High seas, high prices

How much will rising shipping costs hurt Chinese manufacturing

 Aug 7th 2008 | Hong kong | From the print edition 

ON LAND, high oil prices have ended America's love affair with sport-utility vehicles, forcing carmakers to revamp their product line-ups. In theair, sky-high fuel costs have prompted airlines to raise ticket prices andcut routes. What about at sea? Could rising shipping costs scupper China'sexport boom?

This question has been much discussed since Jeff Rubin and Benjamin Talof CIBC, a Canadian bank, issued a memo a few weeks ago saying that areversal of the great migration of manufacturing operations to Chinamight already be under way. The cost of shipping a standard 40-footcontainer from Shanghai to America's east coast, for example, has jumpedfrom $3,000 in 2000 to about $8,000 today. The extra cost of transportinggoods halfway around the world, Messrs Rubin and Tal wrote, is wipingout the often slim margins of Chinese exporters. What is more, if oil andshipping prices stay high, many Western companies that now outsourcetheir manufacturing to China might decide that it makes more sense toshift production closer to their customers at home.

Such scenarios would entail a huge shift in global trade patterns. StephenJen of Morgan Stanley, an investment bank, says higher shipping costscould even sound the death knell of the entire East Asian export model.This is because so many of the finished goods that China exports to

 America and Europe are made from components imported from Taiwan,Japan or South Korea. Clearly, affordable transport costs are an essentialingredient in this regional production matrix.

Exporters in China are certainly feeling the pain of higher shipping costs.The Transpacific Stabilisation Agreement bunker charge, a benchmarkfuel surcharge imposed by shipping firms on sea freight, has risen from$455 per 40-foot equivalent unit in January 2007 to $1,130. Shipments toEurope face similar increases. In the first half of 2008 the growth rate ofChinese exports slowed to 21.9% from 27.6% a year earlier. In Guangdongprovince, the traditional heart of China's export manufacturing, growthplunged to 13% from 26.5%.

But if there is a migration of manufacturing from China, it is hardly anexodus. Even the latest trade figures do not show a fall in Chineseexports — only a drop in their pace of growth. And this can be attributed toa number of factors, including China's stronger currency (up almost 7%against the dollar this year), upward pressure on domestic wages, less

 

generous Chinese government incentives for low-end exporters andweakening foreign demand.

There are already signs that Chinese officials are rethinking their “get

tough” policy towards manufacturers of cheap goods. On August 1st thefinance ministry increased export-tax rebates on a range of clothingproducts from 11% to 13%, and on bamboo products from 5% to 11%, in anapparent effort to help exporters of cheap goods. The closure of thousandsof small factories is clearly worrying officials.

 As for shipping costs, many companies in China export on a “free on board” basis.

So theoretically it is the buyers on the other side of the ocean who must absorbthe higher fuel surcharges on freight. Of course, they are forcing sellers to sharesome of the cost. But large bulk purchasers, such as Home Depot or Wal-Mart,are also squeezing the shipping companies to keep the overall bill down.

On balance, higher shipping costs are “not as big a factor” as the rising yuan or

cost of raw materials, says an executive in the Shanghai office of an Americanbuilding-materials company which exports Chinese-made goods to America, Indiaand Australia. For a typical pair of Chinese-made shoes sold in America,shipping accounts for only 3-4% of the price.

Besides, companies will not find it easy to move their manufacturing out ofChina. Norman Cheng, co-founder of Strategic Sports, one of the world's largestmotorcycle and bicycle helmet-makers, with two factories in Guangdong, says ifhe shifted production out of China, he would have to set up factories in his twobiggest markets, North America and Europe. Shipping costs would fall, butlabour costs would rise and there would be fewer economies of scale.

So China's manufactured-export industry does not seem to be in imminentdanger. Few companies will take the decision to leave China lightly, especiallywhen no one knows if the price of oil will hit $200 or fall back to $100 in thecoming months. A senior manager at a large Chinese electronics company, withfour factories abroad, says higher shipping costs instead “give us urgency and an

incentive to become significantly more efficient and competitive”. Foreign and

local firms can also divert production to China's fast-growing domestic market.There is no doubt that oil at $200 would have dire consequences, both for Chineseexporters and for other firms. But given the impact on the world economy, highershipping costs might be the least of their worries.