Fueled by the United States' insatiable appetite for cheap goods, China's manufacturing industry has shifted into overdrive, churning out everything from bathrobes to high-tech chips. But what happens if that engine overheats?
China has Christopher Prey worried. It's not fears of deadly viruses that keep him awake at night; it's more about the amount of cargo his customers are bringing in from China. Incredibly low production costs have made China the source of choice these days, says Prey, who is vice president of business development at P&O Nedlloyd Logistics in East Rutherford, N.J. "With some customers, 80 to 90 percent of their cargo is [coming from] there," he says. The problem? "It's too much of a good thing. It's dangerous to put all your eggs in one basket."
The numbers bear him out. Chances are, if you're importing goods into the United States from abroad, most of it comes from China. China has experienced phenomenal growth in the last 15 years—foreign trade has risen 2,800 percent since 1978. And the United States has become its largest customer, accounting for 21.5 percent of all Chinese exports, or—looked at from the U.S. point of view—$152.4 billion worth of imports in 2003 (U.S. Census Bureau). Wal-Mart alone sourced $15 billion of its products there last year, according to Paul Clifford at Mercer Management Consulting in Beijing. And the trade is anything but balanced: For every four ships that steam into U.S. ports laden with Chinese goods, one goes back full.
Mostly, of course, the reason is that the price is right. Low labor costs, cheap raw materials and negligible overheads mean factories are churning out everything from hiking boots to automobiles at rock-bottom prices. Even a hidden layer of middlemen—sometimes 15 men thick, and each adding up to 30 percent—hasn't managed to push costs out of the competitive range. Last year brought the first reports that Mexican maquiladoras were closing because their U.S. business was being siphoned off by Chinese competitors.
Nation at risk
But where some see opportunities, Prey sees risks. And he's not alone. Stephen Chipping, Exel's director of strategic development for technology and global freight management for the EMEA (Europe, Middle East and Africa) region, based in Amsterdam, shares Prey's concerns. "Obviously China is the place where there's the most activity in terms of manufacturing. But with SARS and bird flu," he says, "people do worry that they're becoming overly dependent on a single source of supply."
About a year ago, Prey began raising his concerns with customers but says they tended to dismiss his arguments. "Maybe that's because I'm mostly talking to logistics people rather than the people who source. They see the delays and the congestion, but they're not concerned about what would happen to the overall supply chain if China had a problem."
Certainly, there are day-to-day difficulties with getting goods out of China—bad roads, unreliable business partners, the middleman problem, and so on. But Prey and others feel shippers need to be thinking about the potential for drastic change in that region—in particular, about the risks associated with currency, politics and natural disasters that could threaten their business.
Take the currency, which is currently government restricted and cannot be traded on the international open market (except for goods and services). The Economist magazine reported that UBS, a Swiss bank, estimates it's undervalued by more than 20 percent, meaning goods are effectively cheaper than they would be in a free market. Because of the enormous trade deficit with many countries, especially the United States (nearly $125 billion for 2003), the Chinese government is under enormous pressure to float the yuan on the international currency market. If it does, that could mean an overnight 20-percent increase in the prices of goods. Good for balance of trade, but not for shippers committed to sourcing their wares there.
Politics, too, present risks. We've become used to a China that's a strange hybrid—Communist, and yet apparently eager to embrace free-market capitalism. It seems relatively stable. But human rights violations in the country have been enough to draw U.N. criticism, and the Internet reveals a thriving pro-democracy movement. Considering the tight control that the Communist government retains on information coming out of China, it's quite likely a tumultuous political situation could have spiraled out of control before the outside world knew about it.
"Stability comes from control, and people feel the Chinese government is in control," says Rick Moradian, president of international logistics at Oakland, Calif.-based APL Logistics, and until late last year president of APL Logistics' Asia/Middle East region. "Also, the 10-percent GDP growth is based on a stable, controlled environment and the desire to generate greater foreign direct investment. China has a lot invested in presenting that face to the importer community."
Then there's Mother Nature. SARS and bird flu are only the latest big health threats in the country (AIDS is growing rapidly) that could potentially shut down factories. The SARS epidemic is a good example of how information about a crisis was suppressed, even inside China, helping it to spread unchecked for weeks.
Buyer beware
And these are not the only threats. Adrian Gonzalez, analyst at ARC Advisory Group in Dedham, Mass., hosted a number of think tanks with U.S. importers from China in May 2003 and says importers raised a variety of other concerns —including counterfeiting. It's not unheard of to find that the Chinese factory producing brand name goods for you legitimately is turning around and running off an extra shift of the same stuff to sell on the black market—at a lower price, naturally.
Another major problem mentioned by importers at the ARC sessions was finding and keeping good managers. Some 43 percent of Chinese senior managers leave their companies each year (compared to 5 percent in Singapore and 11 percent in Australia), according to Hewitt Associates, an international human resources outsourcing and consulting firm. Hewitt adds that 66 percent of senior managers hired from outside China (who often play a crucial role in East-West business) quit within 18 months. Possibly related to that turnover was the issue of poor quality control. Many importers found they needed to take a hands-on approach to training and hiring quality control personnel in order to ensure that the goods produced consistently met their standards.
Other problems loom down the road. World Trade Organization quotas on exports of textiles and clothing will end in most countries in 2005, and the effects are likely to be felt during this year. A report by the U.N. Conference on Trade and Development (UNCTAD) in July 2003 projected that the Chinese apparel export business, which was worth $48 billion in 1999 under the quota restrictions, would spin skyward once the restrictions were lifted, reaching $78 billion in 2005 and $101 billion in 2010. There's no guarantee that Chinese logistics capacity—roads, ports, local transportation providers—is going to grow in tandem with production. Even the trend toward shifting manufacturing to regions other than the wildly popular Pearl River region around Yentien is presenting problems. "There's such a scramble for space and containers," says P&O's Prey. "Even in Shanghai and central China, it's becoming difficult for people to get their cargo out in time."
Prey predicts a general ocean shipping rate increase of $200 to $400 per container when contracts expire in May. He says that ocean capacity eastbound across the Pacific is already so tight, shippers will no longer be able to undercommit to the amount of cargo they'll give to shipping lines, relying on extra space being available at the time of shipment. Space crunches with extra cargo will mean shippers pay $400 to $500 per container more for spot rates this summer, Prey predicts. There simply aren't enough ships around to serve the current trade.
Proceed with caution
Scared? You should be. But the solution is not to pull out of China altogether. Analysts and the third-party logistics companies that service U.S. and European importers advise a risk-management strategy that—like most risk strategies —emphasizes diversification.
"Most companies have to be in China, but that's not the only place they're looking at," says Gonzalez. "There's a lot of investment and activity taking place in Central and Eastern Europe." Turkey, too, is experiencing export growth, as it is relatively stable politically, wages are low, and goods can be trucked to Europe from there. Other possibilities are African countries such as Kenya, Mozambique and South Africa. Brazil is experiencing modest growth, and Argentina is finally climbing out of the economic pit it's been in for years, making both of them more stable and therefore more viable as sourcing partners.
Other countries in the Asia region are beginning to look promising, too. Gonzalez says he's seen growth in Vietnam, India and Thailand, with people moving away from the traditional Asian stars such as Taiwan and Singapore—which are becoming more middle class and therefore more expensive. Furthermore, a number of Asian countries are building infrastructure and sophistication on the back of the China boom. A lot of sourcing materials for manufacturing in China come from elsewhere in Asia.
Although any major U.S. importer would expect to have a presence in China, importers are becoming increasingly aware of the drawbacks of simply focusing on item-level cost and are starting to think about ways to spread the risk. "Looked at from the end-users' standpoint, the question of where they're going to source product becomes a little more complicated, because they're starting to take a more holistic view of the sourcing decision and considering the impact of China vs. Vietnam, say, in terms of cycle time, lead time, Customs restrictions and so on," Gonzalez says.
Smart companies—Gonzalez cites Selectron, Flextronics and Nike as examples—maintain a presence in multiple countries.
Certainly, the third-party logistics service providers (3PLs) are eager to serve a widening market. "A big part of our role is responding to new markets as they open up and developing them when our customers need to be there," says Chipping of Exel.
But it can be tricky to move your business into a new, unknown country, Gonzalez warns. "Supposing you move from Singapore to Vietnam because now it's cheaper from a wage standpoint. You have to take into account other cost factors like quality, training the local people and hiring managers," says Gonzalez. A lot of mistakes that companies make arise from their habit of hopping from one country to another to take advantage of the lowest labor rates without taking these other cost factors into consideration. "I think that some of the more informed companies are realizing that there might be increasing costs due to labor rates (in an existing source country), but on the other hand there are benefits in terms of trade agreements, infrastructure, and having seasoned managers in place."
Moradian says 3PLs can help retailers interested in developing new sources look beyond the obvious pricing and quality issues.He says he often fields queries from customers or potential customers looking to go into a new region. "Customers are not just looking for a logistics network but also want to know how we would manage the product flow down to individual locations, down to the port or city, as well as the mode of transportation. They're also interested in local government behavior, Customs requirements and investments in technology as well as the bureaucratic levels you have to deal with," Moradian says. "In some countries, we work closely with the government, department of transport and other authorities. The primary factor for our customer is the quality of the product and the sourcing capabilities, but very much in parallel with that are the supply chain performance qualifications. We like keeping the flow as free as possible for our client base."
Supply chain planning (SCP) leaders working on transformation efforts are focused on two major high-impact technology trends, including composite AI and supply chain data governance, according to a study from Gartner, Inc.
"SCP leaders are in the process of developing transformation roadmaps that will prioritize delivering on advanced decision intelligence and automated decision making," Eva Dawkins, Director Analyst in Gartner’s Supply Chain practice, said in a release. "Composite AI, which is the combined application of different AI techniques to improve learning efficiency, will drive the optimization and automation of many planning activities at scale, while supply chain data governance is the foundational key for digital transformation.”
Their pursuit of those roadmaps is often complicated by frequent disruptions and the rapid pace of technological innovation. But Gartner says those leaders can accelerate the realized value of technology investments by facilitating a shift from IT-led to business-led digital leadership, with SCP leaders taking ownership of multidisciplinary teams to advance business operations, channels and products.
“A sound data governance strategy supports advanced technologies, such as composite AI, while also facilitating collaboration throughout the supply chain technology ecosystem,” said Dawkins. “Without attention to data governance, SCP leaders will likely struggle to achieve their expected ROI on key technology investments.”
The British logistics robot vendor Dexory this week said it has raised $80 million in venture funding to support an expansion of its artificial intelligence (AI) powered features, grow its global team, and accelerate the deployment of its autonomous robots.
A “significant focus” continues to be on expanding across the U.S. market, where Dexory is live with customers in seven states and last month opened a U.S. headquarters in Nashville. The Series B will also enhance development and production facilities at its UK headquarters, the firm said.
The “series B” funding round was led by DTCP, with participation from Latitude Ventures, Wave-X and Bootstrap Europe, along with existing investors Atomico, Lakestar, Capnamic, and several angels from the logistics industry. With the close of the round, Dexory has now raised $120 million over the past three years.
Dexory says its product, DexoryView, provides real-time visibility across warehouses of any size through its autonomous mobile robots and AI. The rolling bots use sensor and image data and continuous data collection to perform rapid warehouse scans and create digital twins of warehouse spaces, allowing for optimized performance and future scenario simulations.
Originally announced in September, the move will allow Deutsche Bahn to “fully focus on restructuring the rail infrastructure in Germany and providing climate-friendly passenger and freight transport operations in Germany and Europe,” Werner Gatzer, Chairman of the DB Supervisory Board, said in a release.
For its purchase price, DSV gains an organization with around 72,700 employees at over 1,850 locations. The new owner says it plans to investment around one billion euros in coming years to promote additional growth in German operations. Together, DSV and Schenker will have a combined workforce of approximately 147,000 employees in more than 90 countries, earning pro forma revenue of approximately $43.3 billion (based on 2023 numbers), DSV said.
After removing that unit, Deutsche Bahn retains its core business called the “Systemverbund Bahn,” which includes passenger transport activities in Germany, rail freight activities, operational service units, and railroad infrastructure companies. The DB Group, headquartered in Berlin, employs around 340,000 people.
“We have set clear goals to structurally modernize Deutsche Bahn in the areas of infrastructure, operations and profitability and focus on the core business. The proceeds from the sale will significantly reduce DB’s debt and thus make an important contribution to the financial stability of the DB Group. At the same time, DB Schenker will gain a strong strategic owner in DSV,” Deutsche Bahn CEO Richard Lutz said in a release.
Transportation industry veteran Anne Reinke will become president & CEO of trade group the Intermodal Association of North America (IANA) at the end of the year, stepping into the position from her previous post leading third party logistics (3PL) trade group the Transportation Intermediaries Association (TIA), both organizations said today.
Meanwhile, TIA today announced that insider Christopher Burroughs would fill Reinke’s shoes as president & CEO. Burroughs has been with TIA for 13 years, most recently as its vice president of Government Affairs for the past six years, during which time he oversaw all legislative and regulatory efforts before Congress and the federal agencies.
Before her four years leading TIA, Reinke spent two years as Deputy Assistant Secretary with the U.S. Department of Transportation and 16 years with CSX Corporation.
Serious inland flooding and widespread power outages are likely to sweep across Florida and other Southeast states in coming days with the arrival of Hurricane Helene, which is now predicted to make landfall Thursday evening along Florida’s northwest coast as a major hurricane, according to the National Oceanic and Atmospheric Administration (NOAA).
While the most catastrophic landfall impact is expected in the sparsely-population Big Bend area of Florida, it’s not only sea-front cities that are at risk. Since Helene is an “unusually large storm,” its flooding, rainfall, and high winds won’t be limited only to the Gulf Coast, but are expected to travel hundreds of miles inland, the weather service said. Heavy rainfall is expected to begin in the region even before the storm comes ashore, and the wet conditions will continue to move northward into the southern Appalachians region through Friday, dumping storm total rainfall amounts of up to 18 inches. Specifically, the major flood risk includes the urban areas around Tallahassee, metro Atlanta, and western North Carolina.
In addition to its human toll, the storm could exert serious business impacts, according to the supply chain mapping and monitoring firm Resilinc. Those will be largely triggered by significant flooding, which could halt oil operations, force mandatory evacuations, restrict ports, and disrupt air traffic.
While the storm’s track is currently forecast to miss the critical ports of Miami and New Orleans, it could still hurt operations throughout the Southeast agricultural belt, which produces products like soybeans, cotton, peanuts, corn, and tobacco, according to Everstream Analytics.
That widespread footprint could also hinder supply chain and logistics flows along stretches of interstate highways I-10 and I-75 and on regional rail lines operated by Norfolk Southern and CSX. And Hurricane Helene could also likely impact business operations by unleashing power outages, deep flooding, and wind damage in northern Florida portions of Georgia, Everstream Analytics said.
Before the storm had even touched Florida soil, recovery efforts were already being launched by humanitarian aid group the American Logistics Aid Network (ALAN). In a statement on Wednesday, the group said it is urging residents in the storm's path across the Southeast to heed evacuation notices and safety advisories, and reminding members of the logistics community that their post-storm help could be needed soon. The group will continue to update its Disaster Micro-Site with Hurricane Helene resources and with requests for donated logistics assistance, most of which will start arriving within 24 to 72 hours after the storm’s initial landfall, ALAN said.