All Your Egg Rolls in One Basket?

Higher Chinese labor costs drive manufacturing inland and sourcing elsewhere.

As the Chinese manufacturing industry matures and prospers, it is dealing with all the challenges that come with success. These may be good problems compared to where the society was, but they are problems nonetheless.

New concerns for safety and environmental protection, the need to actually pay taxes, and general cost increases have all combined to raise the price of Chinese-manufactured goods, but the biggest factor by far is higher worker compensation. Labor costs in coastal southern China, long the nexus of China’s industrial revolution, have surged 20 percent a year for the last four years, and are already up over 10 percent in 2012. Foxconn, the giant contract manufacturer in the news as the maker of Apple’s iPhones and iPads, raised salaries 16 to 25 percent last month.

Coastal China is losing trained workers to the newly-industrializing heartland, as they return to be nearer to their families, making retention and turnover an additional headache. The interior, though, has its own issues, many supply chain-related, as it can cost more to ship goods from the inland provinces to port cities than to transport them from Shanghai to New York. With infrastructure undeveloped, shipping by river can add a week to production lead time.

For a comprehensive comparison of labor expense between countries and regions, many factors must be considered, but by all measures, China, particularly the coastal areas, is rapidly approaching parity with other markets nearer to the U.S. At current rates of change, real wage costs in China could reach or surpass those of Mexico in 8 to 9 years, without factoring in the logistical advantages of land-based shipping from a country bordering on ours.

When you think cheap manufacturing, it is important not to put all your egg rolls in one basket.

Note: This “Extra Mile” message is number two in a series looking at various factors of international sourcing choices for U.S. manufacturers and importers. For a link to the first piece, “South of the Border,” click here: http://blog.totalogistix.com/2012/03/south-of-border.html

Kirk Shearer
President
TOTALogistix
www.totalogistix.com
800-989-0054 x103

Explosive Deal

UPS acquires TNT Express, creating world’s largest carrier.

UPS is making a strong bid for global dominance in the world of package delivery. The company has reached agreement on a takeover bid for TNT Express, Europe’s second-largest delivery company, offering $6.8 billion in an all-cash deal that will create the world’s largest transportation provider, with over $60 billion in annual sales.

The UPS offer, increased after an initial offer was rejected, represents a 53 percent premium over Netherlands-based TNT’s closing price the day negotiations were announced. TNT management advised shareholders to accept the offer, and the company’s largest shareholder said it would tender its shares to UPS. TNT lost $225 million in the last quarter of 2011, and $350 million for the year.

If you have been worried what Brown would do with all the cash they have been pocketing, it’s nice to know they found something they wanted. They can afford it; at current rates of earnings, the $6.8 billion paid for TNT represents just over 18 months of UPS’s profits.

With the range of choices diminishing, both in LTL and especially now in small package shipping, it is more important than ever as a shipper to have an independent advocate whose interests are aligned with yours. UPS brings a lot to the table, but it’s a fair bet their solutions are going to involve using . . . UPS.

Kirk Shearer
President
TOTALogistix
www.totalogistix.com
800-989-0054 x103