Firms Rethink Outsourcing As Logistics Costs Climb

The high cost of moving raw materials, component parts and finished goods may well prompt some US companies to return their overseas manufacturing operations to the US, but will not cause a dramatic shift in globalization, according to a new research paper.

US-based manufacturers have welcomed the low dollar because it has boosted competitiveness of their exports. In 2007, manufactured exports rose by 12% over the previous year.

What worries manufacturers are unprecedented high fuel prices and related soaring transport costs.

The cost of shipping a standard container from Shanghai, China, to the US eastern seaboard, including inland costs, has tripled since 2000 and will triple again if oil prices reach $200 per barrel as some experts predict, according to a paper by CIBC World Markets, a Canadian investment bank.

The report claims that soaring transport costs may encourage some US companies, which for years have been moving production to low-wage countries, mostly in Asia, to relocate their manufacturing operations to the US or Mexico.

How much trade ultimately will be diverted depends on how significant freight costs are in relation to the total costs of a product and how much of the huge wage differential between, for instance, Chinese labor and North American labor will be trimmed by shipping costs, say Jeff Rubin and Benjamin Tal, the authors of the report.

Nevertheless, they expect a significant shift by US companies away from manufacturing in Asia and other changes in international trade patterns as well as a major slowdown in the growth of world trade.

However, transport experts say shipping rates are affected not only by fuel costs but also by demand for transport services, availability of cargo ships and efficiency of major ports.

For example, a slowing Chinese economy and expected significant increase in the number of cargo ships operating worldwide are likely to put downward pressure on shipping rates.

Other experts, however, say the near future of US manufacturing also is more complex than the study suggests.

Because high transport costs affect both US imports and exports, it is difficult to establish without further research what their net effects will be on US manufacturers that both export and source their supplies overseas, they say.

Alan Deardorff, an international trade expert at the University of Michigan, said some industries or firms may find out it is not in their interest to relocate production to other countries in the current economic conditions.

“But I would be surprised to see an across-the-board reversal from outsourcing,” he said. In many sectors, the wage disparity between workers in the US and in Asian countries is so great, Deardorff said, that rising shipping costs are unlikely to erase it in the near term.

This, he said, will continue to push US companies to rely on overseas manufacturing, particularly of labor-intensive products.

In 2004, US wages were on average 20 times higher than those in China, according to the International Labor Organization (ILO).

More important, corporations do not change plans directly in response to currency or fuel-cost fluctuations if the outsourcing is part of their overall strategies, experts say.

According to Helen Zak, chief executive of the Lean Enterprise Institute, a nonprofit management consulting group based in Cambridge, Massachusetts, company executives rarely base major decisions on single factors such as shipping costs or foreign exchange rates.

"It is a complicated equation with many variables,” she said, adding that companies are taking a “hard look” at their competitive positions in the changing economic landscape.

But, she said, the outcomes of those considerations, including possible changes in manufacturing locations, “will depend on specific characteristics and conditions of particular industries and even particular firms within those industries.”

Wendy Waters, an investment strategy researcher, writes in her blog All About Cities that multinational corporations, which distribute their products around the world, may try to shift some manufacturing closer to their final markets. But these days, those markets often are in China, India and other emerging economies, not in the US.

Also, US manufacturers and importers that have invested millions of dollars in their overseas production or supply chains will think twice before they scale down those operations, Waters says.

Some experts expect more manufacturing to be done in the United States in coming years as a result of more foreign manufacturers moving in and more U.S. companies re-inventing themselves as lean, more efficient and innovative producers.

There is evidence that the US manufacturing sector already has begun regaining ground, they say citing a June survey conducted by the National Association of Manufacturers (NAM).

The NAM survey concluded that nearly half of North American manufacturers consider the US the most desirable country for business expansion in the next three years, and that more than half expect to become more globally competitive in the next five years.

http://www.caltradereport.com/eWebPages/front-page-1216162166.html

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Firms Rethink Outsourcing As Logistics Costs Climb