China Sourcing Potential Strategic Trap

Congestion at North America's West Coast ports and continuing capacity problems at major European ports have complicated the China sourcing equation to such an extent that companies need to consider alternatives, say experts at The Boston Consulting Group (BCG, Boston).

While the situation is worse in North America than Europe and likely to worsen even more, say George Stalk Jr., a BCG senior partner based in Toronto, and Kevin Waddell, a partner in BCG's Warsaw office, companies in both regions need to look closely at the effects such transportation bottlenecks can have on their profits and reevaluate their manufacturing and distribution assumptions. With no solution in sight, they say, many U.S. companies may be better off manufacturing in Mexico or at home, though labor and other costs are significantly higher than in China. Similarly, West European companies that now source from China may want to switch all or part of their manufacturing operations to Central and Eastern Europe.

"In their rush to source from China," Stalk and Waddell write in the newly published BCG report, Surviving the China Riptide: How to Profit from the Supply Chain Bottleneck, "many companies are blindly walking into a strategic trap.
"The trap is thinking that sourcing from China will result in lower product costs, when in reality the supply chain dynamics will, in many cases, drive up overall costs and reduce profitability."

The BCG experts conducted a number of simulations and found that the China manufacturing "advantage" quickly disappears when companies have problems getting goods to market in a timely fashion.

While there is still some excess capacity at major European ports, and steps are being taken to expand capacity, the situation in the United States is far more serious and far more complicated - with many ports experiencing virtual gridlock. Because there is no politically viable solution, they say, the effective result is "a giant non-tariff trade barrier."

Indeed, the U.S. problems extend far beyond clogged ports. "Existing rail infrastructure to disperse the flood of goods from China ... is also being strained, with freight out of Los Angeles and Long Beach [America's busiest ports] already very near capacity and freight out of Oakland, Seattle and Tacoma expected to reach capacity in the next couple of years."

SOURCE: The Boston Consulting Group

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