Is sourcing going home? Volatile oil prices and the impact on China

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The impact of volatile oil prices and rising transportation costs is still sending shock waves across global supply chains, illustrating the potentially tenuous foundations of low-cost country sourcing and raising new claims that China sourcing is about to be eclipsed.

As The New York Times put it, globalization may be losing some of the inexorable economic power it had for much of the past quarter-century, because cheap oil, the lubricant of a fast global transportation network, may not be returning anytime soon, upsetting the logic of diffuse global supply chains that treat geography as a footnote in the pursuit of lower wages. Yet the greatest impact of rising transportation costs will not be a reversing trend in globalization, but rather that companies will seek to move production closer to consumers, like the growing number of U.S. electronics manufacturers that are returning production to Mexico. Hence globe-spanning supply chains, most of which involve China at some point, make less sense today than they did a few years ago, and a likely outcome if transportation costs remain high is a strengthening of the so-called neighbourhood effect where manufacturers would seek supplies closer to home instead of where they can be bought most cheaply.

Yet as The Economist cautions, if there is a migration of manufacturing growth from China, it is hardly an exodus: the latest trade figures do not show a decrease in Chinese exports but only a drop in their pace of growth. And because buyers on the other side of the ocean absorb the bigger share of fuel surcharges on freight, higher shipping costs are not as big a factor in China as the rising yuan or increasing costs for raw materials. Considering increased labour costs in foreign markets and the volatility in oil prices, moreover, leaving China is not a decision any company can ever take lightly.

Thus for the claims of reversing globalization and increasingly drawing manufacturing away from China, rising and volatile oil prices may be inducing some companies to consider moving production closer to home, but all things considered, for the foreseeable future China remains the sourcing destination of choice.

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Bytesource Author Profile Page said:

As long as there are significant savings when importing from China or Vietnam, there is no real advantage in relocating sourcing capacity. For example, if producing in Eastern Europe one has to take into account overland transportation costs, the strong Euro, rising labour costs, and higher raw material prices as well. So while the final revenue might be lower than two years ago, total savings for many product groups are still considerably higher in the far east compared to popular sourcing regions in Europe.

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