Rising wages in emerging markets, together with years of stagnant salaries in the developed world, are restoring western competitiveness.
These higher wages typically translate into higher inflation, further eroding the advantages of emerging market production.
Moreover, there is a growing recognition that re-shoring manufacturing back to western economies will facilitate the transition to an innovation economy upon which future competitiveness can be built.
Besides these shifting dynamics, a sea change is occurring in global logistics. The old model of producing in one region and exporting globally makes less sense as the need to adapt to local tastes in ‘maturing’ emerging markets increases.
The global supply chain is therefore adopting a more ‘local for local’ model: increasingly localised production destined for local consumption.
Of course, localised sourcing need not mean re-shoring per se: ‘near-shoring’ is a huge part of the global logistics shift, as the likes of Mexico and eastern Europe increasingly encroach on what was traditionally China’s domain.
Mexico, for example, is currently witnessing an industrial expansion, most notably in autos. In the next few years, Honda, Mazda, Nissan, Audi and BMW will open new Mexican assembly facilities and auto production will increase 35 per cent plus by 2017.
As manufacturers relocate production to more convenient locations, certain companies will inevitably benefit. One of the best examples is the US railroad, Kansas City Southern (KSU). The company is uniquely positioned to benefit from the shift to near-shoring in Mexico for a US market, as its rail network extends from both coasts of Mexico into the upper Midwest of the US.
As trade with Mexico has grown, cross-border intermodal (lorry-to-rail) cargo hauled on the KSU rail network has increased significantly – in the first quarter of 2013, volume increased by a remarkable 71 per cent against the same period in 2012.
What is more, cheap and plentiful natural gas along the Gulf Coast of the United States has also driven near-shoring of ethylene plants by the likes of Dow, Chevron Phillips Chemical and Formosa Plastics – all of which will have products to be transported by KSU.
Besides the transportation beneficiaries, there will also be companies excelling at near-shoring their production. The world’s number six auto producer, Nissan, was an early adopter of near-shoring principles, manufacturing more outside of Japan than its main competitors and preferring instead to produce closer to the customer. As the largest auto producer in Mexico, Nissan has two assembly plants there, with a third due to open shortly. The company will also relaunch its iconic Datsun nameplate in India later this month, in an effort to better tailor its products to local tastes.
This theme also considers the importance of localised research and development in manufacturing. US-based conglomerate 3M, best known for inventing Post-it notes and Scotch tape, believes that its R&D needs to stay close to its customers. With two R&D labs in the US versus 32 elsewhere, 3M believes researchers can better tailor new products to local markets, labelling its effort “global capability; local execution”.
Of course, increased localisation brings with it some negatives. FedEx, one of the world’s largest express package shippers, recently reduced its level of Asian flights significantly. Demand for express shipments from Asia back to the US has declined as more localised sourcing and a tighter supply chain reduces the need for speed and customers ‘trade down’ to slower shipping modes.
The bright side to this scenario for FedEx is that its US ground package business is booming. Retailers are now beginning to use branch inventories as ‘mini’ distribution centres (in lieu of building larger distribution bases), increasing ground package volumes measurably because of an increased number of pick-up points.
Undoubtedly, then, the global logistics supply chain is undergoing marked changes. Manufacturers have determined that to compete more effectively on a global basis, aspects of production need to be closer to customers and the supply chain.
Subitha Subramaniam is chief economist and Max Burns is global analyst at Sarasin & Partners
