Friday, December 15th, 2017

China's changing economy may change ours

Posted: Saturday, February 25, 2012

By John Rowe, managing director, Cargo Services Inc.

That “Made in China” tag could be a thing of the past as China’s economy shows signs of over dependence on an export-driven economy. This shift is due to a variety of factors leading many companies to explore near-sourcing, a form of outsourcing performed closer to your borders and customers.

According to a Financial Times online story dated February 1, a range of partial indicators, from housing starts to freight volumes at ports, all point to a marked slowdown from China’s 9.2 percent growth last year.

Turn back the clock twenty-some years ago to the late 1980s. Major Chinese economic reforms sent a signal around the globe that the Asian nation was ready for world trade—mainly exports. Major manufacturing companies and notable brands discovered the bottom line economic benefits to manufacturing and exporting goods from the Pacific Rim westward.

Decades later, the Chinese people and government are reaping the reward. The Chinese have the fastest growing middle class. According to an article published by the Council on Foreign Relations at Duquesne University, China has averaged 9.4 percent annual GDP growth, one of the highest in the world, since 1978. In the same year, the country’s foreign trade was worth $20.6 billion. Today that total is $851 billion. But where there’s boom, there’s often bust as people realize their own economic benefits that result in cost increases. Today a number of supply chain cost and production factors are rapidly influencing company leaders to rethink “Made in China.”

• China’s rising labor costs: Just this week, certain regions in China announced increases to the minimum wage. Employees in Shenzhen will be entitled to about $240 per month—the highest wage in the country. Some speculate a labor shortage is driving the increases.

• The Yuan conundrum: The value is increasing against the U.S. dollar. Alix-Partners, a Chicago-based consulting firm, reports landed-costs of Chinese manufactured goods may soon be higher than Mexican manufactured products because of China’s wage rate increases and increase in the value of the Yuan against the dollar.

• Company price increases: Mattel toys, including Barbie’s and Hot Wheels, will cost more as the company compensates for increasing wages in China, as well as the increasing cost of goods, according to Reuters.

• Increasing shipping costs: The cost of shipping exports is on the rise in all major global shipping lanes for a variety of reasons.

• Shortening the supply chain: Due to increasing costs of shipping, some major lines are using a strategy called slow-steaming. The term means literally what it is—freighters steam through the lane slower to help cut fuel costs. This means longer shipping timeframes within supply chains for manufacturers.

• Better inventory control and costs: As a result of export issues and related factors mentioned above, manufacturers are looking for better inventory control systems and cost control.

Many companies are rethinking their manufacturing strategies and coming to the near-sourcing conclusion. Alix-Partners surveyed 80 large international companies concerning near-sourcing with 42% saying they are already in the process of bringing manufacturing closer to the United States, or are considering doing so in the next three years.

United States Census Bureau data shows the near-sourcing movement is already underway with imports from Mexico increasing 16.9 percent in the first 10 months of 2011 compared to the same period in 2010. The value of all U.S. imports from Mexico, including oil, increased 27 percent for the same period compared to the first 10 months of 2010.

Bottom line, near-sourcing might be nearer than we all think. Only time will tell what country will fill in the blank tag on our goods: Made in ________.