Monthly Archives: June 2013

A Proven Blueprint for Country-Based Global Domination of a Chosen Industry

  1. Become a leading outsourcing destination through low-cost labour.
  2. Patiently build up your cash reserve over a couple of decades.
  3. Through raw material subsidies and free loans, flood the global market with cheap, excess capacity so you become the primary source.

This is exactly how China became:

  • a global leader in solar, steel, glass, paper and auto parts,
  • the world’s largest exporter in 2009 (when it surpassed Germany),
  • the world’s second largest manufacturer in 2010 (when it overtook Japan), and
  • built up the largest foreign-exchange reserves in the world in that same year.

As per this recent post over on the HBR blogs on How Chinese Subsidies Changed the World, since 2001, when China joined the WTO, subsidies have financed over 20% of the expansion of the country’s manufacturing capacity. The state has willingly paid the price of economic inefficiency to accomplish political, social, economic, and diplomatic goals. As a result, huge Chinese subsidies have led to massive excess global capacity, increased exports, and depressed worldwide prices, and have hollowed out other countries’ industrial bases. For example, in 2000, China was a net importer of steel with 13% of world imports and 16% of global output. By 2007, after 27B of energy subsidies, it had become the world’s largest producer, consumer, and exporter of steel. It now produces 50% of the world’s steel, and with no scale economy or technological edge, still sells steel for 25% less than the U.S. or the EU.

This government support of private industry has helped China skyrocket to the second largest producer of GDP faster than anyone expected and will quickly propel it into the top spot. But there is hope for America. All it has to do to regain it’s glory as the largest economic superpower in the world is to:

  1. Take advantage of China’s rising wages and increasing unemployment and start promoting its “low cost labour”.
  2. Patiently wait as China, India, and other fast-growing economies follow its example and outsource everything over the next two decades, grabbing as much renminbi, rupee, and other foreign currency as it can over the next two decades.
  3. Subsidize raw material, manufacturing, and energy production like mad in key industries and begin the climb back up the GDP ladder.

At the rate things are going, China is going to overtake the US before Obama’s term is up, not in the 2020’s like everyone was originally predicting. There’s no stopping them. America’s only hope is to realize economies are often cyclical and take advantage of its next opportunity to get back on top.

Can Trucking Clean Up Its Act?

A recent article over on Inbound Logistics on Going Green to Save Green (which you all know is true after reading SI for years) had a scary statistic: freight trucks are on pace to increase their carbon emissions by 40 percent over the coming decades, according to the Department of Energy’s Annual Energy Outlook. Ouch!

With strict new fuel economy standards for passenger vehicles, which were never the big emission culprit in the first place (they just took the blame for all the pollution caused by ocean shipping, which contributes approximately 3,500* times the pollution produced by all personal automobiles on the planet, and ground transport), this means that trucks are going to become the biggest producer of road sector emissions. The logistics sector constitutes about 6% of the total man-made GHG emissions, with transport as a whole constituting about 12%. This says that the personal automobile, which is 50% to 60% of road sector emissions, depending on the source, accounts for less than 2% of total CO2 and GHG emissions as road transport is only about 25% of logistics emissions (with the rest coming from rail, aviation, and ocean shipping) and that trucking will soon account for more than 2% of total CO2 and GHG emissions.

This does not bode well for the trucking industry which is already hard hit with an impending driver shortage of 240,000, a 100%+ annual turnover, and onerous regulations. With the growing desire of the Millennials (Generation Y) to only work for companies that are socially responsible, this is going to make it even harder to recruit young drivers (which is a must! How long do you think an industry with an average new graduate age of 54 can last without fresh blood?)

So what can it do? While hybrid is an option for smaller trucks, such as UPS and Fedex parcel delivery trucks, it’s not a great option for 18 wheelers (which have to roll on, and will have to continue to do so even after America rediscovers rail). The first thing the trucking industry needs to do is switchover to clean diesel (ULSD) vehicles as fast as possible. Not only is it 97% cleaner than regular diesel, but a well-designed diesel engine can be 40% more efficient than a gasoline engine.

The next thing it needs to do is switch to lightweight pallets and containers. For example, as illustrated in the Inbound Logistics article, a heavy-duty plastic container has only one third the weight of a steel container, and is just as effective. Lower shipment weight translates into a lower fuel requirement which translates into lower emissions.

The third, and most important, thing it needs to do is eliminate empty miles. An empty trailer can weigh as much as 7.5 tons / 15,000 lbs, which is almost 20% of the maximum allowed weight of 40 tons on most US highways. This says that if a truck has to return to its origin point empty, it’s using 120% of the fuel requirement. So how does it do this? First of all, it only works with buyers who recycle containers and pallets so that at least one trip out of every X is full just with reusable containers and pallets. Secondly, it balances its routes by way of the right mix of contract and spot-market deliveries. As hinted at in our recent post on BuyTruckLoad.com which noted that you could expect to pay an average of 15% less on the spot market, an optimization-powered spot-market hub which analyzes a buyer’s need against all of the “empty miles” of all carriers in the area can help a carrier identify the right customers to insure that it’s trucks stay full.

And while trucking may not be able to keep pace with the passenger automobile, if it does these three things, it will be pretty close. Clean diesel has at most half the sulfur content of gasoline (which has to average 30 ppm from any single manufacturer, compared to 15 ppm for clean diesel), diesel engines will be (on average) one third more efficient, lighter weight packaging has the potential to reduce emissions by one sixth, and eliminating empty miles by 80%+ (which spot-market hubs have have the potential to do) will reduce GHGs by another one-sixth. Put this altogether and the GHG emissions from clean diesel engines, which are already twice as clean as gasoline engines, can be effectively reduced by about another five sixths, or 83%. In other words, a 40% GHG reduction is within reach, and close to the mandated 45% reduction from the federal vehicle standards which mandate a fuel economy increase of new passenger vehicles from approximately 30 mpg in 2011 to 54.5 mpg in 2025.

So, if it wants to, Trucking can clean up its act. The question is, will it?


* As per this historical post on SI, 15 of the world’s biggest cargo ships emit more pollution than the roughly 750 Million cars in operation around the globe. The world fleet in 2011 was 104,304 ships. Some are Post-Panamax and emit more pollution than 50 million cars, some are much smaller. Given the average size, the factor of 3,500 is a good approximation.

Even China Knows that You Should Home (Market) Source!

SI has been telling you since 2007 that you should be Home Sourcing. SI has outlined the Advantages of Home Country Sourcing, shared a great post on Home-Shoring from the Manufacturing Innovation Blog, and given you another reason to source close to home. But have you listened? For the most part, no.

But you should, or this is another area where China is going to eat your lunch too. As per this recent article over on the Washington Post that asked if U.S. Manufacturing [is] Making a Comeback, a Chinese company has just set up a factory in the United States!

This January, Lenovo (which acquired IBM’s PC business in 2005), a Beijing-based computer maker, opened a new manufacturing line in Whitsett, N.C. to handle assembly of PCs, tablets, workstations, and servers. Why? According to Jay Parker, President for North America, it needs the flexibility to assemble units for speedy delivery. But, more importantly, the math adds up. Chinese wages are on the rise, the risk of loss to piracy (at sea) is increasing every year, and we have reached the point where the higher North American labour costs can be offset by savings on logistics. And Chinese companies know logistics costs as good as anyone. (As per Sunday’s post on China Packaged Goods, with a [major] stake in 16 global ports, thousands of shipping lanes, and a fifth of the world’s container fleet, China pretty much sets the prices for Ocean shipping these days.) A barrel of crude oil that was $27 in 1993 and $35 in 2003 is now $88 in 2013, inflation adjusted. That’s over a 3X increase since the early stages of the outsourcing craze. And China wages have increased so much in China over the last decade that a new study just found that labour costs are now 20% lower in Mexico. (Source: SCDigest) Plus, the wage gap between China and North America is expected to shrink to a mere $7 per hour by 2015! When you factor in logistics costs and loss due to theft, IP theft, and (ocean) piracy, that’s nothing! (Especially when the US is on pace to have lower manufacturing costs than Europe and Japan by 2015! There’s a reason Nissan, Honda, and Toyota are exporting from the US. That’s right, exporting from, not importing into.)

When you add it all up, and consider the production efficiencies that come from our ability to constantly innovate better processes, it just makes sense to bring (last stage) manufacturing back to North America. (Especially when the productivity of North American workers keeps rising.) Maybe you still outsource key components, but you certainly don’t outsource washing machine production, for example. The last thing you do is ship empty space or dead-weight.