comes down to a strategic view of making sure you manage the risk. And as we go forward, I don't think that changes. If anything, especially with the geopolitical time, it requires even more aspect of attention from a risk management perspective. And then I'm sure we'll get into the way in which technology can enable us to also manage risk in the future. But today, all about resilience.
I mean, resilience though can be expensive, is that fair to say?
It definitely can be expensive, and you have to balance the expense with the risk. And if you look at localization, that's one of the ways we should balance it as well. If you look at the Kingdom, for example, a couple of years ago, Aramco initiated a program of in-Kingdom total value add. And what that made as a benefit was if you came localized, you would be given approval. And that's beneficial for the kingdom because it provides them employment. You manage to withstand the resilience by being able to get some local content.
Countries, I'd like to come back on that cooperation and the resilience. If you localize, is there a loser in, for example, some of the developing countries who may no longer benefit from being a cheap producer? But Alex, your company deals with manufacturers, you help manufacturers become more efficient. So what's your experience with manufacturers? Are they coming to you with that localization that Lorenzo was talking about?
Yeah, I think that's, the guest already shared the same opinion. That's right, now the new form of globalization has started. It's inevitable. So we believe that only localization can bring in globalization. And so how you be able to find a smarter way to localize different factors of the different pipeline on the industry, I think that will be essential. So for us, one of the things that can improve efficiency is how much you can standardize the technology. So one thing is that including manufacturers, the engineering tools, the specifications, instruments, and the way they design it, they produce it, the way they manage the quantity, I think that will be the key part. And how you can standardize all the components...
Is that a role of government to standardize that, or are you saying within a company, for example, that they...
I think that I can only rely on the commercial, right? Because regulators, it's essential, but sometimes it's not efficient enough because the technology is moving so fast. So the things that we agree on, that we should have type of the ecosystem, push the ecosystem to work together to standardize a lot of components, simplify that, and then you can scale as much as you can a single component and bring the effort to govern market.
Ryan, your company, Flexport, helps, what you were mentioning, mostly SMEs, right? Is where most of your revenue comes from in terms of helping them ship from one place to another, not just from port to port. Do you see this localization also happening now, or do you think it's not going to last, that at the end of the day people will still go to the cheaper option?
I think, you know, it's very interesting here, Lorenzo. Resilience does cost money, and not everybody can afford it. And it's not whether or not they can afford it, sometimes they can't afford to make the decision because what it ultimately means is having more inventory or having a, you know, you have your cheapest supplier, but you got to work with also your second cheapest supplier. And it looks ugly in the P&L. And you've got to have a very strong leadership team who's got the boards, the shareholders believe in them in order to continue doing that. Because at the end of the day, if it looks bad at the P&L, you go, why do you have all this inventory sitting here just in case maybe something goes wrong? And you know, once every 10 years you're a hero, and then for nine years you look terrible. That's kind of hard to maintain. So it isn't easy for companies to maintain that posture in a period where things are looking like they're normalizing. And ultimately, we are seeing a lot of, it's a well-known story across the world that manufacturing is shifting out of China, or people are diversifying. And my thesis, some of this is around tariffs, and maybe there's a little geopolitical, but at the end of the day, people make decisions around money. So yes, tariffs, but also labor cost. China's become, it's no longer the low-cost labor solution in the world. And so you're seeing quite a bit, but there is no second China. You know, it's diversifying across Vietnam and half a dozen other countries that are growing like crazy. But at the end of the day, my view is not that the manufacturing is just going to move close to the destination and it's the end of globalization, because ultimately manufacturing is going to go wherever the labor is cheap and you can get the high-quality products made cheaply.
Yeah, no, just building on what they're saying, I mean, the just-in-case option is what actually becomes quite critical. And when you think about it, you have to have, as you mentioned, resiliency and agility. So if you look at companies over the past two years, 70% of them have changed sort of their manufacturing supply chain options. And yes, it does come at a cost of price to convenience. So that is one option. But when you apply technology and that agility and resiliency together to drive greater visibility, greater tracking, and also embedded within the system to give you the ability to make better decisions, that's where you have the... And there are studies that have been shown that if you're able to apply that, your revenue grows during disruptions by around 3% in various companies when they're tracking sort of the impact on COVID. But I think one key question for all of us is not just getting ready for that, is how do we ensure we have a workforce that is technologically adaptable to actually apply and support resiliency and actually to use technology in order to be able to withstand disruptions and to withstand these changes. And these are the things which I think going forward are things that most companies will have to grapple with.
Well, if you mentioned the workforce, and again you mentioned labor as well, Alex, your job is slightly different. Your argument is that by standardizing and automating, you might not need all that.
So I think that's right. For us, we try to improve the efficiency in two directions. So one is that we try to lower the bar for all the design, which means that we offer them standardized kits and the testing environment, etc., and even reference design, let them to lean down. So for that part, we rely less on talent power to have the company, have the customers to come in, because it's not a heavy lift for them to invest. And the second part is that we try to build more and more use cases and try to duplicate. And for those use cases, we think that's going to be something we can duplicate to other locations. So when we design the things, it comes with multiple languages, comes with standards that can use for multiple locations. And then we try to do the go-to-market the first time. So which means that a lot of customers join in the ecosystem, try to learn what other people are doing in other countries and what they accomplished here. So that I think will be the two things we try to improve the efficiency. And the last part is that we provide lifecycle data flow. Like you mentioned, how you manage a manufacturing is another thing. So whether you will be able to produce too much in the inventory set, and how you manage inventory, how you manage yourself through, how you manage your forecast, that'll be another path.
Lorenzo, so in terms of using technology, I know Baker Hughes has done a lot of that. Baker Hughes also has a lot of labor, has a lot of people who work for Baker Hughes. So does that resonate with you and the efficiencies that Alex is talking about? How has that helped you in managing that increase in cost?
It does. It really manages it completely, or there is definitely a cost that will be passed on to the consumer at the end of the day if you break it down. And I think it's going to vary by industries and also by the formulation and advancement of that industry. Labor content really is diminishing from a standpoint of the cost base. And as you look at the globe, there are a number of locations that are now starting to actually standardize on a labor cost. So for us, it's not so much the labor element as it maybe is in some of the other industries. It's the aspect of resilience relative to being able to assure that the customer is able to receive the end product. And to that degree, technology plays a big role. If we think about 3D printing, the ability to have a printed part at site is a huge step forward than what used to be a fabrication and casting, which used to take months. So you're able to reduce the lead time, you're able to improve customer experience by having a 3D printed part, both metallic or plastic, at site.
Can those last as long, or do you have to then, is that a temporary fix until a more durable part comes in? What are you finding?
