Transportation Costs and Their Impact on the China Model

Monday, August 11, 2008 7:39

A topic I first covered 15 months ago in the post Accounting for Transportation Costs , I wrote about how companies were failing to full account for when making their decision to move to China.  Even before oil hit 155 a barrel, this was important stuff that was often being skipped over. but,as role of transportation costs are something that have been highlighted a lot lately in the media, I am fairly confident that is a problem that has been fixed as a few recent discussions lead me to believe.

One of perhaps the best articles I have seen lately is High fuel costs change global supply chains as it does a great job of not simply running through the facts and claiming and end to China and the 2000 mile Caesar salad.  It simple says that firms need to be more careful when looking at how the price of oil will factor into supply chains, that in some categories it may be possible to see regionalized manufacturing enter into the picture, while in others the equation will remain the same at 200 USD as at 80USD.

The most interesting part of the article for me though was the fact that Tesla was originally going to buy their batteries in Thailand, then send it to the UK, then finish in the US.  Talk about a carbon footprint.

Anyway, as we saw earlier this year in the AMCHAM/ Booz Allen Report, many firms were not only fully invested  in China, but were not using China as an export base.  Perhaps for some it was the economics of transportation, but for others it is clear that global companies are regionalizing themselves as a part of business practice anyway.  Regional R&D, regional production, and regional staffing that all create highly segmented products by regional taste and need.

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5 Responses to “Transportation Costs and Their Impact on the China Model”

  1. Christopher Corkery says:

    August 17th, 2008 at 11:34 pm

    Rich:

    I agree with you that Tesla’s original plan is by far the most interesting/curious part of the article. How on earth that made sense in the first place, I can not say.

    In terms of China export, I am continuing to see plenty of Fortune 500s continue or even increasing their China sourcing. They do seem to be doing it in a much smarter mnner however. The three areas I am doing a good deal of work on to allow for continued China sourcing include more heavy analytics around supply chain risks, CO2e impact analysis and domestic China transportation. Yes, most firms are finally figuring out how important the domestic China piece is.

    My one question for you: Do you see enough activity in the China 3PL world to finally justify the long dreamt of movement inland? Yes Chongqing is a manufacturing center. However, will it ever be able to leverage the lower wages and improved transport infrastructure from Sichuan to the Port to become a larger global player? My sense is that we are still waiting for larger 3PLs to play a more central role in China logisitcs (read: logistics outside Jiangnan and Guangdong) before this can happen.

    Hope all is well.

    Chris

  2. Rich says:

    August 18th, 2008 at 2:21 am

    Hi Chris.

    People want to see what they want to see. China does manufacture a lot of batteries, some of them very good (BYD)… but if you are going to promote “green”, you need to be it.

    Yeah.. I have a post coming on China’s “downfall”. it’s amazing … TEUs at all time high. Epxorts by value growing YoY. How are they uncompetitive?

    I have not seen any new 3pls form, but to be honest I have not been looking all that close. It is clear that the trend is for stronger/ larger firms, and Kerry and IDS were leading the pack. Others are still working the kinks out, but I am pretty confident that the the best 3PLs will remain internal to the Haiers of China.

    R

  3. Christopher Corkery says:

    August 19th, 2008 at 8:29 pm

    We spoke too early perhaps…the news on YRC today may be a small sign.

  4. David says:

    August 25th, 2008 at 12:36 pm

    Chris & Rich —

    How is the YRC / Jiayu deal playing in China? What (if any) impact did the stock market slump have on the deal which was announced over a year ago when the market was considerably better? Any other insight?

  5. Rich says:

    August 25th, 2008 at 11:15 pm

    David.

    Haven’t seen anything yet worth commenting on, and the impact would depend on the terms of the deal. It is possible that the downturn in the stock market may have made the deal better for YRC (USD rebounding too), but it all depends on how their structured the deal, when the cash/ equity transfer took place, etc.

    Also – while YRC/ Jiayu have agreed on terms, I am pretty sure that the final approval has yet to come through.

    R

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