Supply Chains Shift on China's Halting Growth

In explaining the vast quantities of excess capacity throughout the U.S. marine terminal world, it’s not hard to identify the culprit: Ports and port investors got drunk on growth in the years leading up to the financial crisis, overinvesting in expectation of a never-ending stream of compound growth rates exceeding 7 percent or higher.

The financial crisis and recession then dealt a fatal blow to that forecast, decimating the housing starts that fueled so much container growth as well as employment that fuels consumer spending.

But on top of those factors, which by themselves will likely take years for ports to recover from, another factor is beginning to manifest itself, and the negative impact on port volumes could be greater and longer lasting: the end of China as a geyser of growth in container volumes.

It’s not the end of China as a source of volumes; the country last year accounted for nearly half of all U.S. container imports and will remain a powerhouse for the foreseeable future. But the rapid industrialization in which China in a historical nanosecond summoned the world’s manufacturing to its coastal lowlands, converting an inexhaustible supply of labor into an ever-expanding outbound flow of container volumes, has reached its zenith and is receding.

It’s not clear yet what this means for the volume of containers moving around the world, the direction they flow in and their origins and destinations. But the unmistakable halt in China’s acquisition of container market share is bound to have far-reaching implications not just for ports in the U.S. and globally, but also for logistics service providers generally.

Moreover, it’s a window into an increasingly complex global sourcing environment in which the optimal mix of quality, price, reliability and speed to market is becoming more elusive to retailers and others reliant on container shipping.

The numbers tell an unmistakable story. China started from nowhere as a manufacturing powerhouse, with its container volume accounting for a small piece of the U.S. market in the early 1990s. By 2001, its share of U.S. container import volumes had climbed to 27.5 percent, according to data from JOC sister company PIERS, and it was doing just as well, or better, in Europe.

By 2007, China’s share of U.S. imports had ballooned to 47.7 percent, but over the next three years, it only inched up to 48.4 percent. That marked the culmination of a six-year period, starting in 2004, that China’s rate of market share expansion was slowing. Last year, for the first time in recent memory, the country’s share declined, if only by less than 1 percent.

The change is slow, like an oil tanker slowly decelerating. In footwear, China last year accounted for 74 percent of U.S. containerized imports. But footwear imports from China declined, albeit by less than 1 percent, while they surged nearly 20 percent from Southeast Asia, including from Vietnam and Indonesia.

In apparel, China last year represented 35 percent of containerized imports, but its volumes fell 5 percent while imports from Central America grew more than 11 percent.

In other words, China’s share isn’t plummeting, but there is a trend: In some major commodities, China is no longer growing. Attribute the change to a pullback in mass migration to coastal areas, hefty labor cost increases and a national policy encouraging consumer spending versus dependence on fickle export markets as a source of growth.

Regardless of the cause, the result will be profound, even if it’s somewhat unclear. The market will fragment, with smaller container markets growing faster than traditional east-west trades as sourcing shifts and living standards improve.

The profound change results from a simple fact: No single nation likely will ever replicate the exporting machine China created. Case in point: India, often mentioned as an emerging container market, generated 7.5 million 20-foot equivalent units last year, compared with some 150 million in China. The scale of infrastructure simply isn’t there.

The China game isn’t over, but the growth likely is. As Bill Leahy, vice president of logistics for Mattel, said at the TPM container shipping conference last month, the toymaker plans to stay in South China rather than seek lower costs elsewhere. “We have made a decision that we will counter increasing costs with increasing productivity,” he said.

For many manufacturers, the China opportunity is one of serving the growing domestic market as well as producing goods for export. But that still leaves the unanswered question: Where will the growth come from?

Peter Tirschwell is senior vice president of strategy at UBM Global Trade. Contact him at ptirschwell@joc.com, and follow him on Twitter at twitter.com/PeterTirschwell.
 

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