Global Logistics: Asia Pacific’s challenges and opportunities in market integration

Rethinking outsourcing
Terrorist attacks or angry acts of nature notwithstanding, it may appear that the tide has begun to turn on the flow of manufacturing jobs from the U.S. to the Asia Pacific.
According to a new study from The Hackett Group, Inc., some companies are already reshoring a portion of their manufacturing capacity, and this trend is expected to reach a crucial tipping point over the next two to three years.

“The total landed cost gap between the two regions continues to shrink, driven in part by rising wage inflation in China and continued productivity improvements in the U.S.,” says David P. Sievers, principal and strategy and operations leader for The Hackett Group.

At the moment, China remains a manufacturing powerhouse, with nearly 75 percent of the companies surveyed having some manufacturing capability in China for at least three years, either directly or through contract manufacturers. The Hackett Group estimates that Chinese manufactured exports to the U.S. currently support between 15 million and 20 million jobs in China.

But reshoring is expected to become more viable with each passing year, as the total landed cost gap of manufacturing offshore shrinks, say some analysts. The Hackett Group’s research found that the cost gap between the U.S. and China has shrunk by nearly 50 percent over the past eight years, and is expected to stand at just 16 percent by 2013. This trend is not only driven by escalating labor costs, but also by rising fuel prices globally, which affects shipping costs.

“This is good news for the American worker as growth in the U.S. manufacturing sector keeps more high-paying jobs at home,” says Sievers.
For Rosemary Coates, president of Blue Silk Consulting, some U.S. companies may simply be getting tired of exercising the diligence needed to start a business in China. “That doesn’t mean shipping and transportation providers will not be needed in the Asia Pacfic, however,” says Coates. “On the contrary, with greater inter-regional trade, U.S. shippers may be hedging their bets by doing business with several neighboring countries at once.”

Mixed forecast
Asia Pacific’s rapid-growth markets (RGMs) started to slow sharply since the beginning of this year, but this will only be a “temporary blip,” according to Ernst & Young’s quarterly Rapid-Growth Markets Forecast (RGMF). The analysts are particularly bullish on the recovery of Vietnam and Thailand.
“RGMs—particularly in Asia—have the necessary tools available to ease both fiscal and monetary policy allowing growth to resume towards the end of the year,” says Carl Astorri, senior economic adviser to Ernst & Young’s RGMF.

He says that RGMs are well placed to weather the major risks facing the global economy at the present time, given that they have the space to relax fiscal and monetary policy. “This has already happened in some RGMs—especially in India and China—and it’s likely that there will be further easing of monetary policy in the months ahead, particularly if the global economy deteriorates further.”

Analysts at Ti also forecast that the Asia Pacific contract logistics market will grow at a compound annual growth rate of 13.9 percent between now and 2015. Growth will be strongest in China and the market is expected to double in size by 2015.

“China will become the largest market in the region overtaking Japan, which will see the lowest level of growth,” says Ti analyst Cathy Roberson. “However, the region remains susceptible to any deterioration in the global economy as exports and subsequently domestic demand would have a significant impact on the contract logistics industry.”

The Association of Asia Pacific Airlines noted a slight decline of 0.8 percent compared to July 2011, while Asian ports continued to report mixed results with Hong Kong’s twenty-foot equivalent units (TEUs) declining almost 7 percent, but Singapore reporting a 9 percent increase. The mixed port data may indicate increasing demand among the Southeastern Asian countries as foreign investment continues to be infused into this region.

While domestic demand in the region generally remained strong, external demand declined. Exports to Europe fell considerably, resulting in a decline in manufacturing activity and acted as a drag on growth within the region.

Zepol Corporation, a leading trade intelligence company, reports that U.S. exports to Asia have been ramping up, thereby benefitting a number of major seaports. But U.S. manufacturers are continuing to lose market share.  At the same time, industry analysts note that Asian countries have negotiated more than 160 trade agreements among themselves, while the U.S. has signed only three with regional countries—Singapore, Australia, and most recently South Korea.