There’s change in the air, and the stage of set for a major shift in supply chain relations, global production, currency manipulation tactics, imports and exports and a host of other things too numerous to list. There’s a lot going on, and we’re all going to be affected.
The Chinese currency devaluation gives expression to our interrelated world in which slight fluctuations can have an immeasurable knock-on effects.
Since the scope of change is so large, let’s limit our focus and take a look at what Chinese devaluation does to the future of the manufacturing, the global supply chain and how this can impact our lives.
Changing global supply chain dynamics have ushered in a thought reversal on the benefits of offshoring. Bottom line improvement through cheaper manufacturing labour in many lower cost countries – China in particular – meant offshoring was once an obvious choice. However, the apparent good times were brought to an end by wage inflation, rising oil prices, the threat of natural disasters and an unnervingly sluggish response to any market shift along a time-consuming supply chain. Re-shoring is fast becoming the solution to rising labour costs bringing with it many other advantages beyond cost savings. However, with the Chinese Yuan’s recent devaluation, could we be seeing an end to the promising re-shoring revolution?
Over the last decade, the five economies traditionally regarded as low-cost manufactory bases: Brazil, Poland, China, Russia and the Czech Republic have seen their cost advantages lessen[1].The drop was driven by sharp wage growth, weakening productivity, adverse currency swings and a dramatic increase in energy costs. The change has been so dramatic, that many common perceptions of low-cost and high-cost nations are simply no longer true, with Brazil as one of the highest cost countries and the UK as the cheapest in Western Europe. The shift back to domestic shores could result in up to three million jobs[2] in the U.S and a GDP increase of 0.4-0.8 for the UK, equivalent to £6-12 billion[3]. Though the changes to global manufacturing a striking, the shift could have other far-reaching effects.
Closer proximity to Western markets have innumerable benefits for those who supply them with products. The strain on the fragile transportation industry would be diminished, resulting in more sustainable and environmentally sound business practices. Re-shoring for wouldn’t carry the drawbacks of longer transportation networks such as increased risk and longer delivery times Shorter lead times would mean supply chains can become more customer-centric, with the ability to rapidly respond to trends along with customisation and post-sales service options. Re-shoring would also fulfil the rise in a demand for locally manufactured goods. Local networks would make the supply chains more flexible, alert and transparent due to their much-contracted form enabling greater visibility. Supplier relationships would be stronger due to increased geographical proximity and common business culture.
No longer would there be the current worries of unethical practice due to opaque chains which often end in disaster, such as the UK’s horsemeat scandal and the Thai slave labour crisis. Re-shoring would enable many companies to reduce costs, risks and inefficiencies whilst also improving product quality.
There were just 64 re-shoring cases in 2011, and this rose to around 300 in 2014[4], with electronics and transportation equipment companies leading the way. Despite the addition of 60,000 manufacturing jobs in 2014 through re-shoring, 50,000 jobs were offshored in the same year. Harry Moser, president of the Reshoring Initiative states:
“It’s taken 60 years for [offshoring] to happen, and it’s going to take decades for it to reverse,” he says. “For our trade deficit to be eliminated, for re-shoring and foreign direct investment to bring many of those jobs back.”
Rather than a stampede, it’s more of a slow slide back to home shores, as many companies will obey the bottom line and go in search of other low cost countries such as India or South Africa before seeing the light. With growing awareness of the advantages of re-shoring and a need to protect their bottom line attractiveness, China may stop the trend of sustainable localised supply chains in its tracks.
China had been facing economic difficulties with exports declining 8% in July 2015, extending a worsening trend[5]. In the beginning of August, China acted, devaluing its currency. Goods produced in China immediately became less expensive for buyers in other countries, meaning companies manufacturing in China will benefit from lower costs and increased exports. Imports will be more costly and Chinese businesses will look to domestic suppliers rather than the now more costly imported goods, vastly increasing local demand for locally manufactured goods. The resulting lower production costs of devaluation makes off-shoring attractive once again by counteracting labour cost increases. Steve Tracey, Executive Director of the Centre For Supply Chain Research said: “For now, the devaluation is too slight to have an effect on the Western supply chain.” However, that may be the intention, to drive away any thoughts of reshoring and keep an abundance of cheap manufacturing firmly grounded within Chinese borders.
The crisis is symptomatic of China’s reliance on the manufacturing industry for their famed rapid growth of over 10% a year in the first decade of the 21st century. These rates cannot continue, and China must look to consumer spending to ensure gradual, but sustainable growth. However. with recent economic intervention of quantitative easing being more suited to manufacturing development, it seems China is returning to a reliance on the ‘tried and true’ manufacturing industry.
Despite a single devaluation being unlikely to affect the long term, China’s recent rejection from the IMF’s reserve currency and their ongoing financial crisis creates an even greater drop in economic value which could provide the ammunition for a new bout of offshoring. For now, any manufacturing companies’ decision to re-shore from China may be replaced with a wait and see approach while a definitive economic direction is decided, halting the re-shoring revolution just as it was getting started.
However, the developments do make one thing clear. The state of costs will always be in flux and quickly seeking out the best short-term cost reduction may become an outright bad decision. The truth is, many American and European companies would do better if they produced much closer to their market. Rather than fixate on where an item is produced, companies should look to simplify supply chains for the sake of long-term sustainability, rapid response to market demands and ethical transparency. Often, the ‘to offshore or not offshore?’ the question ought to be entirely moot as the sophisticated advantages of producing close to market – which go beyond the arena of mere labour costs – are infinitely more valuable than labour concerns due to the ever-shifting nature of global relations. Until companies realise this, we may be seeing a return to ‘Made in China’.
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References are below!
[1] GERRY SHIH AND PETE SWEENEY China’s July exports slump 8 percent, raises pressure for more stimulus, August 2014
[1] “BCG’s Global Manufacturing Cost-Competitiveness Index,” The Boston Consulting Group, BCGPerspectives.com, August 2014
[2] H. Sirkin, M. Zinser, D. Hohner and J. Rose, “U.S. Manufacturing Nears the Tipping Point: Which Industries, Why, and How Much?,” The Boston Consulting Group, BCGPerspectives.com, March 22, 2012.
[3] “UK Economic Outlook” Pricewater house Coopers, http://pwc.blogs.com/March 2014
[4] “Reshoring Initiative Data Report: Reshoring and FDI Boost US Manufacturing in 2014,” Reshoring Initiative,http://www.reshorenow.org/recent-data/ 2014.
[5] GERRY SHIH AND PETE SWEENEY China’s July exports slump 8 percent, raises pressure for more stimulus, August 2014