Everyone knows theres an East-West trade imbalance, and if you dont, well, you probably havent been paying attention. But the more pressing question is: how long is it going to last? Well, that depends on a variety of thingsspecifically, the fact that Asian manufacturers are now competing on higher quality as well as low cost. Here, we take a look at what that means for you.
Manufacturers in low-cost countries are becoming more capable
Strategic industries in
With time, todays low-cost countries will join the ranks of the developed nations. Chinese companies will do the same thing that Japanese did, says the executive director of a major automotive distributor, referring to
Asian governments are establishing pro-Western foreign investment institutions and frameworks
In fact, serving the off-shoring wave has become an industry in itself!
These policies seem to be working. Asian countries are receiving billions of dollars of foreign direct investment, and
Asian logistics infrastructure is getting better
Many of the developing countries are making massive investments in both physical infrastructure and intellectual and human capital. Some examples capture the extent to which these countries are building physical infrastructure:
· The Chinese government has built a $4.2 billion rail line between
manufacturers and logistics providers invest in infrastructure based on the continued growth of Asian imports? US
The shift toward
· Western manufacturers, surviving mostly on thinner margins, have been busy defining a growth strategy that can succeed in the face of competition from low-cost sources. Boston Logistics fifth annual State of
· West Coast states, as well as regional consortia and public-private partnerships, have committed over $7.7 billion to fund infrastructure and freight mobility between now and 2020, and
· Ocean carriers took vessels out of other trade lanes and deployed them on Asia to the Trans-Pacific over the last decade; many of them are now reviewing these vessel deployments in light of decreased West Coast volume connected with a devalued US dollar, decreasing margins on the trade connected with higher bunker fuel prices, and opportunities to redeploy them in the booming intra-Asia and Asia-Europe trades.
· Rail and intermodal operators have invested in equipment, infrastructure, information systems, and de-bottlenecking to increase eastbound throughput to handle surge of the Asian imports.
Five factors will impact
s future competitiveness, and shippers and carriers should consider them when making operations and infrastructure plans China
Supply chain planners should consider the potential impact of five variables that could affect
· Chinese labor cost inflation
· Devaluation of the US dollar
· Increasing shipping costs
· Dual sourcing
· Environmental regulations
The main reason attributed to
However, rising wages have started to change how companies operate in
Already, Boston Logistics sees companies taking an active interest in sourcing from other Asian countries,
Exchange rate changes are tempering the benefits of off-shoring to American companies, and making US exports to
Europe more competitive.
Over last three years, the dollar has devalued by 12% against the Euro and 13% against the Chinese Yuan. This has helped US manufacturers export competitiveness and dampened the thirst for off-shoring. Conversely, Europe's export competitiveness has been challenged by a rising Euro. If the US dollar continues to depreciate against the Chinese yuan, this could begin to tilt the balance in favor of sourcing from domestic US companies.
Higher fuel costs are driving freight rates higher and profitability lowerFuel cost has increased by 15% and steel cost has increased dramatically over the last several years, both of which have affected ocean shipping rates. If current trends continue, the cost of shipping could begin to make Chinese goods less attractive to American and Western importers. The delta is no longer as advantageous, observes the Supply Chain Manager for an US importer.
More companies are dual-sourcing to assure continuity of supply9/11 caused many companies to design resilient supply chains that would survive a terrorist attack. This led to the use of deliberate redundancy in the form of dual sourcing using suppliers on both sides of the Pacific instead of being dependent on an overseas supply line. The dockworkers strike in 2002 reinforced the use of multiple ports to safeguard supply in the face of possible port shutdowns, and the memory of that strike was recently reawakened with the threat of an ILWU strike. Dual sourcing dampens the economic effect of off-shoring.
Asian environmental and social regulations are increasing offshore costsSeveral regulatory and social changes that are underway are increasing the cost of off-shored goods and services.
Environmental concerns and regulatory measures could increase Asian costs and reduce the gap.
If China and other nations take air pollution more seriously, the free ride that manufacturers are currently getting may end up costing money. That money would further reduce the differential between Chinese and Western delivered costs. Whether it comes from factories or from transportation, pollution controls could affect the overall competitiveness of Chinese goods. One interviewee living in China adds a CO2 emissions and future introductions of emission quotas may become impactful. I don't believe shipping things back and forth across the world will be feasible in the long run. Sooner or later reality will catch up with us and I wouldn't be surprised if in the future there will be a reversal in trends, with some manufacturing being moved back to the West.
All parties in the supply chain need to understand the economics of the Asian Sourcing Boom (the subject of another one of Boston Logistics annual studies) in order to make wise plans and investments. Our infrastructure adequacy, cost-competitiveness, and supply continuity depend on an accurate reading of these tea leaves.
David Jacoby is President of Boston Logistics, a supply chain research firm offering global industry analyses, commodity forecasts, and strategic consulting services. To contact Mr. Jacoby or the firm, please call (1) (781) 250-8150 or e-mail firstname.lastname@example.org.