In an earlier post [Changing Supply Lines], I discussed how rising fuel prices are changing manufacturers thinking about maintaining long supply lines. A recent article in the Washington Post reiterates that concerns about long supply lines continues ["China's Outsourcing Appeal Dimming," by Ariana Eunjung Cha, 8 September 2008]. As I pointed out in the above mentioned post, rising fuel prices have forced some manufacturers to look for closer regional suppliers. I warned that while regionalization is good for many product chains, it could also slow globalization's advance into areas that are currently mired in poverty, such as Africa. Supplier companies can only survive when they are positioned within the logistics paths of production chains. As those logistics lines shrink, they are likely to bypass some geographical regions that are anxiously awaiting for the rest of the world to discover them. Without being embraced as part of disintegrated production chains, these regions will never attract enough capital to build up a sustainable regional economy. As Cha reports, even mainline supplier countries, like China, are starting to feel the pinch. She writes:
"Harry Kazazian built his business on sleeping bags that are made in China and shipped across the ocean to the United States, but he realized recently that the math doesn't work anymore. With fuel prices at record highs, the cost of sending a standard 40-foot container of goods has gone from $3,000 in 2000 to about $8,000 today, squeezing profit. So this summer Kazazian, chief executive of Exxel Outdoors, a Los Angeles-based maker of recreational equipment, did something radical: He moved the manufacturing back to Haleyville, Ala. Soaring energy costs, the falling dollar and inflation are cutting into what U.S. manufacturers call the 'China price' -- the 40 to 50 percent cost advantage once offered by Chinese producers. The export model that has powered China and other Asian countries for three decades will be compromised if fuel prices continue to rise, said Stephen Jen, a managing director for Morgan Stanley."
Jen goes on to assert that "globalization has gone a little bit too far" and that "energy shock" is quickly changing conditions.
"The ripple effects have been far-reaching. The trade imbalance between the United States and China -- a source of political tension for years -- is beginning to right itself as Chinese exports fall and U.S. exports rise. Global trade routes are being transformed, suggesting a possible return to a less integrated world economy. The model of outsourcing to China emerged at a time when oil was going for $20 a barrel. In the past few months, oil has been trading at about $110, and many experts say it will eventually hit $200. This has led some companies to move production from China to northern Mexico, next door to the U.S. market. But others have chosen to relocate inside the United States."
The shift in manufacturing, according to Cha, is not just in the consumer goods sector, but in more basic industries as well.
"Midwestern steelmakers are doing booming business as steel exports from China to the United States slowed down by 38 percent in the first seven months of the year while U.S. steel production rose 10 percent. Manufacturers of furniture, electronic appliances and textiles are also among those shifting production back. The most prominent company in the group might be Thomasville Furniture, which was criticized a few years ago for sending several thousand American jobs overseas. It announced in June that it was returning production of an entire line of upholstered and wood furniture to the United States. The company says it will add 100 jobs in North Carolina."
In earlier posts, I have noted that not all companies will relocate production now being conducted in China. The reason is simple. They have too many sunk costs in production facilities in China and cannot afford another expensive facilities move in the near term. Even in the long term, such a move might not make sense for them. As I wrote earlier, "such dramatic changes in so short a period of time make it more important than ever for companies to involve themselves in alternative futures planning. Companies need to consider a number of possibilities about the future because no one can predict how the competitive landscape is going to change with any certainty." Cha agrees:
"It's unrealistic to think that all or even the majority of factories lost to China will return to the United States if the price of oil continues to rise. A lot of equipment was disassembled and shipped abroad years ago, and it would require a massive reinvestment to move or replace it. And despite the high shipping costs, China still offers advantages: Many raw materials remain cheap, and millions of skilled laborers work for wages that are a fraction of what their American counterparts get. A survey released in June by the audit and consulting firm Deloitte found, however, that U.S. manufacturers consider locations in North America, including Mexico, the most desirable for expansion over the next three years."