January 16, 2009
SCDigest: Will Current Economic Turmoil Scale Back Globalization?
By SCDigest Editorial
Staff
Through
a special arrangement, presented here for discussion is an excerpt of a
current article from Supply Chain Digest.
Amid the financial crisis
and global economic slow down, some observers are betting that the powerful
rush towards globalization will slow dramatically and perhaps even reverse
itself.
Indeed, there were some
indications this was happening even before the brewing financial crisis
kicked into high gear. (See – Is
the World Going Unflat? – SCDigest).
Now, some companies are
seeing their Chinese suppliers disappear, as tens of thousands of manufacturers
in China shut their doors. (See – Will
there Turn out to be a “China
Import Bubble” Too? – SCDigest)
“There are some
changes going on for sure, but not as dramatic as some of the reports would
have you believe,” said Gene Tyndall, executive vice president at
Tompkins Associates and a SCDigest contributing editor.
“There is a lot
of news – and rumors – about thousands of China factories closing
and assertions that North American and European multi-nationals are bringing
sourcing and production back, but that trend is being over exaggerated,” Mr.
Tyndall said.
The trend is both a matter
of degree and Chinese Government policy, Mr. Tyndall said.
For example, while thousands
of Chinese factories are closing, 98 percent are for low-end commodities
that the government there wants to transition out of anyway, Mr. Tyndall
said.
He also said more of
those closings are related to the economic downturn and not due to the
supply chain strategies of the multi-nationals.
“We continue to
see a lot of activity in China for both sourcing and distribution,” Tyndall. “The
multi-nationals know that the only sales growth in the near-term will be
in emerging markets.”
He also notes that China
continues to invest in infrastructure and new plants that make high-end
components and products, and that the Chinese government has recently announced
a series of stimulus plans to build out still more infrastructure and stoke
export business, which is still positive but currently well down in terms
of the growth it enjoyed over the past few years.
Mr. Tyndall said, however,
he is seeing some trends towards greater sourcing diversification to low-cost
countries outside of China. “We’re seeing interest in Mexico, Eastern
Europe, and Brazil, depending on the industry.”
While globalization is
here to stay, Mr. Tyndall said, the current dislocation does provide an
opportunity to rethink global supply chain strategies.
“To me, the winners
coming out of the recession will be those companies that have planned and
established a new business model — one that yields the lowest Total Delivered
Cost to their customers, no matter where they are located,” Mr. Tyndall
said.
Discussion Question:
Do you expect a reversal of globalization coming out of all this or not?
Do you expect more diversification away from China? Is now the time to
rethink global supply chain networks and strategies?
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Barring unforeseen political developments, the word “reversal” may be putting it too strongly. A slowing of globalization–sure. The economy is slow now, so sure there’ll be some slowing, perhaps aided by Chinese policy as well.
I agree with the commentator that those companies who already have infrastructure in place will be much stronger globally through this period. Others with global ambitions may not have the wherewithal to invest at this time.
Another interesting question is the future of “Brand America.” Obama’s election has given the US a fresh chance to revive its reputation, and perhaps demand for US brands globally. Can we emerge from this period with friendly global trading partners, receptive global consumers, and financially solid US-based companies? I hope so.
The assertion that globalization would be slowing or reversing is contrary to modern economic theory and the proven supply chain and logistical strengths that globalization offers both retailers and the consumer.
Globalization allows for enhanced productivity, lower prices and a free flow of goods and resources. The tremendous efficiencies as well as market availability that globalization offers contradicts the claims that in recessionary times they would slow down. If anything, globalization seeks the most efficient and cost effective solution. Thus as times are more demanding in this recession, globalization will actually increase in both strength and velocity.
The economic problems, both here and abroad, have served to illustrate that gravity is indeed still the reality of our world. We saw the upside of globalization and, like housing prices and credit markets, now everyone is hopefully seeing that cycles and markets go up and down.
Globalization is not going away, nor should it. What should go away is people’s willingness to suspend belief in reality and act irrationally. While this is never going to happen, those who study will learn and hopefully be more intelligent about risk management and expectations during the recovery and beyond.
Globalization will not slow at all. In fact, if anything, it will continue to increase, although now instead of simply looking to China for the best, low-cost manufacturing, companies will look at alternative international countries. Companies that are now finding China to be costly, are moving their production to Vietnam. Many European food retailers are purchasing their produce from sub-Sahara Africa, and having the produce processed in factories located strategically near African airports.
Since the recession is a global one, there are more opportunities to find inexpensive manufacturing around the world. China is no longer the low-cost leader, and this will result in a wider-scale globalization program for most forward-thinking companies.
In the unforeseen political circumstances category, Obama appointed Larry Summers to be the head of the White House National Economic Council. John McLaughlin (of the Mclaughlin Group) predicted that Summers was destined for political stardom in 2009 because he recognizes that Globalism is the chief problem behind our financial meltdown. John’s an insider, it is a prediction, but that’s a beltway floater that may deserve watching.
The recent economic run up in the U.S. was fueled in large part by export growth–and the recession was staved off by strong exports as well until our U.S. “credit crunch.” The U.S. benefited from stronger international trade–all the while we we were decrying the devil of “off shoring.”
One of the great dangers of economic downturn is that global trading partners retreat to protectionism–and even isolationism. Those most tempted to do so are the largest and most diverse economies (i.e. the U.S.). These actions typically deepen recessionary impacts and dampen recovery as export markets are denied and cheaper imported goods are cut off.
Recovery programs aimed at creating jobs and increasing production are good. But we have to have someplace to sell the goods and services.
Reversing? Don’t tell that to Walmart. They’ve stated publicly that much of their new growth will come from outside of the U.S. And so far, they’ve been right about almost everything.
If anything, the major contraction at retail that’s now underway here will do more to help (force?) retailers think outside the borders than hinder it. Growth is and always will be a prerogative for public companies so, where else to go and get that quickly???
And, from a consumer perspective, 90% of the Global population is “retail underserved” (with 10% completely overserved). So, there’s a market out there as well, however unsolved. As stated above, look for it to slow, but pick up by ’10.
Well, “globalization” is a big word that includes more than sourcing; however, the expanding and contracting world of sourcing is a great overlooked topic. Over the past few years, many of my clients exploded their sourcing options; diversifying inside and outside of China in order to hedge their bets and match specific products with supplier capabilities.
However, as Walmart and other retailers call for even more stringent factory standards and documentation, companies have begun to consolidate their sourcing once again. Add to this the ongoing need for speed (to shelf), and you have many suppliers establishing domestic back-up resources (hey, it’s cheaper than repeated air shipments). Throw in massive attrition in the supplier base and you have an interesting situation. Striking the perfect balance will be a huge challenge for 2009 and beyond.
It may slow down for some companies due to the fact that they can no longer afford to expand. This will create opportunities for other companies to expand in their place.
I expect that globalization will slow down for both reasons of needing to focus on issues at home and also political issues.
Sitting here in Hong Kong, we see it from the Asian side. This morning in the South China Post, two articles caught my eye. First was an article by a Chinese professor as to whether or not President Obama would engage China in discussions of the trade imbalance between the two countries. It was determined that economic pressures at home would be his immediate focus.
The second article was about the President’s aging Air Force One airplane and the offer made by Europe’s Airbus, to equip the fleet with the company’s newest A300 superliners. For reasons of national pride, it is questionable that the US government would not choose America’s Boeing equipment for this purpose.
Similarly, retailers will focus on issues at home, like sustainability and survival, and only engage in global issues if it is politically expedient. To the advantage of the Chinese, this stay-at-home focus still has 1.3 billion consumers to serve–still a basis of growth.
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Barring unforeseen political developments, the word “reversal” may be putting it too strongly. A slowing of globalization–sure. The economy is slow now, so sure there’ll be some slowing, perhaps aided by Chinese policy as well.
I agree with the commentator that those companies who already have infrastructure in place will be much stronger globally through this period. Others with global ambitions may not have the wherewithal to invest at this time.
Another interesting question is the future of “Brand America.” Obama’s election has given the US a fresh chance to revive its reputation, and perhaps demand for US brands globally. Can we emerge from this period with friendly global trading partners, receptive global consumers, and financially solid US-based companies? I hope so.
The assertion that globalization would be slowing or reversing is contrary to modern economic theory and the proven supply chain and logistical strengths that globalization offers both retailers and the consumer.
Globalization allows for enhanced productivity, lower prices and a free flow of goods and resources. The tremendous efficiencies as well as market availability that globalization offers contradicts the claims that in recessionary times they would slow down. If anything, globalization seeks the most efficient and cost effective solution. Thus as times are more demanding in this recession, globalization will actually increase in both strength and velocity.
The economic problems, both here and abroad, have served to illustrate that gravity is indeed still the reality of our world. We saw the upside of globalization and, like housing prices and credit markets, now everyone is hopefully seeing that cycles and markets go up and down.
Globalization is not going away, nor should it. What should go away is people’s willingness to suspend belief in reality and act irrationally. While this is never going to happen, those who study will learn and hopefully be more intelligent about risk management and expectations during the recovery and beyond.
Globalization will not slow at all. In fact, if anything, it will continue to increase, although now instead of simply looking to China for the best, low-cost manufacturing, companies will look at alternative international countries. Companies that are now finding China to be costly, are moving their production to Vietnam. Many European food retailers are purchasing their produce from sub-Sahara Africa, and having the produce processed in factories located strategically near African airports.
Since the recession is a global one, there are more opportunities to find inexpensive manufacturing around the world. China is no longer the low-cost leader, and this will result in a wider-scale globalization program for most forward-thinking companies.
In the unforeseen political circumstances category, Obama appointed Larry Summers to be the head of the White House National Economic Council. John McLaughlin (of the Mclaughlin Group) predicted that Summers was destined for political stardom in 2009 because he recognizes that Globalism is the chief problem behind our financial meltdown. John’s an insider, it is a prediction, but that’s a beltway floater that may deserve watching.
The recent economic run up in the U.S. was fueled in large part by export growth–and the recession was staved off by strong exports as well until our U.S. “credit crunch.” The U.S. benefited from stronger international trade–all the while we we were decrying the devil of “off shoring.”
One of the great dangers of economic downturn is that global trading partners retreat to protectionism–and even isolationism. Those most tempted to do so are the largest and most diverse economies (i.e. the U.S.). These actions typically deepen recessionary impacts and dampen recovery as export markets are denied and cheaper imported goods are cut off.
Recovery programs aimed at creating jobs and increasing production are good. But we have to have someplace to sell the goods and services.
Reversing? Don’t tell that to Walmart. They’ve stated publicly that much of their new growth will come from outside of the U.S. And so far, they’ve been right about almost everything.
If anything, the major contraction at retail that’s now underway here will do more to help (force?) retailers think outside the borders than hinder it. Growth is and always will be a prerogative for public companies so, where else to go and get that quickly???
And, from a consumer perspective, 90% of the Global population is “retail underserved” (with 10% completely overserved). So, there’s a market out there as well, however unsolved. As stated above, look for it to slow, but pick up by ’10.
Well, “globalization” is a big word that includes more than sourcing; however, the expanding and contracting world of sourcing is a great overlooked topic. Over the past few years, many of my clients exploded their sourcing options; diversifying inside and outside of China in order to hedge their bets and match specific products with supplier capabilities.
However, as Walmart and other retailers call for even more stringent factory standards and documentation, companies have begun to consolidate their sourcing once again. Add to this the ongoing need for speed (to shelf), and you have many suppliers establishing domestic back-up resources (hey, it’s cheaper than repeated air shipments). Throw in massive attrition in the supplier base and you have an interesting situation. Striking the perfect balance will be a huge challenge for 2009 and beyond.
It may slow down for some companies due to the fact that they can no longer afford to expand. This will create opportunities for other companies to expand in their place.
I expect that globalization will slow down for both reasons of needing to focus on issues at home and also political issues.
Sitting here in Hong Kong, we see it from the Asian side. This morning in the South China Post, two articles caught my eye. First was an article by a Chinese professor as to whether or not President Obama would engage China in discussions of the trade imbalance between the two countries. It was determined that economic pressures at home would be his immediate focus.
The second article was about the President’s aging Air Force One airplane and the offer made by Europe’s Airbus, to equip the fleet with the company’s newest A300 superliners. For reasons of national pride, it is questionable that the US government would not choose America’s Boeing equipment for this purpose.
Similarly, retailers will focus on issues at home, like sustainability and survival, and only engage in global issues if it is politically expedient. To the advantage of the Chinese, this stay-at-home focus still has 1.3 billion consumers to serve–still a basis of growth.