Taxonomy: BlueWater Reporting Analysis

Companies mull manufacturing move out of China

Rising tariffs spur look at geographic shifts in supply chains.

Companies mull manufacturing move out of China

Rising tariffs spur look at geographic shifts in supply chains.

Companies mull manufacturing move out of China

Rising tariffs spur look at geographic shifts in supply chains.

 
Many countries likely will capitalize off the trade war between the United States and China as various businesses shift some or all of their manufacturing operations out of China due to concerns over steep tariffs the U.S. has implemented on Chinese goods.
    While many businesses began moving some or all of their manufacturing operations out of China over the last several years because of soaring costs, the China-U.S. trade war is quickly amplifying the exodus.
    On July 6, the U.S. implemented a 25 percent tariff on goods from China totaling $34 billion in annual import value; on Aug. 23, the U.S. implemented a second tranche of 25 percent tariffs on goods from China with an annual import of $16 billion; and on Sept. 24, the U.S. implemented tariffs on goods from China with an annual import value of $200 billion. The tariff on this third tranche of goods will total 10 percent until Jan. 1, when it is slated to increase to 25 percent.
    After the first and second round of tariffs were issued by the U.S., China immediately retaliated by implementing a 25 percent tariff on the same value amount of U.S. goods, and on Sept. 24, China issued 5 percent to 10 percent tariffs across $60 billion worth of U.S. goods.
    Various companies already have begun moving their manufacturing operations out of China to other countries across Asia, as well as to Mexico, due to the steep tariffs the U.S. implemented on China, while other companies still are considering which countries they should set their sights on.
   This trend already is starting to show up in China’s manufacturing purchasing managers index (PMI), an indicator of the economic health of the country’s manufacturing sector. China’s manufacturing PMI stood at a reading of 50.2 percent in October, down from 50.8 percent in September and 51.3 percent in August, according to data release by the National Bureau of Statistics of China. A reading above 50 percent indicates expansion, and a reading below 50 percent signals contraction. The October result was the lowest since July 2016, when China’s manufacturing PMI was 49.9 percent and fell short of a 50.6 percent reading that analysts polled by Reuters were expecting.
    Additionally, a subindex, known as China’s new export orders index, showed a reading of 46.9 percent in October. The last time it fell below a reading of 46.9 percent was in November 2015, when it stood at 46.4 percent.

    Businesses have to consider multiple factors before moving their manufacturing operations out of China to other countries, including labor costs, currency exchange rates, infrastructure in different countries, as well as what incentives certain countries offer to attract manufacturing.
    Additionally, supply chains involving China are already organized, so moving manufacturing operations to other nations could create chaos, thus spurring risk for companies, which is why it is essential they carefully plot their moves before jumping ship.
    Jae Auh, senior vice president of South Korea-based CJ Logistics and its Chinese subsidiary CJ Rokin Logistics, said in October at Armstrong & Associates’ 3PL Value Creation North America Summit 2018 that many companies are moving manufacturing operations to countries such as India, Indonesia and Vietnam. Previously, Ho Chi Minh was Vietnam’s major market, but Hanoi also has emerged as a manufacturing hub, he added.
   “Light manufacturing factories move very quickly. A number of them have already moved out of China. They are going to Vietnam, they are going to Bangladesh, they are going to Indonesia,” Jean-Jacques Ruest, president and CEO of Canadian National, said on the Class I railway’s earnings conference call on Oct. 23.
    Meanwhile, Todd Bluedorn, chairman and CEO of Lennox International Inc., a climate control product provider, said during the company’s earnings conference call on Oct. 22, “We are taking action to sort of avoid the tariffs by moving to Southeast Asia and other low-cost countries that can meet our requirement.”
    A report released in October by management consultancy McKinsey & Co., titled, “Is apparel manufacturing coming home? Nearshoring, automation, and sustainability: Establishing a demand-focused apparel value chain,” said, “Take Mexico as an example of a nearshore market for the U.S. Today, Mexico offers lower average manufacturing labor costs than China. While development in nearshore countries for the Western European market is moving in a similar direction, manufacturing labor costs are still higher than those in China — but the gap is shrinking. Whereas hourly manufacturing labor costs in Turkey were more than five times higher than those in China in 2005, the factor diminished to only a factor of 1.6 times by 2017.”
    China was the United States’ largest supplier of goods imports in 2017 at $505.5 billion, up 9.3 percent from 2016, according to data from the U.S. Trade Representative.
    There are currently 47 liner services deploying capacity on the China-to-U.S. trade, as illustrated in the list below, which was built using data from BlueWater Reporting.



   For the first eight months of 2018, the United States imported $344.7 billion in goods from China, which accounted for 20.6 percent of U.S. goods imports by value during this time period, as illustrated in the chart below, which was constructed using data from the U.S. Census Bureau.



    The United States’ trade deficit with China actually has increased over the last few months, and on a year-over-year basis for each of the first eight months of 2018, the trade deficit also was higher, as illustrated in the charts below, which were constructed using data from the U.S. Census Bureau.




    Shippers over the spring and summer months also were striving to move their goods as quickly as possible from China to the U.S. before each round of tariffs starting kicking in. This trend bumped up freight rates on the trade beyond the normal peak season jump and exacerbated the capacity crunch in the U.S.
    Sean Kelly, senior vice president of business development at the third-party logistics provider Geodis, said in October at the 3PL Value Creation North America Summit 2018 that Geodis has a large U.S. warehouse footprint and the company has gotten a number of “frantic” phone calls from people who aren’t even clients trying to secure warehousing space in a push to get products into the U.S. as quickly as possible.
    Despite shipments from China to the U.S. holding strong in recent months, data released by the National Bureau of Statistics of China in October illustrates that the growth of China’s economy already appears to be slowing down. According to preliminary estimates, the gross domestic output (GDP) of China was 65.09 trillion yuan (U.S. $9.38 trillion) for the first three quarters of 2018, up 6.7 percent year-over-year at comparable prices. Broken down by quarter, the year-over-year growth was 6.8 percent for the first quarter of 2018, 6.7 percent for the second quarter and 6.5 percent for the third quarter.
    This year’s third quarter marked the weakest year-over-year GDP growth for China out of any quarter since the first quarter of 2009, when year-over-year growth clocked in at just 6.2 percent. The third quarter figure also fell short of analyst expectations, with analysts polled by Reuters collectively expecting China’s GDP to expand 6.6 percent year-over-year.
   Looking ahead, World Bank forecasts China’s GDP growth will continue to decline. The international financial institution expects China’s GDP growth will total 6.5 percent for 2018, 6.3 percent for 2019 and 6.2 percent for 2020.

Despite new tariffs on exported products, China is benefiting from the strong U.S. economy. The nowcasts show we should expect this to continue also throughout December.
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