Posts Tagged ‘globalization’

The China Syndrome

Tuesday, July 6th, 2010

The unwinding of global imbalances signals the end of China's unfair advantage.  As global financial disparities start to wind down, China is likely to end up a winner because emerging-market economies have a definite advantage rooted in the way the global economy functions. Writing in the McKinsey Quarterly, Lowell Bryan, a director with McKinsey & Company, notes that “Saber-rattling Western trade negotiators frequently focus their attention on the ‘unnaturally’ depressed exchange rate of countries such as China, and this is a component of the structural advantage to which I refer.  But its roots run far deeper – all the way down to the fundamental issue that labor can’t be freely traded on a single global market, while capital and commodities can.  Any company sourcing its production or service operations in a lower-wage emerging market-country therefore can save enormously on labor costs.”

China’s recent decision to relax the informal peg of its currency, the yuan, to the U.S. dollar proves that the world must come to grips with a set of economic relationships that are currently unsustainable.  According to Lowell, “Their unwinding will have serious long-term implications for those executives’ strategic priorities, including where they locate operations and what customers they serve in which markets.  Equally important is the need for preparedness in case the unwinding process is sudden and abrupt.  While we surely seem to be headed toward a new global equilibrium, the transition to that future may not be smooth and gradual.”

The cost of labor in China and India is less than one-third of what it is in developed nations.  Additionally, Chinese and Indian productivity are at extremely high levels and tend to be in highly specialized fields – high-tech assembly in China and software development in India.  To take advantage of the cost savings, many multinational firms are locating production facilities in emerging markets.

Container Shipping Riding Choppy Seas

Monday, August 24th, 2009

Container trade is entering rough waters, despite the strength of global supply chains and China’s status as the world’s factory.  According to AXS Alphaliner, a container shipping information service, 15 percent of shipping capacity will be idle by October — thanks primarily to the recession.

Shipping companies that link Asian workshops with American retailers are forecast to lose about $20 billion this year after earning $5 billion in profits last year.  Drewry Shipping Consultants huge-container-shipreports that the reason is a $55 billion shortfall in expected revenues, only partly balanced by savings from lay-ups, slow-steaming to conserve fuel and opting for the longer but less expensive trip around the Cape of Good Hope to avoid using the costly Suez Canal.  The canal is facing a 14 percent decline in revenues this year.

Container rates have fallen from last summer when it cost $1,400 to move a container from China to Europe.  Today, shipping that same container costs just $400.  Chang Yung Fa, head of Taiwan-based Evergreen, the world’s fourth largest container company, says there is over capacity.  In addition to dropping plans to order new ships, he is getting rid of some of his 176-ship fleet.

Container shipping’s grim outlook reflects a deeper concern than the recession.  Containerization encouraged globalization by cutting the cost of shipping goods so deeply that manufacturers could find the lowest-cost factories possible – no matter the location.  In response, the amount of sea transport soared.  The concern with over capacity is overstated, I believe.  Recent economic news, heralded by Alan Greenspan, show that inventory levels have been eroded because of the cut in production.  While the recovery will be slow, the rebound in the equity markets will boost consumer spending which will affect trade.  While we are sure to see more efficient supply chains, distribution is poised for a comeback.

High Costs Could Impact Shipping Routes

Wednesday, September 24th, 2008

Two trends in international trade worth highlighting:

American exports are booming, thanks to the dollar’s current weakness.  This considerable increase in volume has made it virtually impossible for U.S. manufacturers to get space on container ships within a four-week window, especially for products shipping from the ports of Los Angeles or Long Beach to any Pacific Rim destination.  To illustrate the scope of the change, container space from these ports was available on demand just one year ago.  And, according to a recent Reuters article, waiting times for cargo space have jumped from two days to three weeks on the East Coast.

Fast-rising transportation costs that are a direct result of the cost of fuel is another important logistics trend – one that could negatively impact globalization.  According to an August 2 article in the International Herald Tribune by Larry Rohter, shipping a single loaded 40-foot container from Shanghai to the United States has soared to as much as $8,000 per unit, compared with just $3,000 earlier in the decade.  Additionally, there are cost add-ons, primarily in the form of fuel surcharges and government-mandated fees.  To save on fuel costs, container ships have shaved their top speeds by nearly 20 percent, which means it takes longer for products to reach their intended markets.

Shipping to and from Prince Rupert in British Columbia is slightly less costly, because the distance to Asian ports is shorter than from Los Angeles or Long Beach.  Still, space amounts to several thousand dollars per container.

“If prices stay at these levels, that could lead to some significant rearrangement of production, among sectors and countries,” said C. Fred Bergsten, author of The United States and the World Economy and a director of the Peter G. Peterson Institute for International Economics in Washington.  “You could have a very significant shock to traditional consumption patterns and also some important growth effects.”

A far better alternative could be to ship to and from Asia from the southern border regions, where the going rate is approximately $800 per loaded container.  That price differential could potentially lure companies to move production facilities to Mexico or the Southwestern United States – primarily Texas.  This would give them the opportunity to leverage the more attractive shipping rates through the growing Mexican ports of Lazaro Cardenas and Punto Colonet.