Following the money... to China

Jan. 12, 2003
Following the money... to China Now that Saddam Hussein has been hauled out of his spiderhole and delivered into the hands of international justice, maybe
Following the money... to China

Now that Saddam Hussein has been hauled out of his spiderhole and delivered into the hands of international justice, maybe those pundits hoping to make political hay focusing on international matters might shift their attention elsewhere. After all, the country on the minds of most American shippers these days is not Iraq, but rather China.

According to Franklin Vargo, vice president, international economic affairs with the National Association of Manufacturers, “No other trade issue comes close to commanding the attention that China is getting from both large and small [manufacturing] companies.” China is the greatest concern of import-competing companies and the fastest-growing global market for manufacturers who operate internationally, he notes.

Testifying before Congress recently, Vargo pointed out that shipments of manufactured goods in the U.S. have fallen by $270 billion since 2000, and 2.8 million American factory jobs were lost in that time. Manufacturing “has accounted for nearly 90% of all the job losses since total U.S. employment peaked in March 2001,” he observed.

Where have all those jobs gone? A decade ago, when the North American Free Trade Agreement (NAFTA) was passed into law, the assumption was that manufacturing would head south to Mexico, and indeed the rise of maquiladoras in the 1990s bears that out — but only up to a point. Ironically, just as the U.S. has seen many of its core manufacturing jobs leave the country, so too is Mexico experiencing an exodus of its own.

Invoking Ross Perot's famous line, Bruce Richardson, vice president of analyst firm AMR Research Inc., observes, “Mexico is hearing its own giant sucking sound as jobs are being pulled to China.” Those jobs are disappearing, Richardson says, “because of the wage discrepancies between Mexico and China — $4,400 vs. $1,200 per year.” So those jobs aren't just leaving the U.S., but they're even leaving North America.

While you're digesting that bit of news, consider too that the reason jobs are going offshore parallels the whole movement toward outsourcing — it's cheaper that way (or at least, it's perceived to be cheaper). A recent study of manufacturing executives conducted by Accenture and Northeastern University indicates that the percentage of large manufacturers using third-party logistics (3PL) services increased from 65% in 2002 to 83% in 2003. Clearly, farming out logistics work to a third party has become the American way of business.

Another key to the American economy, though, is farming out as much work as possible overseas. Digging deeper into the Accenture/Northeastern University study, about half of the manufacturers surveyed say their companies manufacture or sell in China, and plan to expand their activities in the Far East. And consider this: 3PLs have just barely broken into the Chinese market, and are basically a non-factor at the moment. That will soon change, though, with 3PL revenues in China expected to double by 2005.

The one nagging question that the 3PL study doesn't address, though, is this: With China playing an increasingly important role as a manufacturing and sourcing location, and indeed with India serving much the same capacity for outsourced information technology and customer service capabilities, will the recovery of the U.S. economy come at the expense of American workers?

There's no easy answer to that question, of course. Consider, too, that while U.S. manufacturers see almost unlimited growth potential in outsourcing more and more of their logistics tasks to third parties, the 3PLs themselves are nowhere near as upbeat about their growth potential — perhaps because the sheer number of 3PLs continues to swell. Some have estimated that there are now more than 1,000 3PLs of various shapes and sizes (many of which provide services to just one company), indicating that a definite shakeout amongst the 3PLs is on the horizon.

As for China, one step in the right direction (though some have suggested it's more like a baby step) was the signing of a maritime agreeement between the U.S. and China that should, according to Secretary of Transportation Norman Mineta, open significant new business opportunities for U.S. companies that do business in China.

“This agreement offers U.S. companies similar privileges to those that Chinese companies already enjoy in the U.S.,” Mineta points out. “It gives U.S.-registered [carriers] the legal flexibility to perform an extensive range of new business activities in China. For example, they will now be able to open offices in more locations in China.”

Far-reaching the agreement is not, but at least it helps establish a more equitable balance of trade between the two nations. It's a good start, but don't sit back and wait for the government to bail you out — for this economic recovery to last, it's going to require long-term vision from all interested parties, and that includes every logistics manager in the country.

Dave Blanchard

January, 2004

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