Category Archives: Global Trade

Nearsourcers – Is Brazil in Your Future?

I’ve been on a nearsourcing kick for a while now because I never really believed in the outsourcing craze (and the outsourcing craze to China in particular) as it’s just not rational that it should be cheaper to source the vast majority of products from half way around the world. Now, it was for a while, but I’m blaming that on ignorance and incompetence and not what pseudo-economists like to call “market reality”. Let’s face it, fuel is expensive. Labor is expensive … and if you need trucks, boats, and trains to ship your product, that requires lots of extra labor to load and unload. And lead-time is expensive. Who knows where the market is going to move during the 35 days it takes the product to reach your warehouse? You might end up with a lot of unmoveable inventory and that’s going to cost you. (So unless you can air-freight affordably and without a lot of environmental damage, and unless the other factors Dick pointed out in his recent post on Nearshoring are met, outsourcing half-way around the world just isn’t a good idea.) And if we’re as smart as we’re supposed to be, we should be able to innovate a way to produce the (vast) majority of products more cost effectively close to (if not at) home. (If we can’t, shame on us.)

Now, my thoughts were that the rising cost of oil and the rising cost of labor in the former “low-cost” countries would push us back to Mexico — which received a lot of investment before the China craze, which has a lot of excess capacity, and which has a good understanding of our needs — but after reading this recent special report on business and finance in Brazil in the Economist, I’m wondering whether or not Brazil should be getting more attention.

For what might be the first time in modern history, Brazil is democratic, experiencing economic growth, and realizing low inflation. If the trend continues, it could be one of the world’s five biggest economies by the middle of the century. It’s already self-sufficient in oil, it’s government paper is classified as investment grade by all three of the main rating agencies, it is now lending money to the IMF (which was wary of lending to Brazil but a decade ago), and FDI in Brazil is up 30% year-over-year while the FDI global average is -14%. Plus, GDP outpaced inflation in Brazil in 2006 for the first time in over 50 years.

Most economists are pegging its expected growth in the 4-5% range, which is pretty damned good considering the current global economy. Furthermore, this growth should pull its higher-than-average interest rates down to normal levels soon, which will make Brazil a fertile ground for (new) business expansion.

All-in-all, Brazil is looking like a very good location to be near-sourcing from.

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Nearshoring? Not on this planet. At least not yet.

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

One of the predictions (or purported trends) we heard a lot about in the last few years is “nearshoring”. Google has 78,000 references to the term. Supposedly, trans-Pacific supply chains are so unreliable and complicated that US businesses are leaving their Chinese suppliers and moving to closer areas such as Mexico. If that were happening, I expect we would be seeing Mexican imports to the US being an increasing percentage of Chinese imports. Here’s the data. See for yourself. There was a surge in early 2008 but it went away. The data source is the U.S. International Trade Commission.

 

Dollar

value of US imports from Mexico as a percent of imports from China
2007 2008 2009
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
68 67 62 64 72 71 59 57 59 59 57 n/a

 

Here’s why I think many predictors are going astray:

First, they don’t differentiate between goods that usually travel by air and goods that travel by ocean. If your goods travel by air, an 8000 mile supply chain is only 12 hours longer than a 2000 mile supply chain. I agree that trying to have a long flexible supply chain is only possible if air freight is economically feasible. The economics work for laptop computers but not for clothing.

Second, the predictors overlook the main reason companies buy from a given country … that’s where the best suppliers are. You shouldn’t just say “I’m moving from country X to country Y” unless country Y has equal or better suppliers. (“Best” here means best against criteria that include landed cost.)

Economics Professor Michael Porter wrote a book called The Competitive Advantage of Nations. It has a great chapter on how countries become centers of excellence in building things. He says it requires four conditions:

  1. High degree of domestic competition
  2. Related and supporting industries
  3. Demanding customers
  4. Adequate factor conditions

Too many predictors focus on condition four, factor conditions. That includes labor, overhead and material costs, infrastructure efficiency and overall business environment. The other three conditions are also necessary. If factor conditions were the only criterion, Japan never would have become excellent in building cars.

I’m not saying that nearshoring will never happen. It will happen first in purchasing products that can’t be shipped by air and require supply flexibility. For any product, today’s best countries will not be best forever. Some external shocks to the system can speed up the process. If China allows the yuan to float, costs for the Chinese content of China’s exports will go up with respect to the US dollar. If energy costs soar or emissions from aircraft or ships are tightly controlled, the “best” countries could change. Both of these changes are likely to happen sometime.

The typical purchasing company cannot solve these problems. You can’t generate a nearby supply base for the parts needed to manufacture your supplier’s products if it doesn’t exist already. Because of that, “insourcing” may often be a better solution than nearshoring. If starting to manufacture something you are now buying isn’t practical, the company best positioned to solve the problem is your current supplier. I suggest you start probing your Chinese supply base about what they would do if the yuan increases in value. Farsighted Chinese companies are already looking in Africa and Latin America for both sourcing and manufacturing.

Dick Locke, Global Procurement Group and Global Supply Training.

It’s the Year of the Tiger … and China is Going to ROAR!

In 2008, according to the World Bank, China had a GDP of approximately 4.326 Trillion. Given that China projected growth of 8% in 2009, that puts them at about 4.672 Trillion for 2009. Continuing this trend, as China is projecting similar growth for 2010, that puts them at a GDP of about 5.046 Trillion this year. Meanwhile, Japan, which clocked in at 4.909 Trillion in 2008, just downgraded its projected growth to 1.3% for 2009, putting it at 4.973 Trillion for the year. As its economic outlook is not looking up, holding steady, this puts Japan at an estimated GDP of 5.023 Trillion for 2010. What does this mean? This will likely be the year that the Tiger ROARS and China becomes the 2nd largest producer of GDP in the world.

So what should you do besides learn Mandarin, if you haven’t already? (You can even start for free at sites like Chinese-Tools.com.) Good Question! While I still adamantly believe that you should not be importing goods from China that you can produce closer to home — as there’s nothing lean about an 8,000 mile supply chain — that doesn’t mean that you shouldn’t be producing in China for the Chinese market. Or that you shouldn’t be tapping the collective knowledge of the almost two million geniuses that live in the country.

But where do you start with the world’s fastest-growing economy? I’m not sure, but a recent article from Knowledge@Wharton on “The Road to China” that interviewed Harbir Singh, Saikat Chaudhuri, and Lawton Burns on their recent trips to China provided some fresh insights that are worth a second thought.

The economy is barreling ahead in high gear in major cities like Shanghai and Beijing which have literally transformed over the last decade. They have a strong infrastructure, a very strong manufacturing-based economy (as they are the manufacturing hub of the world), and are investing a lot of money to set up firms and an ecosystem to foster innovation. They’re trying very hard to move up the global value chain very fast. Plus, a lot of overseas Chinese are now returning to China — junior people as well as senior people.

However, they’re still a big country with a huge population which collectively has many different types of people with varied interests. As a result, where China is concerned, it’s still about managing diversity. It’s about meeting the aspirations of those people and managing the differences, as much as its promoting some uniformity in a standard of living.

In other words, you probably have to start by diving in head first because there’s so much happening, so fast, that it’s hard to really wrap your head around it all unless you’re immersed in it. But check out the article. Although it’s five pages, it is quite interesting.

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Why Haven’t You Applied Automation to Global Trade Yet?

Considering that

you have to be either extremely organized and knowledgeable about your global operations or a complete idiot not to.

And now Hausman and Lee from Stanford University and Napier and Thompson from TradeBeam have released the full study on “How Enterprises and Trading Partners Gain from Global Trade Management” (A New Process Model for the China-to-US Trade Lane) which found

  • $ savings of 1.7% to 2.4% in Annual Sales for Exporters
  • $ savings of 0.6% to 2.2% in Annual Sales for Importers
  • a 28% to 40% increase in Annual Profit for Exporters
  • a 10% to 37% increase in Annual Profit for Importers
  • Manufacture-to-Invoice Cycle Reduction of 9% for Exporters
  • Days Sales Outstanding Reduction of 28% to 29% for Exporters
  • Order to Receipt Cycle Reduction of 35% for Importers

Extrapolating these benefits to total worldwide trade Exports and Imports based on World Merchandise Exports of 13.6 Trillion in 2007 and World Merchandise Imports of 14.0 Trillion, this suggests that the annual benefit to global supply chains would be:

  • $194 Billion to $263 Billion to Exporters and
  •   $54 Billion to $109 Billion to Importers.

That’s free savings there for the taking! All you have to do is some business process re-engineering, which consists of:

  • modelling “as-is” processes,
  • designing “to-be” processes,
  • benchmarking the current state,
  • defining the target state,
  • identifying the skills, partners, processes, tools, and technologies to get to the target state from the current state, and
  • implementing, measuring, and continually improving in a methodical, step-by-step fashion, until you get there.

There are a number of Global Trade companies out there with SaaS solutions ready and willing to help you. And if you don’t know where to start, [shameless plug] you could always contact the doctor and I could help you with a needs assessment and RFP to find the right solution and partner(s) for you.

So go out and get yourself a Global Trade solution. You’ll be glad you did … especially when you come out looking like a Global Trade Hero.

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Is Basel II Crippling Trade Finance?

The purpose of Basel II, the second of the Basel Accords (which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision), was to create an international standard that banking regulators can use when creating regulations about how much capital needs to be reserved to guard against financial and operational risks. In essence, the goal was to reduce risk and insure trade even in the event that a series of major banks collapsed.

But did it, in fact, accomplish the exact opposite? In two recent articles in the financial times which addressed the current trade credit shortages that are threatening to throttle the global flow of goods, we see that “Basel II has become (an) obstacle to trade flows”. It seems that the Basel II charter imposes a significant increase in the risk weighting for this activity, relative to its predecessor. (This is scary. Physical goods HAVE a value and invoices to solvent companies result in receivables and trade credit loans make a lot more sense than business development loans to risky start-ups or bail-outs to big corporations that ARE NOT too big to fail in this economy).

More specifically, the focus of Basel II on the “probability of default” of banks’ counterparts — which naturally increases during downturns — substantially exacerbates the negative effect of recessions on banks’ lending. In this context, Basel II has inadvertently become an obstruction to the very lifeblood of international trade. As a result, even though the “World Bank (is) urged to lift trade credit finance” by the primary global players in trade finance, until a review of the impact of Basel II implementation on lending activities is carried out and new recommendations are made, those companies that don’t take a different path to trade finance and start trading against accounts receivable on The Receivables Exchange (in the US) or Venture Finance (in the UK) are going to have a very rough road ahead.

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