Will oil reverse globalization?

[jesseps]

The China Price used to be the global standard for low-cost manufacturing. It shut thousands of factories across North America, put tens of thousands of Canadians out of work and drove down the price of consumer goods around the world.

 

Now China's cost advantage is being eroded by soaring oil prices, rising wages and an appreciating currency. Canadian companies that outsource their manufacturing to China are already feeling the pinch and some are even bringing production closer to home.

 

Could globalization be reversed in an era of high oil? What would that mean for Canadian companies that have come to depend on the China Price?

 

Levon Afeyan flew to China this week to find out the answer to these questions for his mid-size Montreal company. He's the president of Seatply Products Inc., a manufacturer of molded plywood for use in commercial seating.

 

About half of Seatply's products originate in China and Malaysia and he's becoming increasingly uneasy about soaring freight costs that have seen the price of a shipping a standard container from China hit as much as $6,000 from $4,000 a year ago.

 

"People are taking a second look at everything because the costs are becoming prohibitive," said Afeyan, whose compan tried to cut costs through lean manufacturing techniques. "It goes right to the bottom line."

 

On his trip, Afeyan will try to get price concessions from his Asian suppliers to help cover his rocketing freight costs. But he's not expecting an easy time, because his suppliers have their own problems and want to raise prices.

 

Inflation has already risen eight per cent this year in China and the government just lowered subsidies on gasoline, resulting in an increase of roughly 20 per cent at the pump.

 

Meanwhile, the Chinese currency has jumped about 17 per cent against the U.S. dollar, making exports more expensive.

 

And wages are rising fast. Depending on the industry and skill-level, wages are up by 10 to 25 per cent a year and labour shortages have developed in some regions.

 

CIBC World Markets economists, who predict oil is heading to $200 U.S. a barrel, believe the cost of maintaining a supply chain that reaches to the other side of the world is outstripping the benefits for many North American sectors.

 

"In a world of triple-digit oil prices, distance costs money," CIBC economists Jeff Rubin and Benjamin Tal wrote in a report at the end of May. "Soaring transport costs suggest trade should be both dampened and diverted as markets seek shorter, and hence, less costly supply lines."

 

Rubin and Tal note there remains a huge differential between Chinese and North American wage rates but have found evidence that companies are already looking for production closer to home in capital-intensive manufacturing such as steel, where there's a high ratio of freight costs to final selling prices.

 

"Furniture, apparel, footwear, metal manufacturing and industrial machinery - all typical Chinese exports, incur relatively high transport costs."

 

The CIBC economists expect Mexico with its maquiladora plants along the U.S. border to be a prime beneficiary of the high freight phenomenon as companies seek low-wage centres closer to home.

 

(Courtesy of The Montreal Gazette)