Tuesday, August 26, 2008
Strained Supply Chains
"When Tesla Motors, a pioneer in electric-powered cars, set out to make a luxury roadster for the American market, it had the global supply chain in mind. Tesla planned to manufacture 1,000-pound battery packs in Thailand, ship them to Britain for installation, then bring the mostly assembled cars back to the [US]. ... 'It was kind of a no-brainer decision for us,' said Darryl Siry, the company's senior vice president of global sales, marketing and service. 'A major reason was to avoid the transportation costs, which are terrible.' [Doing the work in California]. ... Cheap oil, the lubricant of quick, inexpensive transportation links across the world, may not return anytime soon, upsetting the logic of diffuse global supply chains that treat geography as a footnote in the pursuit of lower wages. ... 'If we think about the Wal-Mart model, it is incredibly fuel-intensive at every stage, and at every one of these stages we are now seeing an inflation of costs for boats, trucks, cars,' said Naomi Klien, the author of 'The Shock Doctrine: The Rise of Disaster Capitalism.' ... 'If prices stay at these levels, that could lead to some significant rearrangement of production, among sectors and countries,' said C. Fred Bergsten, author of 'The United States and the World Economy' and director of the Peter G. Peterson Institute for Internatonal Economics, in Washington, 'You could have a very significant shock to traditional consumption patterns and also some important growth effects.' ... The study, published in May by the Canadian investment bank CIBC World Markets, calculates that the recent surge in shipping costs is on average the equivalent of a 9 percent tarriff on trade. 'The cost of moving goods, not the costs of tariffs, is the largest barrier to global trade today,' the report concluded, and as a result 'has effectively offset all the trade liberalization efforts of the last three decades.'... The industries most likely to be affected by the sharp rise in transportation costs are those producing heavy or bulky goods that are particularly expensive to ship relative to their sale price. Steel is an expample. China's steel exports to the [US] are now tumbling by more than 20 percent on a year-over-year basis, the worst performance in over a decade, while American steel production has been rising after years of decline. ... In addition, the sharp increase in transportation costs has implications for the 'just-in-time' system pioneered in Japan and later adopted the world over. ... Jeffery E. Garten, the author of "World View: Global Strategies for the New Economy' and a former dean of the Yale School of Management, said that companies 'cannot take a risk that the just-in-time system won't function, because the whole global trading system is based in that notion'. ... As a result, he said, 'they are going to have to have redundancies in the supply chain, like more warehousing and multiple sources of supply and even production'," Larry Rohter at the NYT, 3 August 2008.
Welcome aboard NYT. Global trade patterns are being and will continue to be disrupted.