A recent headline over on the World Trade Magazine site that asked whether or not global trade still has its groove (Link) got my attention because, even though the global economy tanked from 2008 to 2010, a lot of leading companies are focussed on accelerating the development of Global Business Services centers (which was one of the foci of the recent Hackett Group Best Practices conference) in order to take advantage of lower labour rates in other parts of the world. Plus, I haven’t seen any drop in services outsourcing to India or product manufacturing outsourcing to China. And there has been a resurgence in interest (though not necessarily much in the way of action yet) in moving or creating new manufacturing locations in Mexico and Brazil by US (and even European) companies. So while Global Trade may not have grown as fast as we were predicting back in 2008 before the global recession, it does not appear to have taken any backwards steps by any stretch of the imagination.
Nevertheless, it’s always good to check the pulse. The article addressed the question from a risk, optimism, and emerging market viewpoint.
The eruption of Eyjafjallajokull in Iceland, the disaster in Japan, and the political upheavals in Egypt, Libya, Bahrain, Algeria, and even Albania are placing risk front and center in the Supply Management landscape. Plus, the consistently high price of oil, which could go even higher due to the instability of oil-exporting countries, puts global sourcing of certain goods at risk as the cost of transportation could soon make some global buys unaffordable. In addition, as more of the household budget goes towards fuel, consumers will have to spend less on unnecessary consumer goods. Then we have price increases across certain categories of raw materials as countries like China implement quotas on rare earth metals and create global supply constraints.
The article has an interesting quote from Carlos Rice, Vice President of Supply Chain Services for Crowley Logistics who says that we’ve seen an upturn in the economy recently and we are watching the emergence of new markets — not only in India and greater China — but closer to home in Central and South America. What is happening with Brazil’s economy today is almost unprecedented. So, we see lots of opportunities not just east-to-west, but also north-to-south as well. Plus, there has been continuous growth in the trans-Pacific and Asia-to-Europe markets for some logistics carriers, balance is returning to many global trade lanes, and some carriers are seeing up to 20% growth in logistics to emerging markets that are creating a consistent demand for commodities. The expectation is that container trade will be at upper single-digit growth as a whole.
Adrian Gonzalez, director of Logistics Viewpoints, notes that the traditional economic powers like the U.S., Japan, China, and Germany are all looking at other developing areas as opportunities for future growth and you see these countries starting out first as sources of low-cost labor in much the same way as China began its development. Then you see the development of a middle class that begins buying products. And we have the situation where countries like China and India are now able to grow and thrive independently of richer countries. In fact, the World Bank states that developing economies were responsible for 45% of world growth in 2010.
So what’s the projected return on equity (ROE) for those invested in global trade? According to Paul Bingham, economics practice leader at Wilbur Smith Associates, barring another unexpected calamity, the [logistics] industry anticipates a slow yet steady global economic recovery. Right now, about 20% of what comanies manufacture is consumed in other parts of the world. Carlos Rice expects that this number will grow to 80% in the next 10 years or so. I personally think this is a bit ambitous with the high price of fuel, but don’t doubt that it will continue to rise as multi-nationals find new low-cost locales to produce in and new markets to sell it. I think the big difference is that there will be more near-sourcing from neighboring countries, or at least countries on the same continent, than there will be global sourcing from locations halfway around the world. What do you think?