Recently in Transport/Shipping Category

The shipbuilding industry has been the scene for a major uptick in Chinese export market share in the period 2007-10. 

Ship Exports.png
The OECD countries that China captured market share from were in this case Japan and South Korea. These two, in their turn, were responsible for capturing the market from Europe as early as the 1970s, but it was only in 2010 that South Korea was surpassed by China as the world's leading shipbuilder. The chart above illustrates how rapidly this occurred in the period 2007-10. 

According to the global shipping services provider Clarksons, in 2011 China accounted for around 41% of the global shipbuilding share in dead weight tonnes, while South Korea had 33%, Japan 20%, and Europe only 2%. China's ascent in the industry was complicated, however, by the global financial crisis. With sluggish demand for new ships and rising costs for labour and steel, the volume of new orders in 2011 fell 52%, according to the China Association of the National Shipbuilding Industry (CANSI). 

China's smaller shipyards are bearing the brunt of the downturn, and more than 30% of them could go bankrupt this year, according to some observers. The current dearth of orders is not a new phenomenon, moreover, as Clarksons have pointed out that the numbers of orders for local Chinese yards have been declining all the way since 2007.     

Early in 2012, the dire situation facing China's smaller shipyards seems to have contributed to China's Transport Ministry banning from its ports any ships larger than 300,000 dead weight tons. For more on this somewhat controversial issue, see this Reuters report.   

This blog posting was inspired by the cold Beijing winter and a recent conversation with my roommate. After having lunch together, my roommate, a native of Shenyang in China’s northeast, described what she and her family ate during the winters of her childhood. Fresh fruit and vegetables were scarce to nonexistent; large quantities of Chinese cabbage and pears were bought in late autumn and had to last all winter. The pears were frozen, which caused them to turn black. The cabbage was either dried or put in jars to make “sour cabbage”. Meat was a luxury.

Having only two food choices available for one-fourth of the year sounded terrible to me. “So what did you eat in winter?” she asked. Well, I ate the same things as in the summertime – except maybe more cups of hot chocolate. Although winter likewise halted regional agricultural production, bananas, broccoli, seafood – you name it – managed to find their way to grocery stores in the American Midwest – where I grew up.

How could our childhood experiences in the 80s and early 90s have been so different? At least part of the disparity may be due to differences in the availability of transportation within China and the US.

As anyone involved in sourcing knows, although goods may be available in one location, the challenge remains of connecting them with their prospective end users, often many kilometres away. The greater the ease of connecting point A to point B, the cheaper the cost, hence, the more feasible trade becomes. This process requires infrastructure.

China has done a lot to improve its infrastructure since the 1980s. When imports arrive from overseas, they usually do so by boat. Not only does China now host some of the world’s busiest ports, but it has also has increased the length of its navigable inland waterways from 101,000 kilometres in 1985 to over 110,000 in 2008. From these inlets, the goods must then traverse land to reach their destinations. To this end, China has upped its railway length to 80,000 kilometres, as of 2008, from 55,000 in 1985. Even more substantial is the increase in highway availability, now at around four million kilometres, an increase of almost 300% from only 20 years prior.

The result of these advances in infrastructure: more goods are able to make it across the Chinese mainland to the people that need them. The amount of freight traffic within China, measured in ton-kilometres, has increased more than three times its 1987 value. Just as the wintertime shelves of the grocery stores in my hometown are filled with goods from the warmer southern US states, Mexico, and South America, similarly those in Shenyang can now be more readily stocked with products from southern China, the Philippines, or elsewhere.

CnUS FrT-Km2 graph.JPG Source: China Statistical Yearbook; US Bureau of Transportation Statistics: US Census Bureau; Beijing Axis Analysis

The increase in transportation channels has reduced the contribution of shipping costs to goods’ retail prices, lessened the impact of food expenditures on one’s budget, and has enhanced the well being of Chinese consumers. This is evident when comparing the Engel’s coefficients – the percent of the typical household’s income spent on food, used as a general measure of a country’s standard of living – between China and the US. This statistic suggests that my roommate’s family may have spent about 55% of their household income on food in the 80s. The affect of both rising incomes and greater transportation availability since then have reduced this to less than 40%.

CnUS Engels2 graph.JPG Source: China Statistical Yearbook; US Census Bureau; Beijing Axis Analysis

It is interesting to consider how much more this is likely to improve in the future. I think for the Chinese New Year I will indulge in a little variety and buy my roommate both oranges and pears – fresh green ones– to celebrate the holiday and the progress made by China.

There are many similarities between China and India in today's global-economic climate. Both have over one billion citizens, both have experienced resilient growth in output, and both have greatly expanded their roles in international trade. The relatively inexpensive yet well educated workforces of these two countries have made them key prospects for the sourcing of manufactured goods. Yet differences remain in their supplier and logistical capabilities which must be taken into account by the sourcing professional.

Both India and China are capable of world class manufacturing processes. A study performed by the London School of Economics on the supply chains of the two countries’ automotive industries found that two-thirds of their domestic suppliers were able to provide inputs with defect rates of less than 100 parts per million – the typical threshold for suppliers in the US, Europe, and Japan. It was observed that both Chinese and Indian auto manufacturers domestically outsourced component production at similarly high rates, suggesting an adequate availability of competent local suppliers. Whereas the study found higher productivity levels in India, in terms of capital intensity, delivery frequency and stock-turn ratios, China had the edge. In a more recent, broader assessment across multiple industries, Deloitte found that the average number of days an item sits in inventory favored China at 24.2 compared to India’s 32.5.

Beyond the factory floor, connecting products to end users poses different challenges in China and in India. Within India there is a heavy reliance on roads. Their network is the second largest in the world, behind the US, at over three million kilometres. However, only around half of these roads are paved, and their width is generally too narrow to allow the passage of anything beyond smaller, two-axel trucks. Road transit is further slowed by a fragmented Indian trucking industry and by state border checkpoints. China, in contrast, has a far less extensive network of roads. Out of its million-plus kilometre road network, only around 300,000 kilometres are paved. But what China lacks in actual length, it makes up for by having newer, more passable roads. It has five times the number of multiple lane highways than India.

China also has more transport options available to its supply chains in the form of rail, air, and waterways. Over 78,000 kilometres of terrain are connected by rail in China compared with 63,000 in India. Goods can be flown in and out of China by way of 500 airports whereas there are only 334 locations to take to the sky in India. Thanks to geographical endowments, China also has more navigable waterways. Besides some of the world’s most active ports, commerce in China moves on 110,000 kilometres of inland aqueous passageways. This is more advantageous than India’s 16,000 kilometres of waterways, particularly in the movement of bulk commodities.

These transportation differences are partially reflected in the World Bank’s Logistics Performance Rankings. China is rated the highest of all BRIIC (Brazil, Russia, India, Indonesia and China) countries at 27th in the world. Its comparatively higher scores in customs clearance, infrastructure adequacy, logistics, timeliness and tracking ability place it above India, ranked 47th globally. Some of the largest discrepancies between the two countries are shown in survey data collected by the World Bank. Responders reported much higher frequencies of compulsory warehousing/transloading and involuntary payment solicitation in India, while in China greater expenses were incurred in the form of agent fees.

The infrastructure and logistical differences may explain why India is a more common site for the outsourcing of services, particularly IT services, which do not require a physical good to be brought to market. However, India should not be entirely discredited as a sourcing destination for manufactured goods. Both it and China have allocated over 10% of their GDPs toward infrastructure development which will enhance their future logistical abilities in bringing their products to the world’s consumers. The greatest similarity between China and India: neither can be ignored by the sourcing professional.


International LPI Ranking (5 Pt. Scale)– World Bank
Country Rank LPI Cstms Infra IntSh Lgstc Trckg Time
China 27 3.49 3.16 3.54 3.31 3.49 3.55 3.91
India 47 3.12 2.70 2.91 3.13 3.16 3.14 3.61
Brazil 41 3.20 2.37 3.10 2.91 3.30 3.42 4.14
Indonesia 75 2.76 2.43 2.54 2.82 2.47 2.77 3.46
Russia 94 2.61 2.15 2.38 2.72 2.51 2.60 3.23
Abbreviations: "Rank" is World Rank; "LPI" is cummulative Logistics Performance Index; "Cstms" for customs procedures; "Infra" for infrastructure; "IntSh" for international shipping; "Lgstc" for logistics; "Trckg" for tracking capabilities; "Time" for timeliness


Country Logistics Scorecard – World Bank
  China India Brazil Indon. Russia
Clearance time with physical inspection (days) 3.38 3.45 5.47 5.12 4.62
Clearance time, no physical inspection (days) 1.70 1.92 1.67 2.14 2.57
Percent of imports physically inspected 8.59 13.63 10.54 11.08 44.20
Percent of imports inspected multiple times 2.46 6.20 2.04 2.56 10.05
Export lead time from shipper to port (median) 2.77 2.34 2.80 2.12 3.98
Import lead time from port to cosignee (median) 2.56 5.31 3.88 5.35 2.88
Number of export agencies 4.06 3.43 3.47 2.50 5.83
Number of import agencies 4.20 3.71 4.21 3.67 5.17
40 ft container export charge (USD) 418.90 660.30 1,614.05 378.93 1,310.37
40 ft container import charge (USD) 376.37 1,266.94 1,570.42 1,023.84 1,144.71


It is said that one does not only buy a product, but the supply chains that come with it. For those sourcing from China, this is especially true. The rapid development of China has taken place unevenly within its territory. Various levels of infrastructure development, different legal structures – particularly within special economic zones – and diverse geographic features give some cities a logistical edge over others. A recent paper[1] in the Journal of Social Science and Management attempts to make sense of it all. The findings of this study are presented to enable supply chain professionals to assess their own logistical standing.

Logistics Rankings list2.JPG

The authors evaluate a city’s ability to move goods based on ten variables, which include local gross domestic product, the number of foreign funded enterprises, freight traffic (by weight), investment in fixed assets, railway and highway density, and possession of civil motor vehicles. Scores are then generated from the relative dearth or abundance of these features to compare the logistical situation of 30  Chinese cities.

The results are unsurprising. The top of the list is dominated with cities along the east coast. Shanghai is number one in all but two categories – it is behind Beijing and Tianjin in railway development and ranks 21st in regards to the possession of motor vehicles. Chongqing may be considered the most prominent city for logistics in western China. It is 7th overall, number two in freight traffic, and is in the top five in four of the other factors. In general, cities in the west were overshadowed by their eastern counterparts: Xining (in Qinghai province) lagged behind the other 29 cities in all but one category - freight traffic.

Keep in mind that this study provides only a historic snapshot of a dynamic picture, given that 2005 data was used. However, the overall situation of China's logistical capabilities remains clear; the north has an edge in rail capacity, the south by way of road, but above all it is the eastern cities which are best endowed to handle large flows of goods.

CN logistics rankings map2.JPG


[1] Jiang, C., and D. Chen. "Research on Urban Logistics Infrastructure: An Empirical Study of China." Journal of Service Science and Management 2.2 (2009): 80-91. ProQuest Computing, ProQuest. Web. 21 Dec. 2009.

The following table shows the latest China Containerised Freight Index (CCFI), released on 20 November. The CCFI was registered as 985.6, increasing by 0.56% from 13 November. Of all the shipping lines, the index for the EUROPE SERVICE was 1585.97, which was the highest, 0.56% higher than last week. The lowest was 513.93 for the HONGKONG SERVICE, and this dropped by 2% from 13 November. The WEST EAST AFRICA SERVICE indicated the strongest growth, at 2.67%, while the growth of the MEDITERRANEAN SERVICE was 0.27%, the lowest growth rate.

The drop in the SOUTH AFRICA/SOUTH AMERICA SERVICE was particularly severe, decreasing by 2.26%. The W/C AMERICA SERVICE fell by the smallest rate, namely 0.67%. And the indexes of other shipping lines like HONGKONG SERVICE and AUSTRALIA/NEW ZEALAND SERVICE also declined, dropping by 2% and 1%, respectively.

CCFI.JPG
Source: Shanghai Shipping Exchange



The following table illustrates the China Containerised Freight Index (CCFI) which reflects the China container transportation market. It shows that the latest CCFI is 980.11, 1.04% higher than in October. Of all the shipping lines, the index for the MEDITERRANEAN SERVICE is the highest (1577.16), increasing by 4.72% from October. The lowest is 524.42 for the KOREA SERVICE, and this dropped by 3.38% from October.

The MEDITERRANEAN SERVICE has indicated the strongest growth, however, at 4.72%, while the growth of the SOUTH AFRICA/SOUTH AMERICA SERVICE was 2.26%, the lowest growth rate. The indexes of Shipping Lines like KOREA SERVICE, E/C AMERICA SERVICE, JAPAN SERVICE, W/C AMERICA SERVICE, WEST EAST AFRICA SERVICE and HONGKONG SERVICE all declined. The drop in the KOREA SERVICE was particularly severe, decreasing by 3.38%. The HONGKONG SERVICE fell by the smallest rate, namely 0.20%.

Shipping Freight Index.JPGSource: Shanghai Shipping Exchange

Crude oil reserve base, Ningbo.JPGOn September 24 construction commenced on the 5.4-million cubic-meter strategic petroleum reserve (SPR) in Dushanzi, Karamay city, in China's far western Xinjiang region. This marked the beginning of the second phase of China's building up of its oil reserves capacity. On September 25, Zhang Guobao, head of the National Energy Administration (NEA) and vice-minister of the National Development and Reform Commission, said at a national energy conference that China will work to increase its strategic crude oil reserves capacity to 90 days by 2020. At the present moment China is still far from reaching this level, with its national oil inventory covering only 21 days of its economy’s needs.

In the light of China’s growing dependence on imported oil, the country cannot rely on its existing capacity. As the world's second-largest oil consumer, China now relies on imports for about half of its oil needs. It imported 178.9 million tons of crude oil in 2008, an increase of 9.6% year-on-year, according to the National Development and Reform Commission. This tendency will only accelerate in the near future, when by 2020 China is expected to import 60% of its oil. The country’s lack of an SPR already caused problems during 2004-2008, during the period of sharp oil price surges. Yet right now, when China has the opportunity to take advantage of favorable oil prices, it cannot fully use it simply because it does not have enough reserves to store the relatively cheap (compared to last year) oil.

So far China has only completed the first phase of its SPR, with bases in Zhenhai, Zhoushan, Dalian and Huangdao, which are all located in the coastal areas of Zhejiang, Shandong and Liaoning provinces. The second phase, which has already started, includes building 8 new SPR bases by 2011, which will raise China’s strategic crude oil reserve capacity to 44.6 million cubic meters, or 281 million barrels. According to Zhang Guobao, China will start building the third phase of strategic oil reserves after the second phase is finished. If everything goes as planned, China will be able to avoid the economic disruptions it suffered in 2008 due to fluctuations in the world oil prices, and increase its energy security as a whole.

Image: Crude oil reseve base at Ningbo, Zhejiang province. (China Daily)

What Chinese Future for Hummer?

| | Comments (0) | TrackBacks (0)
Hummer China.jpgOn June 2, just a day after General Motors filed for Chapter 11 bankruptcy, it was announced that the US auto giant reached agreement on selling its Hummer brand to a little-known private Chinese company, Sichuan Tengzhong Heavy Industrial Machinery Co., Ltd, a manufacturer of road, construction and energy industry equipment in southwest China’s Sichuan province. So why would a company which mainly produces industrial machinery and has no experience in the passenger-vehicle market buy this famous off-road vehicle brand?

While the auto industry in the US and the rest of the world is suffering, the Chinese auto market alone keeps on expanding with unprecedented speed. Data released on June 9 by the China Passenger Car Association showed that sales of passenger vehicles, including minivans, sports utility vehicles, and multi-purpose vehicles reached 812,178 units in May, increasing by a faster-than expected 54.7% year-on-year, and up 1.2% from April. Total passenger car sales in the first five months jumped 29.6% to 3.64 million units from the same period last year. Many experts believe that China's automobile market is expected to see a new monthly sales record in June, and sales in the second half of the year is expected to be much better still than those in the first six months.

Given such assuring results and promising forecasts, its not surprising that companies without a direct relationship to manufacturing passenger cars should start showing stronger interest in this segment of the market. Yet what becomes more interesting now are the actual details of the deal.

It is not the first time that a Chinese company has bought a famous foreign auto brand. In 2004, Shanghai Automotive Industry Corporation Group (SAIC) purchased a 48.9% equity share of Ssangyong Motor, the fourth-largest automaker in the Republic of Korea. In 2005, Nanjing Automotive bought the British brand MG. And this March, China's largest independent carmaker Geely Automobile acquired Drivetrain Systems International, the world's second-largest auto transmission supplier.

For its part, Tengzhong have officially announced that it has no plans to manufacture Hummer in a Chinese plant. Rather than setting up a plant in China, Tengzhong plans to keep using the current facilities in the US. Moreover, the deal will also allow Tengzhong to keep Hummer's original management and operational team intact, along with the Hummer brand. As Yang Yi, Tengzhong CEO, put it in a statement, “the company will allow Hummer to innovate under the leadership and continuity of its current management team.”

Considering this information, it is clear that Tengzhong is investing not in new manufacturing capacity, but in Hummer’s research and development capabilities. This serves as another good illustration of how Chinese companies are willing to pursue opportunities to learn from foreign brands’ successful experience in research, design, marketing and service.

Tengzhong’s plans, however, may still face resistance from the Chinese government. Officials from the Development Research Center of the State Council have already made it clear that they are not enthusiastic about the deal, to say the least. They have claimed that “buying a fuel-hungry and high-emission brand is directly against the current trend of energy saving and emission reduction.” So there is still a possibility that the deal can be blocked. So both sides, General Motors and Tengzhong, are waiting in anticipation of the government’s decision on the matter.
The following article analyses the trade process by emphasizing particular cosiderations for the efficient use of containers in the transportation of goods. 

在外贸出口过程中,大部分卖方都会非常注意相关单据的审查,交货期的安排,付款方式的磋商,订舱,报关等等主流的注意事项。然而我们知道,虽然出口流程是固定的,但是随着各种外在变量变化,同样的出口流程会产生很多额外需要注意的细节。例如,在准备发货时,往往很少有人注意到集装箱摆放这样的细节。

当然,在拼柜情况下,出口方也会记得交待货代不要把自己的货合不合适的产品装在一个柜里,如食品和化学品的拼柜。但是,更进一步的细节呢?

笔者曾见到过这样一个案例:某出口商和其长期客户签订了一单出口合同,货物是上百吨的青豆,整柜出口。在正常的商检,订舱,报关,发货后,一切看起来很正常,客户甚至也已支付了剩余款项。但是半个月后客户来传真说当打开集装箱,准备转卖给下家的时候发现,所有的豆子表面都是裂纹,有的已经完全裂开了,并且要求赔付!

出口商在装船之前无疑是经过了小心的检查和严格的包装的,在正常情况下是不应该出现这种事情的。到底是什么原因造成的呢?出口方立即咨询了货物代理,但是货代也说不清。最后,他们给货代下达了最后通牒,要求货代必须给个合理的交代。后来货代又去找了船公司,一直找到这艘船的二副,问题才终于搞清楚。

原来,这批货上船时被配载在最上面,由于产品含水率高,又被放在了最上面,而交货期是一个日照十分充足的季节,高温造成集装箱温度升高,产品内水分的蒸发。同时,集装箱密封的比较好,里面的压力比较大,产品会保持原来的样子。 当货物到达目的港开箱后,压力被释放,豆子就都开裂了,就造成了上述的结果。

由此可见,有时候极不易注意的一个小小细节都会照成意料之外的后果。所以我们在出口流程中一定不要掉以轻心,对任何简单的一个细节都要再三检查和思量,才是避免风险的唯一办法。同时也提醒大家,以后有类似的产品,订舱的时候一定要注意和货代说清楚,避免出现以上类似问题。

How to Make a Good Enquiry Part 3

| | Comments (0) | TrackBacks (0)
  • Quotations
Quotations should always include the trade terms, currency, price number and unit. Both sellers and buyers should understand the trade terminology very well, especially those terms which are commonly used, such as FOB, CIF, C&F, etc. The choice of currency has become extremely important since exchange rates between RMB and other currencies are frequently fluctuating. So it is essential for the buyers to be familiar with the RMB's exchange rate with their local currency and to be prepared for the potential risk caused by the RMB's fluctuation. For some special products, the buyer should clarify what unit the quotation should be based on. For example, with casting products, buyers should make it clear whether the price should be per piece or per kg.

  • Payment Terms
Buyers usually consider the enquiry stage to be too early to discuss payment. This is indeed true most of the time, but buyers operating within financial systems with specific requirements should be given favorable terms. For example, some countries have strict foreign currency systems that require buyers to transfer a certain minimum amount before the goods can be shipped, and sometimes buyers are subject to a long process of applying for bank clearance or approval from a currency management bureau. Under such circumstances, the buyer may prefer lower prepayment or other payment terms which require no T/T before shipment, which creates extra banking costs for both sellers and buyers. Those working in procurement should be aware of these limitations and if necessary, let the potential suppliers know.

  • Delivery Time
When enquiring about delivery time, the buyer should pay attention to the following:
  1. If a sample is required, how long will it take for the sample to be ready?
  2. How long will it take to manufacture different quantities of products?
  3. When will delivery time commence, the contract signing date or the prepayment arrival date?
  4. Will delivery time include the shipment booking time? (After they are ready, goods can sometimes only be shipped several weeks later due to difficulties in booking the shipment, especially bulk shipments, or shipments to certain countries).
In my next posting, I will cover more items.


mexico.jpgMexico is currently being considered as an alternative sourcing option to China, especially by some US-based supply chains eager to bring production closer to home. Yet they are not the only ones hoping to find new opportunities in Mexico, so are manufacturers from....China.  

At the Supply Chain Digest, Dr David Simchi-Levi of MIT has proclaimed that the dramatic rise in fuel prices and transportation costs of recent times constitutes a tipping point where logistics costs have started to negate the unit cost advantages of China and other Asian countries. As a result, Simchi-Levi has noted a number of companies that have either put Asian offshoring on hold or have brought production back to domestic or nearshore sources, the so-called in-sourcing (or near-shoring) phenomenon that is raising Mexico's profile for US sourcing and supply chains.

And logistics costs are not the only concerns with China. As this article from IHT outlines, inflation, rising labor costs, shortages of workers and energy, a strengthening currency, and dwindling tax breaks for foreign investors all have multinationals encouraging their suppliers to diversify out of China. With the so-called China plus one strategy, companies are expanding their bases elsewhere in Asia (particularly Vietnam) so as not to be overly dependent on factories in one country. Yet few companies are actually closing factories in China, and for those with large operations in China, China plus one is only a strategy intended to mitigate risk and control costs.

If US supply chains are not about to retreat en masse back to Mexico, expanding Chinese auto manufacturers are preparing to advance into Mexico to get a foothold in America. Following the Chinese company First Auto Works, who announced plans to build an assembly plant in Mexico with Grupo Salinas, private Chinese auto manufacturer Geely Automobile this week also announced plans to move ahead with construction of an assembly plant in Mexico to supply both the North and South American markets. Geely and a local partner will invest up to $270 million to build a factory in Leon, capital of Guanjuato state in central Mexico. With the plant eventually set to have an annual capacity of 300,000 units, Geely wants Mexico to be a stepping-stone for achieving its ambitions of conquering the US market.

And Geely might pave the way for a host of Chinese manufacturers to head into Mexico. With China now being Mexico's second largest trading partner, during his visit to China in July Mexican President Felipe Calderon invited Chinese business leaders to invest in Mexico:
We do want global investment, and if there are (Chinese) companies that are thinking about investing in other (Latin American) nations, but those nations are not hospitable to investment, they should know that they are welcome in Mexico and we protect their rights.
So if some US supply chains are forced to head back closer to home in Mexico, manufacturers in China are prepared for a big push westwards, to Mexico and beyond.

Image: www.iho-ohi.org
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.
Is low-cost country sourcing set to become a victim of the rising costs of oil?

A new article from Purchasing.com reports on an Economics and Strategy Report from CIBC World Markets in Toronto, whose chief economist believes that the rapidly rising costs of transportation may be reversing globalization as businesses are forced to look closer to home for suppliers. Claiming that rising costs will once again make the world rounder, the article notes that the combination of global raw material costs and high energy costs in China have led to receding Chinese exports of such products as steel, furniture, footwear, metal goods and industrial materials. Interpreting the CIBC World Markets Report as a sign that transport costs are erasing China's labour savings edge, the Montreal Gazette cites from the report that it currently costs $8,000 to ship a standard 40-foot container from Shanghai to the North American east coast, up from just $3,000 in 2000, and at $200 per barrel of oil, the cost to ship the same container is likely to reach $15,000, making the cost of moving goods the largest barrier to global trade today.

While the greatest impact of rising oil prices is on poor, oil importing countries, record prices even have energy producers concerned. During talks between energy producers and consumers held in Rome in late April, OPEC oil ministers insisted the problem has nothing to do with short-term supply but is rather the result of a weak U.S. dollar. Yet in October last year China Dialogue analyzed the findings of a German energy study produced by the Energy Watch Group (EWG) which found that petroleum output peaked in 2006 and henceforth would drop annually. Expecting world oil production to fall by as much as half by 2030, the study envisioned apocalyptic consequences when extreme shortages of fossil fuels and rising demand lead to economic restructuring and social breakdown. In China, the rising price of oil is particularly daunting, as Donald Straszheim comments at Forbes.com, because while its strong economy has been a key driver inflating prices, China has a burgeoning appetite for oil with demand growing 65% faster than the U.S. and four times faster than India, complicated by China having to import over half of its oil while controlling retail prices with inflation in excess of 8%. 

Cargonews reported this week that, in response to the dizzying rise of bunker fuel prices, shipping lines have shredded almost all of last year's customer contracts, in contrast to previous years when contracts were usually extended for another year. As fuel prices are making it hard for lines to make a profit, oil price shock has replaced the traditional arm wrestling at the negotiating table over the rates for the peak season from July through October. Hence more emphasis is being placed on volume discounts, guaranteed sailing dates and shipments, and long-term pledges by shippers.

Dan Gilmore at Supply Chain Digest recently analyzed the cost impacts of rising oil prices on supply chain network design. Incorporating the analysis of MIT professor and supply chain thought leader Dr. David Simchi-Levi, who used data from a real consumer goods company, it was found that every $10 per barrel price increase of crude oil amounts to a 4-cent per mile increase in transportation costs in the U.S., yet when the price of crude oil surpasses $150, things really start to change:
At that point, rising transportation costs start to significantly impact both where products are made and what the distribution network looks like...Rising oil prices would have the effect of changing the way we think about outsourcing and offshoring, after 10 years of a mad rush to China and other Asian locations.
Yet if $150 is an ominous benchmark, Gilmore expects that we will blow past $200 in a heartbeat, so with some fitting hyperbole of the doom that awaits us, Gilmore likens the impact of rising fuel costs to an unwitting frog in a pot of water being slowly heated:
We're being boiled alive, but may not realize it until its too late. The US economy and our supply chains can be very resilient, but at some point in both, something has to give. 
If confined to thinking of completely uncontroversial explanations for the smashed vehicles and rocks thrown at taxis in a restless, distant outpost recently, one can only wonder (however forlornly) if someone became a bit upset (like the mayor of Shenzhen, who last year called on the city's residents to stop buying cars in response to mounting pollution and traffic problems) at the surge in the number of motor vehicles in this region in southwestern China. Citing local tax authorities, the People's Daily in January reported on the introduction of an annual vehicle tax of 120 Yuan for private car owners in the troubled western region as it had more than 143,900 civilian vehicles by the end of 2006 - meaning, the article claimed, one in every 20 people owned an automobile: a per capita car ownership close to that of Beijing. Some office workers on the 'roof of the world', the article mentioned, complained they had to spend an average of 20 minutes more on their way to and from work than they did four years ago.

That is certainly enough to upset anybody. Yet anyone trying to force a change would have to face up to the fact that a corner is being turned on what seems like a road of no return. Turning again, for better or worse, to the suspect use of English of the People's Daily, the newspaper this month relayed some basic information in connection with China's suggested enlarged transport ministry, claiming that at the end of 2007 China had 3.57 million km of roads and over 53,000 km of expressways (second largest in the world after the U.S. and increasing fast). And now rural roads extend into 98.5% of China's rural towns, with but one last notable exception: the aptly-named Medog in the southeastern part of China's 'autonomous' western region that recently sustained some well-publicized damaged vehicles.
Medog...is the last county in China without a highway,
yet all this is about to change:
...construction of one is scheduled this year,
because the Chinese government has finally determined to undertake this significant engineering challenge (which it has been considering since 1975), as Medog sits on the Himalayan fault line where there are many earthquakes and landslides.

Euphemisms aside, China's roads are clearly very dangerous places, and the modus operandi (or the lack thereof) of the traffic they carry (where pedestrians usually have good reason to get upset, as in blogger Henry B.'s descriptive outline of the notorious left turn prevalent in Beijing traffic, blocked on mainland China) are widely held in some contempt, apparently borne out by reports of China leading the world in the number of road accidents.

To David Dayton at the Silk Road blog,
you are literally taking your life into your hands when you get into a car - the roads are some of the most deadly in the world,
yet its not that the Chinese are bad drivers, he says, it's the system that sucks as people usually receive little quality training and most drivers in China are as yet relatively new to owning private cars and inexperienced behind the wheel (see also Peter Hessler in the New Yorker on some bizarre driving conundrums in China). In addition, road signs are often situated in unsuitable places and the number of lanes in a road can change suddenly, while drunk driving is not a big deal socially. And there is no community policing of driving laws in China, and police enforcement is specific and sporadic.

While some (see China Law blog posting) have argued that the out of control appearance of traffic in China is mostly transposed from China's economic environment (a sink-or-swim, save-yourself kind of economy that one can sense on the street), one observer at China Business Success Stories recently spoke of how his keen observations of horrific Shanghai traffic led him to some deeper insights:
I became aware of the traffic pattern. It was full-bore traffic, and yet there was a pattern in the chaos: without lanes, lights or stop and go order, everything flowed. Cars, taxis, trucks, vans, buses, carts, scooter, people were all flowing. I didn't see many accidents, which was unbelievable to my Western eyes... My paradigm shifted again: from the Chinese being the worst drivers in the world to being the best drivers, subject to driving in their own city and country.
Clearly, being subject to driving in their own country is the toughest challenge Chinese drivers could have asked for. If you can make it on China's roads, you can compete in the world's toughest driving environments, no small feat for China's newcomer car-owners who are supposedly rank amateurs in the fast lane of the rat race. And despite road traffic's bewildering outward appearance, it is held together by a distinctively Chinese element that consistently allows it to continue in some agreeable manner. A group of business-tourists recently visiting China for the first time made just this observation during a giddy, whirlwind tour of China. David Dayton at the Silk Road blog hosted a group of his clients in China this month, and heard them observe that
The fluidity of the "system" of traffic and people was amazing. No honking, no rude gestures. It just flowed.
And to Dayton, his visitors' comments confirmed some of his own perceived rules about Asia, one of which was to believe that money is more important than anything.

Anything, that is, except face, the saving grace of getting from A to B in China. The keeping of face simplifies traffic to such an extent that drivers are basically free to do whatever they want on the road, and they know that they are likely to get little more than a fleeting, resentful stare in return. If there is space in front of you, then that space is yours unless someone gets there before you. How you get there is up to you. It is an image of chaos, yet its a form of chaos with an harmonious edge.
In what could have been a regrettable case of unintended double meaning, or 双关 (shuang guan), Chinese officials last week delivered news of how suspicious, inflammable liquids in an aircraft toilet nearly facilitated a terrorist attack. I would not be so presumptuous to assume that the toilets on China Southern Airlines are unusually unpleasant places (see for instance Mutant Palm's expose of the airline, blocked on mainland), but in my experience toilets on public transport in China are generally places to enter with extreme caution (except perhaps on the all-new 300 k/m per hour bullet train between Tianjin and Beijing. As a resident of Tianjin, kudos to the Ministry of Railways for making my journey to Beijing soon only 30 minutes, short enough likely not to need to go).

The suspicious liquid on the China Southern Airlines flight from Urumqi to Beijing, however, turned out to be gasoline (a particularly suspicious liquid indeed), which, the story goes, someone had been carrying around with ulterior motives. Yet one would think China Southern Airlines were happy in the end to pocket two cans of gas, as the consumption tax on imported fuel was raised by more than four fold on March 5 as part of efforts to limit energy use.

This is not the first incident involving suspicious liquids (especially the flammable types). When a British Airways Boeing jet crash-landed in London in January this year, and it turned out it had departed from China, quality fade expert Paul Midler smelled a rat. With suspicions of contaminated fuel and the possible presence of water in the tanks raised by the crash investigators, Midler thought somebody on the ground could easily have replaced 1% fuel with water, which could be a tidy saving of $2,000. So that's quality fade applied to gasoline: a very suspicious liquid.

With its commercial aviation market booming, China doesn't need a lot of water-tinged gasoline. The country's leading manufacturer of helicopters declared early this year it will be focusing more on developing civilian aircraft to cash in on growing demand, and China is also developing its first passenger jet, the ARJ-21, produced by the country's biggest plane maker, the China Aviation Industry Corporation I. Attempting to break into a very competitive aviation market (forecast to need as many as 3,400 new planes globally in the next 20 years) the 70-90-seater aircraft was showcased in December and delivery to the first customer is expected later in 2009. (The plane's chief designer, Wu Guanghui, sounded a hopeful note in the People's Daily last week, saying a total of 171 ARJ-21 jets had received internal orders, and talks were underway with foreign customers).

Its uncertain, however, whether ARJ-21 is going to keep pace with Great Wall Motor Company, the largest producer of pick-up trucks in China. Great Wall is clearly extending its boundaries and told People's Daily on Wednesday it expects to sell 55.7% more pick-up trucks abroad this year, especially in North America and Europe, exporting a total of about 80,000 units. In December it was reported that China's motorcycle exports reached 7.27 million in the first eleven months of 2007, up 22% over the same period in 2006.

Some of these have really rocked the world of a few villagers in Laos, where (the New York Times reported in December) fruit farmers in the steep hills above the Mekong Delta have been able to purchase cheap Chinese models to transport their produce to the market at the local city of Luang Prabang. And where before improvised bamboo stretchers were the quickest way to get to hospital, the Chinese motorcycle has literally meant the difference between life and death for some. Until, that is, your Chinese bike starts developing maintenance problems, which (as the article put it) was a commonly heard complaint affecting the enthusiasm for Chinese goods. People with money, one local mechanic explained, buy Japanese motorcycles, but at least the influx of Chinese motorcycles (which usually need an overhaul within three to four years) has been good for mechanic shops in Luang Prabang, increasing from only a few a decade ago to more than 20 today.

The motorcycle mechanics in Bangladesh, where Chinese motorcycles are set to enter the market from this month, must be looking forward to the prospect.