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I suppose those in the trade know this day to day. But I found
it odd that the high oil prices were not being reported to be affecting
international trade. China can make its costs and wagest 40%
lower, artificially, through currency manipulation. Other
countries can tax our goods shipped to them, and subsidize their goods
going out to us - through VAT rebates.
But at what point does the
oil price weigh too heavily. 6,000 miles from Beijing to Kansas
City. On $130 oil. A heavy weight.
The WSJ's Tim
Appel has a good story today. Insourcing may be the new game, or
at least slowed outsourcing, even if foreign protectionism/mercantilism
goes unchecked.
OIL SHOCKERStung by Soaring Transport Costs,
Factories Bring Jobs Home Again
By TIMOTHY AEPPEL
June 13, 2008; Page A1
The rising cost of shipping everything from industrial-pump parts to
lawn-mower batteries to living-room sofas is forcing some manufacturers
to bring production back to North America and freeze plans to send even
more work overseas.
"My cost of getting a shipping container here from China just keeps
going up -- and I don't see any end in sight," says Claude Hayes,
president of the retail heating division at DESA LLC. He says that cost
has jumped about 15%, to about $5,300, since January and is set to
increase again next month to $5,600.
The privately held company, known for making the heaters that warm
football players on the sidelines, recently moved most of its
production back to Bowling Green, Ky., from China. Mr. Hayes says the
company was lucky to have held onto its manufacturing machinery. "What
looked like an albatross a year and a half ago," he says, "today looks
like a pretty good asset."
The movement of factories to low-cost countries further and further
away has been a bittersweet three-decade-long story for the U.S.
economy, knocking workers out of good-paying manufacturing jobs even as
it drove down the price of goods for consumers. But, after exploding
over the past 10 years, that march has been slowing.
The cost of shipping a standard, 40-foot container from Asia to the
East Coast has already tripled since 2000 and will double again as oil
prices head toward $200 a barrel, says Jeff Rubin, chief economist at
CIBC World Markets in Toronto. He estimates transportation costs are
now the equivalent of a 9% tariff on goods coming into U.S. ports,
compared with the equivalent of only 3% when oil was selling for $20 a
barrel in 2000.
"In a world of triple-digit oil prices, distance costs money," Mr.
Rubin wrote in a recent report. He figures that for every 10% increase
in the distance of a trip, energy costs rise 4.5%.
Transportation costs are just part of a larger wave of inflation
sweeping global manufacturing, which has also been pounded by higher
costs for basic materials, such as steel and resins.
The cost of doing business in China in particular has grown steadily as
workers there demand higher wages and the government enforces tougher
environmental and other controls. China's currency has also appreciated
against the dollar -- though not as much as some critics contend it
should -- increasing the cost of its products in the U.S.
Edward Zaninelli, vice president of trans-Pacific westbound trade at
Orient Overseas Container Lines in San Ramon, Calif., a major shipping
line, says he's heard from customers who are moving production back to
the U.S., including a maker of steel pans for car engines.
"I believe a decent amount of production could come back into the
States within five years, not everything," he says. "But it won't be
because of transport costs -- it'll be because other production costs
have gone up and companies have realized they can have better control
over their production when it's closer to home."
For many manufacturers, though, oil prices that have hurtled past $130 a barrel have been the tipping point.
Emerson, the St. Louis-based maker of electrical equipment, recently
shifted some production of items such as appliance motors from Asia to
Mexico and the U.S., in part to offset rising transportation costs by
being closer to customers in North America.
Edward Monser, the company's chief operating officer, says logistics
costs, which include all the expenses associated with moving goods,
became a worry about a year ago.
"That's when it became a dominant part of the discussion," he says,
adding that oil then was less than $100 a barrel. "So with oil now at
$130, it's even more serious." Mr. Monser says Emerson's larger
strategy is to regionalize manufacturing, producing as much as possible
within the part of the world where its sold.
But moving production closer to markets won't avoid all the problems
associated with rising transportation costs. Manufacturers face hefty
surcharges on domestic shipments by truck and train. And already
congested domestic transportation systems may have difficulty handling
a sudden upswing in demand from manufacturers buying and moving more
raw materials and other supplies over U.S. rails and highways.
Moreover, in certain industries the advantages derived from offshore production continue to trump higher transportation costs.
Electronics firms, for instance, are now clustered in Asia and gain a major benefit of proximity to one another.
While many manufacturers are re-evaluating production strategies, there
are limits to how many jobs will flow back to the U.S. One problem is
that much of the basic infrastructure needed to support many industries
-- such as suppliers who specialize in producing parts or repairing
machines -- has dwindled or disappeared.
U.S. job losses in manufacturing have averaged 41,000 a month so far
this year -- nearly double the pace last year, with sectors such as
autos and construction materials tied to the housing slump especially
hard hit. In essence, every job added as a result of companies pulling
work back home is being more than offset by others reeling from the
domestic slump.
Higher fuel costs "may slow the outsourcing of goods in the future,
rather than causing a massive shift back of those things that have
already been outsourced," says Daniel Meckstroth, an economist at the
Manufacturers Alliance/MAPI, a public policy group in Arlington, Va.
A prime example is Craftmaster Furniture in Taylorsville, N.C. The
company, bought two years ago by a Chinese manufacturer, once intended
to shift 40% of its U.S. production to China by the end of this year or
early next year. With the planned move only about half done, that
exodus has stopped cold.
"We're getting hit with increases up and down the system," says Roy
Kalcain, the company's president. "It's changing our whole equation for
where we produce." As recently as a year ago, Mr. Kalcain says he was
saving 15% when he assembled sofas in North Carolina using kits of
fabric that were pre-cut in China. Those savings are now only 7% or 8%.
When savings fall to far less than 15%, it gets harder to justify
having the work done in distant Chinese factories that take 12 weeks to
deliver products.
The higher costs are particularly problematic for lower-value goods:
The cheaper a product, the more significant transportation costs are in
the final price. That may help explain why Chinese exports of such
"freight-sensitive" goods to the U.S. are now falling for the first
time in more than a decade, according to CIBC's Mr. Rubin.
Bremen Castings Inc., a family-owned foundry in Bremen, Ind., is seeing
a wave of customers bringing work back from China and other low-cost
countries.
Last month, a pump manufacturer, which had moved more than $1 million
worth of metal-casting work from Bremen to China two years ago, called
"to reactivate everything," says J.B. Brown, the foundry's president.
"They told me the cost of transport from overseas was the straw that
broke the camel's back -- and they said they didn't see it going back
down any time soon."
And the heavier and bulkier goods are, the more sensitive they are to
fuel costs. CIBC's Mr. Rubin predicts Mexico will be "the biggest
winner of all" as increased transportation costs make China
uncompetitive in an ever-growing list of businesses in North America.
Even Mexico may be too far for some companies.
Last fall, Crown Battery Manufacturing Co. decided to close a plant it
bought in Reynosa, Mexico, and move the jobs to its Ohio home base,
adding 25 workers to the 400 it already employed.
"We're shipping batteries, which are big and heavy," says Hal Hawk, the company's chief executive.
Mr. Hawk estimates shipping to customers, who tend to be clustered in
the Midwest, was adding 5% to 10% to the cost of the Mexican-made
batteries, which he says also suffered from quality-control problems.
The smallest batteries are 20-pounders for lawnmowers, but they also
make 29,000-pound giants for running underground mining machines in
places like southern Illinois.
"They were traveling 2,000 miles to get to those major customers," says
Mr. Hawk, and all indications are that fuel surcharges on the trucks
would just keep growing.
-- Conor Dougherty
contributed to this article.
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