Buyers are looking for complex and structured solutions in the
supply chain that provide connectivity globally between themselves and
their suppliers.
https://globalconnections.hsbc.com/global/en/articles/emerging-economies-change-the-world-trade-map
The
evolution of supply chains is forging new trade corridors around the
world, creating new opportunities in emerging market economies.
"It's not just about trade between for example China and the U.S. or
China and Europe. There are new strands of activity that are growing
fast," says Adrian Rigby, Global Deputy Head of Trade and Receivables
Finance for HSBC in London. "In more difficult economic times,
businesses are re-engineering themselves and hunting out new markets."
Many of the new opportunities arise in fast-growing emerging market
economies, especially those with expanding import and export markets.
The trade aspect is important because it indicates a certain level of
interconnectedness with global supply chains, as well as a certain
threshold of infrastructure and regulatory development to make it
possible to do business.
Opportunities for new business or growth of existing business may exist in markets that weren't very evident before the crisis
"You can't have network trade without industrialization," says Richard
Kozul-Wright, Head of the Unit on Economic Cooperation and Integration
among Developing Countries at the United Nations Conference on Trade and
Development (Unctad), in Geneva. Network trade accounts for more than
75% of total developing country trade, with China responsible for about
60% of that.
Trade by low- and medium-income countries has increased to about 20% of
world trade today from about 8% in the early 1990s. The trend of
developing economies of the world trading between themselves, often
called south-south trade, has picked up speed since the 2008 global
economic crisis, says Przemyslaw Kowalski, Economist at the Organization
for Economic Cooperation and Development in Paris. Some developed
countries still haven't recovered fully from the crisis, while
others—mostly emerging market economies—didn't dip as much and have
fully recovered in trade.
That means that since the economic crisis, opportunities for new
business or growth of existing business may exist in markets that
weren't very evident before the crisis, Mr. Rigby of HSBC says.
"Corridor creators" are what HSBC calls businesses that seek out the
best trade partners to drive competitive advantage, regardless of
location.
The crisis just accelerated changes that had already started in global supply chains.
Supply chains consist of four things: a supply source, a destination,
an intermediate point and a final product, says ManMohan Sodhi,
Professor of Operations and Supply Chain Management at the Cass Business
School of the City University London. "Any combination of those is a
supply chain," he says. "All of them are changing now."
Destinations are changing—countries that were supply sources have also
started buying products, Dr. Sodhi says. Some are actually buying
locally goods that also are produced for export, such as clothing made
in India, and sold in India and Europe by an international retailer.
Warehouses have sprung up to cater to the new supply chains.
Many sectors are seeing a shift from export-driven production to a mix
of domestic consumption and exports, says Mr. Kozul-Wright of Unctad.
"It will be interesting to see whether these value chains become more
self-contained in the developing world rather than depending on
technology and markets in the north," he says. "If the developing world
would like to maintain the kind of growth its had in the last decade,
then value chains will have to have more local content than in the
past."
The top emerging growth importers between 2012 and 2016 are predicted
to be Egypt, with a 10% compound annual growth rate; Panama at 8.8%;
Indonesia at 8.5%; Brazil at 8%; Peru at 7.7%; Russia at 7.4%; Argentina
and India, both at 6.8%; China at 6.6% and Saudi Arabia at 6.3%,
according to "HSBC Global Connections Trade Forecast Update," which HSBC
published in February.
Sources are changing—companies that made their supply chains too lean
got burned by disruptions and are switching to a combination of long and
short supply chains to reduce risk, Dr. Sodhi explains. They continue
to source supplies from low-cost countries around the globe but they may
also arrange for nearshoring, with a secondary supplier much closer.
"They still have the old supply chain but now they have another one in
addition to it," he says.
Stephan Wagner, Professor of Logistics Management at the Swiss Federal
Institute of Technology Zurich, known as ETH, also sees a move away from
single sourcing, despite its cost advantages, toward diverse sourcing
to reduce vulnerabilities. "Companies put suppliers in different regions
to reduce risks such as exchange-rate risk or geographic risk."
Another aspect of the sources also is changing: costs. Labor costs in
coastal China have risen, prompting some companies to chase lower cost
labor farther inland, or in other countries such as Vietnam, Cambodia or
Sri Lanka, whose costs haven't risen as much. "There’s a new source and
a new trade corridor," Dr. Sodhi says.
The top emerging exporters to 2016, according to the HSBC report, are
Egypt, with 9.26% growth; Panama at 9.5%; Paraguay at 8.8%; India at
7.5%; Australia at 7%; Colombia at 6.7%; China at 6.6%; Peru at 6.4%;
Indonesia at 6.1% and Poland at 5.9%.
The intermediary point is changing—the Iceland volcano that disrupted
air traffic in 2010 made companies look at locations for transshipments
of goods. And these intermodal hubs aren't necessarily manufacturing
anything. "They say, bring it to my place and I'll route it further,"
Dr. Sodhi says. Some of these transshipment hubs include Dubai,
Singapore, Rotterdam, Panama and Egypt.
"In the future," says Dr. Wagner of ETH, "we will have more
intraregional trade and less trans-Atlantic and trans-Pacific trade."
Southeast Asia, in particular, is poised for fast intraregional growth.
"As a consequence, logistics firms need to build up strong capacity for
regional trade," he adds. "You have to be able to run a logistics
operation in China and not just ship parts from Asia to Europe and
finished products from Europe to Asia."
The products are changing—most of the sectors forecast to have the
fastest growth over the next five years are those that support world
trade, HSBC says. Containers, packaging and plastics are expected to
register 9% compound annual growth between now and 2016. Binding
products for foundries, which are needed for infrastructure projects
like roads and railways, are forecast to rise 8.8%. Electrical energy,
defined as all non-fossil fuel energy, is expected to be the
fastest-growing sector, at 9.1%.
The largest traded sectors now are oil and gas, petrochemicals and
plastics, cars, electronics, pharmaceuticals and iron and steel. HSBC
forecasts continued growth in all these, though it will be outstripped
by the standout sectors mentioned above.
On a consumer goods level, products also are changing. The growing
middle class in countries like China, India, Thailand and other
countries is driving sales of luxury goods. Now these countries, long
the world's low-cost suppliers, are becoming the buyers for goods whose
supply source might be Italy or France, Dr. Sodhi says.
Sometimes the change presents surprising challenges for companies. Some
European machinery companies have found that customers in emerging
market economies are willing to settle for quality that's just good
enough, if it means a lower price. "This can be problematic for
companies that have a culture of high technology and high precision,"
Dr. Wagner of ETH says. "The customers don't need such high standards
and aren’t willing to pay for it."
At the same time, companies in low-cost countries are increasingly
engaging in research, development and engineering to develop their own
products, rather than simply to manufacture what's been designed in
traditional markets, he notes.
"Local or national companies are moving beyond their initial stages of
just copying products. They are also investing in engineering in
developed markets," Dr. Wagner says. He sees cases of Chinese machinery
companies buying medium-size German engineering companies, for example.
"It's the next step of the maturity curve," he says.
Foreign direct investment by OECD countries has contracted since 2008,
notes Mr. Kowalski of the OECD. But China and India "are heavily
investing. Their role in foreign investment has grown dramatically."
That leads to a fifth element—finance—which has evolved in the supply
chain, says Dr. Sodhi of Cass Business School. "Money is what makes
global trade possible," he says. Global banks are now acting on behalf
of buyers and paying suppliers directly.
Companies are looking for ways to manage risk in global supply chains,
particularly as they enter new markets, says Mr. Rigby of HSBC.
Solutions including trade credit insurance, guarantee structures and
collection support are growing strongly.
"Buyers are looking for complex and structured solutions in the supply
chain that provide connectivity globally between themselves and their
suppliers," he says. "We at HSBC are well-placed to meet that need."
Large buyers are increasingly seeking supply chain solutions, he says.
These take a number of forms, depending on where trading partners seek
to allocate and retain payment risk. Therefore flexibility of product
solution is key.
The risk also has diversified with the supply chain, bringing in more
counterparties. "Finance really creates a new diversification point that
we didn’t talk about before," Dr. Sodhi says.
Catherine Bolgar is an independent writer covering business and economics.
One producer believes more businesses will follow his lead and start to bring the work home.
"If current trends
continue, we'll be looking at bringing more back," says Tony Caldeira.
China's appeal as a manufacturing base is on the wane. One producer
believes more businesses will follow his lead and return to UK
manufacturing as an alternative.
Caldeira is bringing manufacturing home to the UK. UK manufacturing
is a move that would have been unthinkable to Tony Caldeira just four
years ago, when he opened his 25,000 square metre production unit near
Hangzhou, on China's east coast.
The Liverpool-based cushion designer and manufacturer has been hit by
soaring wages in China. Like other producers, he has had to cope with
qualified employees demanding 50% wage rises, and the defection of
scores of employees after the Chinese New Year celebrations.
When you factor in the other variables at the top end of quality, the
cost difference of manufacturing in the UK becomes more or less neutral
But other factors, such as rising shipping costs and the strong
renminbi, have had an equal impact. "The duty on finished products
coming from China is 12%; the duty on raw materials is only 8%," says
Caldeira. "When you factor in the other variables at the top end of
quality, the cost difference of manufacturing in the UK becomes more or
less neutral."
Asian alternatives?
Vietnam, Bangladesh or the Philippines – the next stop for some
China-based producers – are not options for Caldeira. He believes the
concurrent boom years of China and India were a one-off event, never to
be repeated elsewhere.
"China had the cluster model, the infrastructure, the stability and a
steady trade flow," he says. "There's more risk in some of the newly
emerging economies.
"And the fabrics we use are woven in China – so they would need to be
shipped to the other country to be sewn, and then shipped back. Bear in
mind that the labour cost on our most expensive cushion might only be
10 to 15% of the product cost."
Home thoughts - UK Manufacturing
For Caldeira, it makes sense for more cushions to be produced at the
company's base. "The UK is a leader in home fashion. Our big
Commonwealth markets, such as Australia, Canada and South Africa, tend
to look for products that were in demand in Britain six to 12 months
earlier."
Caldeira's Chinese base, established as a joint venture, continues to
run but with only a third of the one-time 200 workforce. So far, 20 new
jobs have been created in Liverpool's production lines and warehouses.
"If current trends continue, we'll be looking at bringing more back,"
says Caldeira. "I think we may find many businesses with Chinese
production following in our footsteps."
'Half chips, half rice'
Caldeira started the process by buying out his Chinese business
partner. Unused factory space should not be an issue: "The financial
situation in China means a lot of SMEs there are looking to rent space,
because they can't get long-term finance."
Tony Caldeira counsels other businesses to take a similarly cautious
approach. "There are so many 'known unknowns' in the current economy
that flexibility is the key. The companies that will be around in 10
years' time are those with a flexible outlook.
"We will certainly be taking it step by step in terms of moving
production. It will be a 'half chips, half rice' approach for the
foreseeable future."
Ormat designs, builds, owns and runs power plants, around 80% of
which are in the US. It also manufactures and sells power units and
other equipment for geothermal and recovered energy-based electricity
generation - this part of the business is mainly centred on exports.
Listed on the New York Stock Exchange, the company has annual turnover of around $400m.
But while the political will may exist, CEO Dita Bronicki explains:
"It's not yet clear whether there is substantial potential for
electricity generation from geothermal energy in China.
"The most active resources are in the so-called 'Ring of Fire',
bordering the Pacific Ocean. China is very rich in resources generally,
and it already exploits geothermal energy for heating in the south-west.
But any major expansion would depend on having the right geology and
the right power market nearby."
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