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Drops in containerized freight, and the following drops in China-US freight prices, will start putting pressure on a lot of manufacturing onshoring initiatives
by mediaman 4y ago
Drops in containerized freight, and the following drops in China-US freight prices, will start putting pressure on a lot of manufacturing onshoring initiatives started during the pandemic.
For many classes of bulk goods, freight was becoming 50-100% or more of total landed cost for goods imported from China, which overwhelmed labor cost differentials. In addition, Chinese production problems provided more reasons to move production closer to demand.
But US labor costs increased substantially during the labor crunch of 2021. Prevailing wages that were around $15 ramped to $18-22 as companies worked to compete against the likes of Amazon hiring hundreds of thousands of warehouse workers. Entry level Chinese wages have not increased nearly as much.
So if freight costs collapse such that the landed cost only has 25% of landed cost as freight, and US manufacturers have experienced an increase in labor costs relative to Chinese production, this could spell some very challenging times over the next 1-2 years as a recession applies cost management discipline on the supply chain and US manufacturers find themselves in potentially an even worse comparative cost position than pre-pandemic, vis-a-vis offshore production.
This is also why many US manufacturers were wary about adding capacity: they know about the bullwhip effect, and they also knew that it would affect not only consumer demand but also their supply chain advantage versus offshore production, and so any capital intensive capacity added to meet short-term demand may go idle 1-2 years afterward. And most manufacturing capacity doesn't pencil out if you only get a couple years of good utilization out of it.
- lumost 4y agoA smart move would be tostart ratcheting up tariffs. Given the amount of international capacity, the bullwhip effect should be bluntable via tariffs.
- whatshisface 4y agoIf the bullwhip effect obeyed predictable timing, companies would already be compensating for it. If you have a secret formula that can predict when it will hit, don't bother trying to convince the polity to do something about it - become a billionaire by buying ahead of the shortages and fix the problem yourself.
- chrisseaton 4y ago> freight was becoming 50-100% or more of total landed cost How can freight be more than 100% of total cost? Everything else was zero or negative?
- ketzo 4y agoMaybe just sloppy language, but OP might have meant “50-100% or more of the cost of producing the good itself”.
- chrisseaton 4y ago‘Landed’ means total cost for producing and getting into country.
- mediaman 4y agoYes, you're right, I meant as a percent of the FOB price of the product. So 100% of the FOB price would be 50% of the landed cost. 100% of landed cost doesn't make sense and was the wrong term.
- akira2501 4y agoA $4 item costs $4 to ship, making it $8 to get it on shore.
- chrisseaton 4y agoThat’s $8 landed so that freight is 50%.
- arcticbull 4y agoI assume they meant percentage of the cost excluding shipping. Probably shouldn't have said 'landed' but I do know of some goods that cost over 100% of BOM to ship.
- throwawaymaths 4y agoI think there is an argument for semi-onshoring, aka not quite getting it to the US but reducing supply chain risk: Mexico for low cost labor with low value-added and near zero supply chain risk (if it's a maquiladora on the border), Colombia for low cost with high value added but slightly higher supply chain risk.
- Teever 4y agoIs Mexico really a zero supply chain risk? I don't know much about the cartels or violence in Mexico, but that's the first thing I think of when you describe Mexico as low risk.
- brendoelfrendo 4y agoIt's unquestionable that violent crime in Mexico has gone up over the past several years, but the question is: does that represent a supply chain risk? I don't have the data, but it doesn't seem like cartels or violent criminals typically target civilian manufacturing infrastructure. Mexico has a lot of manufacturing already, and a relatively healthy demographic distribution (that is, unlike the US and some other developed countries, they actually have enough young folks to replace the old folks leaving the workforce). I feel like Mexico would have to try very hard to fail at being a manufacturing powerhouse in North America. As an aside, this is a good reason for the US to really strengthen its relationship with Mexico and try to help Mexico fix its problems; the US is probably going to be even more dependent on Mexican manufacturing in the future when this whole supply chain shuffle shakes out.
- throwaway0a5e 4y agoThe cartels generally don't wanna destroy the factories. They wanna tax them.
- anonAndOn 4y ago>try to help Mexico fix its problems Do you mean like returning the former Defense Minister to Mexico before trial? It's so nice that we can "help". [0]https://www.cbsnews.com/news/salvador-cienfuegos-zepeda-dismissal-drug-trafficking-charges-mexican-general/ https://www.cbsnews.com/news/salvador-cienfuegos-zepeda-dism...
- taf2 4y agoIf what you say is true/correct than it stands to reason removing the tariffs, would just make this issue even worse for US manufacturers and drive us into an even deeper recession?
- Zigurd 4y agoBoth globalization and deglobalization can become fashionable herd mentalities. As long as the populist isolationists can be held at bay in the US and most of Europe, a sane balance should return.