Some Companies Will Move To China, Others Will Move Closer To Home
As noted in this recent Supply Chain Management Review article on the short tail, analyst Jeff Rubin estimates that the cost of transporting imported goods into the United States is now equivalent to a 9% tariff on imports. Nine Percent! That's a significant cost considering it's supposed to be "low cost country sourcing". In addition, the cost of fuel is now about 40% of carrier operating costs -- it used to be about 15%. And the U.S. dollar has significantly decreased in value against the Yuan, Yen, and Euro over the last three years, close to 20%. In fact, the decrease is so significant that, as I noted in a recent post, the United Nations Conference Is Calling For A New Global Currency.
When you put it all together, near-sourcing is starting to look pretty good, and a lot of smart companies are going to do it. And they're going to win big.
Furthermore, so are a number of other companies as well. Who's going to benefit, besides the companies that near-source to save transportation related costs? The SCMR article points out three types of companies who can win big with the coming shift:
- Near-Sourcing Transportation & Service Providers
Truck and rail is poised for growth, and so are 3PL firms that manage near-sourcing transportation. - Warehousers and Packagers
Companies that can offer warehousing and packaging services to near-sourcing companies are also poised for growth. - Domestic Raw Materials & Manufacturing
Near-sourcing means local production, and that means local manufacturing and raw materials.
Well, if the smart companies are moving nearshore I guess the computer companies aren't smart.
Try as I may, I can't discern much of a trend in the relative market share of overall computer shipments between China and Mexico. In Q1 of 2007, US import from Mexico of all computer related products (HS 8471) were 19.7 percent of China's. In August of 2009 they were 21.1%. Intermediate dates fluctuated between 17.0% and 23.1%.
For notebooks (8471.30.01) Mexico's share dropped from 2.1% to 1.1% of China's in the same period. Notebooks can be air freighted for around 3-4% of their declared value or around 1-2% of their sales price so they are a natural for long-distance supply chains. Shipping costs could increase several-fold before they become a deal killer.
There's more to a country's dominance of a particular market than cost. There's an infrastructure of supporting industries, there is high competition and there is a demanding customer base.
There is also the trained, skilled workforce to support design and manufacturing. Transplanting that knowledge, competition and support infrastructure from one country to another is slow and difficult.
Near-sourcing isn't feasible for many organizations. Far too little attention and/or financial analysis is paid to why companies outsource so aggressively. More and more companies are making the strategic decision to eliminate the entire manufacturing function within their organizations. Apple's a brilliant example of this. The idea that companies can turn around and fundamentally reorganize themselves as near-sourcers or manufacturers is laughable when these functions have atrophied or are extinct. Far easier and executable to pay a few extra percentage points on cost. It's one reason that the engineer crisis that's been predicted for decades has never materialized. Engineers leave the function at higher rates than schools can churn them out because they simply are not needed.
U.S. Dumps China for Mexico
http://money.cnn.com/2009/11/03/news/international/US_dumps_china_for_mexico/index.htm?section=money_topstories
"Mexico did not have an extreme economic makeover, but the global recession was enough to defeat China as the number one place for American assembly-for-export factories, or maquiladoras."
Good information, thank you. I haven't confirmed the manufacturing location but going back through the references led to this very well done study.
http://preview.tinyurl.com/yg5yzwb
It's very product specific and the overall figure on productivity was based on a market basket of low to medium tech parts. Those are easier to shift countries. Within those limitations, I think AlixPartners did a good job.