Wednesday, 15 February 2012

Supply chain shifts threaten Asia

Global businesses are reassessing their supply chains which if not handled sensibly by the likely losers in the Far East, economically, politically and socially, will lead to destabilising repercussions that could leave the world in turmoil.

Trade is the handmaiden of prosperity but like a woman it can be fickle. Over the last 15 years, for example, China has prospered from its innate dynamism unleashed by a change from collectivism to capitalism. It depended heavily on stetched supply chains based on just-in-time (JIT) deliveries but those supply chains are now being seen as problematic owing partly to their inherent inflexibility which leaves them vulnerable to sudden changes in customers' demands. Other major concerns are soaring soaring Chinese costs, the disruptive power of Nature's fury, like the Japanese tsunami and Thailand's floods which hammered manufacturing in both countries, leading to multi-billion pound losses through lost production around the world. If all that were not enough, countries like China have scored an own goal through its blatant disregard for intellectual property rights and wholesale product counterfeiting. And, as always, changes in exchange rates are another threat and European currencies have weakened, giving them an advantage. There are also serious concerns about product quality.

The result of all this is that in Britain, in particular, manufacturers are stepping up their purchases of parts and materials from domestic suppliers, according to one survey of 362 manufacturers organised by General Electric. The research shows that 27% of those questioned said that in the past year they had raised the amount of purchases made from UK-based producers, compared with 13% who were buying less. For some UK manufactures the change in supply sources is stark. One SME, for example, a Yorkshire-based maker of industrial machinery, now sources 90% of its annual needs of iron castings from UK suppliers, as against 40% three years ago. One of its key reasons was reliability of supply. A problem here is that if something goes wrong from a far-flung supplier it can be very difficult to resolve. A UK-based buyer, however, can usually resolve the problem with a local supplier over a 'phone call or a visit to the supplier.

Another company, Sherwood Electronics, which makes cable assemblies for computers and railway equipment, has raised the proportion of cable-related components its obtains from UK producers from 40% to 55% with a matching fall in purchases from Asia. The company found that rising costs of Asian-sourced items had increased by 30% over the last 17 months compared with single digit rises from UK suppliers.

A demand from UK buyers for smaller batch sizes can also play into local suppliers hands. This pushes buyers to selecting suppliers based in Britain rather than in far-flung offshore suppliers like China. It is, as it were, an ironic development in that JIT deliveries are now being turned against the birthplace of JIT -- Japan.

Missed costs mislead

Western manufacturing companies, according to the Reshoring Initiative, of America, often ignore certain costs when making decisions on where to make products. One of these includes factors such as total cost of ownership, which includes aspects like intellectual property risk, the cost and time of travel to visit distant suppliers and the negative impact of dividing manufacturing from engineering staff back at HQ. By ignoring these costs it could be shown that America was, on average, 108% higher than China but when factored in to allow for the total cost of ownership America averaged only 12% higher and in some cases undercut China by 22%.

Some big US manufacturers like Ford, Caterpillar and General Electric are beginning to move some production back to America, though it is small so far. Apart from lower wages that drove companies overseas, another reason was cheap fuel but oil has risen four fold since 2002 so shipping costs have jumped. China's wages have also averaged rises of 15% a year over that time.

The result of these adverse movements against the Far East, according to supply chain analysts, is that by 2014 it is predicted that the production of 20% of goods now made in Asia and destined for US consumers will shift to the Americas. According to one study by Accenture, 61% of 287 manufacturers surveyed reported that they are thinking of moving operations closer to customers.

If this "secret" shift becomes a tidal wave it will yield an environmental dividend through lower fuel emissions, especially from ships which are not governed by environmental strictures like road transport users. But if the shift is not handled well then the disruptive fall out would be significant. Working against that scenario, however, is the likelihood that China's growing wealth will boost its local production to satisfy soaring local demand. In the process, however, China's huge balance of payments surpluses with its trading partners could begin to dwindle unless it husbands its bulging treasury wisely. Like oil rich Middle-East states, China has invested heavily abroad, particularly in Britain, not only to ensure raw materials and energy supplies but also to
ramp up its overseas investment income.

The military stumbling block

One development that could jeopardise all that, however, is China's military caste's desires to don the mantle of a great military power, exemplified by a big build up in naval strength spearheaded by an aircraft carrier with, allegedly, up to four more planned. China has plenty of internal social problems which will inevitably lead to much higher spending on internal security as it struggles to contain a soaring crime rate and civil disturbances with only 150 police officers to 100,000 people. China also needs every Renminbi it can muster to cope with the inevitable natural calamities to come. High military spending, therefore, is unwise, especially as it has a knock on effect with neighbours like India, who feel obliged to spend billions of pounds beefing up its air force while so many of it people subsist in abject poverty. If China followed the teachings and warnings of its ancient, illustrious sages by avoiding such costly, vainglorious, military spending then it would go down in history as the first powerful nation to do so in recent times. That would be true greatness but history suggests that it will be ignored and so the people will be denied their hard-earned dues.