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 the
air, sky-high fuel costs have prompted airlines to raise ticket prices and
cut routes. What about at sea? Could rising shipping costs scupper China's
export boom?
This question has been much discussed since Jeff Rubin and Benjamin Tal
of CIBC, a Canadian bank, issued a memo a few weeks ago saying that a
reversal of the great migration of manufacturing operations to China
might already be under way. The cost of shipping a standard 40-foot
container from Shanghai to America's east coast, for example, has jumped
from $3,000 in 2000 to about $8,000 today. The extra cost of transporting
goods halfway around the world, Messrs Rubin and Tal wrote, is wiping
out the often slim margins of Chinese exporters. What is more, if oil and
shipping prices stay high, many Western companies that now outsource
their manufacturing to China might decide that it makes more sense to
shift production closer to their customers at home.
Such scenarios would entail a huge shift in global trade patterns. Stephen
Jen of Morgan Stanley, an investment bank, says higher shipping costs
could 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 essential
ingredient in this regional production matrix.
Exporters in China are certainly feeling the pain of higher shipping costs.
The Transpacific Stabilisation Agreement bunker charge, a benchmark
fuel surcharge imposed by shipping firms on sea freight, has risen from
$455 per 40-foot equivalent unit in January 2007 to $1,130. Shipments to
Europe face similar increases. In the first half of 2008 the growth rate of
Chinese exports slowed to 21.9% from 27.6% a year earlier. In Guangdong
province, the traditional heart of China's export manufacturing, growth
plunged to 13% from 26.5%.
But if there is a migration of manufacturing from China, it is hardly an
exodus. Even the latest trade figures do not show a fall in Chinese
exportsonly a drop in their pace of growth. And this can be attributed to
a 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 and
weakening foreign demand.
There are already signs that Chinese officials are rethinking their get
tough policy towards manufacturers of cheap goods. On August 1st the
finance ministry increased export-tax rebates on a range of clothing
products from 11% to 13%, and on bamboo products from 5% to 11%, in an
apparent effort to help exporters of cheap goods. The closure of thousands
of 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 absorb
the higher fuel surcharges on freight. Of course, they are forcing sellers to share
some 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 American
building-materials company which exports Chinese-made goods to America, India
and 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 of
China. Norman Cheng, co-founder of Strategic Sports, one of the world's largest
motorcycle and bicycle helmet-makers, with two factories in Guangdong, says if
he shifted production out of China, he would have to set up factories in his two
biggest markets, North America and Europe. Shipping costs would fall, but
labour costs would rise and there would be fewer economies of scale.
So China's manufactured-export industry does not seem to be in imminent
danger. Few companies will take the decision to leave China lightly, especially
when no one knows if the price of oil will hit $200 or fall back to $100 in the
coming months. A senior manager at a large Chinese electronics company, with
four 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 Chinese
exporters and for other firms. But given the impact on the world economy, higher
shipping costs might be the least of their worries.