Near sourcing -- all talk but little action
During the past few years much has been reported about the transfer of manufacturing from Asia to countries located closer to western markets, but much of it appears to be hype over substance.Whilst many importers claim that near sourcing is increasing, the evidence seen by Drewry suggests that it is unlikely to affect deep-sea container cargo volumes significantly in the near future.
The result is surprising as all the anecdotal evidence points to a significant increase in near sourcing. Many shippers to whom Drewry have spoken say that the trend is escalating for reasons that are easy to understand. Retailers need to offer more made to measure goods that can be delivered to market a lot faster than from Asia. For example, a car or computer with a limited range of options doesnt sell as well as models that can be sourced from closer to home with a wider range of cheap extras.
Whilst the problem can be overcome by increasing stock levels locally, it doesnt deal with the faster trend cycles now confronting retailers.
Stocking up on green shoes when the current fashion is for red boots is a sure way to lose money, as prices then have to be heavily discounted to keep the goods moving. Moreover, keeping more stocks in developed markets, where labour and rents are more expensive, is a costly business.
Ocean carriers have not helped matters by slowing vessels on headhaul routes from Asia to save fuel. This highlights another problem as the cost of fuel rises to allow for green taxes, so will the expense of off shoring. Moreover, minimising carbon footprints is becoming increasingly desirable.
The way that the proportion of North Europes and the US imports from Asia have flat-lined over the past couple of years also suggests that importers have been having second thoughts over the benefits off shoring (see charts below). It explains why the usual multipliers of GDP growth used by analysts to forecast trade growth have been falling.
On the other hand, flat-lining of off shoring does not necessarily mean the return of manufacturing to Europe and North America. It could just mean that there are fewer remaining factories there to close down.
For example, although Mexico is reported to be one of the main beneficiaries of retailers needing to service US customers more quickly, the countrys growth in exports of containerisable cargo to the US has only been marginally faster than that of China and the rest of Asia over the last few years.
However, the data needs to be treated with care, as it doesnt take into account inflation or the changing value of currencies. China, in particular, has suffered from high inflation, but the same applies to Mexico, only in more variable cycles.
So, although the fact that Asias maritime traffic to the US increased by only 1.5% last year, up to 12 million teu, following on from 1.4% in 2011, it is dangerous to assume that the value of Asias exports to the US must be inflated much more than that of Mexicos, bearing in mind that Chinas export values still amount to more than those of the rest of Asia.
It could also be that some raw materials and component parts are imported by Mexico from Asia before being exported to the US.
Quantifying Mexicos trade with the US in teu terms is complicated by the fact that most of it moves overland. Using the average value per teu of Asias exports to the US as a conversion factor, we estimate that Mexicos containerisable export traffic to the US reached 3.5 million teu in 2012, or 29% of the total eastbound transpacific market.
In conclusion, although trade from Mexico to the US is important, ocean carriers appear to have little to fear from near sourcing in the short term. However, as one major shipper recently confided to Drewry: Near sourcing is going to increase, we just dont know yet by how much, and from where.
There are certainly goods that are already seeing production transferred from Asia to closer US production centres such as Mexico, such as footwear (see chart below). And, of course, there are some products, such as computers, that are now even being manufactured in the US itself.
Near sourcing may yet take off, therefore. According to Kansas City Southern, Mexicos largest Railway, expectations are running high, with four new automotive plans scheduled to come on stream between 2014 and 2015, increasing annual production by close to one million vehicles. There is also a corresponding surge in the relocation and growth among tier 1 & 2 automotive suppliers moving into the market to support this new production.
Domestic appliance manufacturers are moving the same way too.
Tyre exports from Mexico to the US market has yet to take off, although, as mentioned previously, it ignores the different impact of currency and inflation rates in Mexico and Asia.
Much is also reported about near sourcing in Europe, although, here again, the evidence so far suggests more hype than substance. Turkey, like Mexico for the US market, is claimed to be one of the main beneficiaries, yet, as shown in the chart below, its trade to the UK, Europes largest importer, is tracking behind the trend line from Asia.
Near Sourcing will increase, but off a very low base, so its impact on deep-sea ocean carriers is unlikely to be significant in the short-term.
These are desperate times for consumers, so cheap prices from Asia are more important than before.
Predicting the situation after that is dangerous due to the uncertain growth rate of internet shopping, which will soon demand same-day delivery.
This is a more immediate revolution confronting retailers, with up to 10% of all retailing in Europe likely to be conducted over the internet by 2016, according to Jones Lang LaSalle.
Another more immediate trend will be the transfer of production away from China to cheaper Asian countries.