Anyone who sells anything in North America typically gets some or all of it made in China.
This is true of low-value items such as key fobs and doorknobs, mid-range items like calculators and computers, and high-value items like car parts and MRI machines. It’s a result of a trend that was famously spearheaded by big box retailers in the 1990s based on econometric models of that era.
Back in the 1990s, and until recently, a fundamental variable of that model was cheap shipping between China to the US. A 40-footer container could reach San Francisco and Los Angeles on the West Coast of the US in about 15 days and Miami, Philadelphia, or New York on the East Coast of the US in about 25 days. The cost to get it from port to port was low and had risen steadily, in line with inflation and demand, to just about US$5,000.
Figure 1: China/East Asia to North America East Coast (Courtesy: Freightos Biotic Index)
August 2021 however brought a rude shock to importers.
Reuters reported that shipping rates from China to the US breached the US$20,000 mark for a 40-foot container to scale fresh highs. More specifically, the rate ex China to the East Coast reached US$20,804 which was a 500% hike compared to the rate a year ago. Shipping to the West Coast is just a few hundred dollars cheaper and to Europe is about US$14,000 per 40-footer.
Going by rates provided by Freightos Biotic Index, rates for both routes have crossed US$20,000 in September 2021.
Given the significance of the rates, China’s Ministry of Transportation and Communication directed shipping carriers in Shanghai to build capacity in a bid to bring an equilibrium in the market and to protect Chinese exporters.
However, building capacity takes time and it seems like this period of adversity in the world of logistics could be the straw that broke the (offshoring) camel’s back.
The rise in shipping costs was initially attributed to the fact that vessels were being dedicated to support the transport of supplies to battle Covid-19 in the US and around the world. Next, the rise was on account of the backlog created because of the emergency-related prioritizations. A few months later, there was another bump in the rates as a result of the Suez Canal blockage. More recently in July, typhoons off China's busy southern coast have contributed to the hike in rates.
According to maritime consultants who spoke to Reuters, “global container shipping has been turned into a highly disrupted, under-supplied seller’s market in which shipping companies can charge four to ten times the normal price to move cargoes.”
While experts agree they haven’t seen anything like this in more than 30 years – they believe that things might not change for the better in the near-term, especially with no real increase in shipping capacity (supply) till 2023.
According to a market update issued by logistics leader DHL earlier this month, container trade is expected to only be able to grow by 3.9% between 2023 and 2025. Of course, China’s directive to its carriers will contribute to accelerated growth - but the extent of its impact is yet to be determined.
Figure 2: Ocean Freight Market Update (Courtesy: DHL Global Forwarding)
With North America’s biggest sale days (Black Friday and Cyber Monday) on the horizon, and Single’s Day sale coming up in Asia, China will be hard pressed and spoilt for options when it comes to lucrative shipping deals – but at the cost of export opportunities.
Back in April 2021, Bloomberg forecasted that the increased shipping costs are here to stay. Six months later in September, companies are re-thinking their procurement and production strategy – nearshoring now looks like a credible option.
Truthfully, North America has plenty of options that can provide competitive rates and help get the job done. In fact, if logistics costs are factored in, producing in this part of the world is looking more and more attractive every day.
Founded in 1994, Advantage Engineering is based in Canada and works with automakers, aerospace companies, medical device producers, and consumer goods leaders doing business in the country and across the border in the US. Clients of the company have traditionally adopted a dual strategy, offshoring and nearshoring for different parts of their product and for different needs.
While offshoring has been for cost competitiveness, nearshoring has provided engineering excellence, better control, and often, a chance to continuously improve and innovate. With shipping costs rising, it looks like moving everything to this continent will not only be a good idea but could also reap significant dividends in the long run.
For companies worried about managing the transition from offshoring to nearshoring, an experienced partner like Advantage Engineering can provide a smooth experience – offering design and engineering support, project management, and competitive rates.
In the next decade, it might not be typical for anyone who sells anything in North America to get it made in China. It’s what companies that care about their stakeholders are gearing towards. It’s not only the smart play from a profitability perspective but also an environmental perspective. After all, reducing our carbon footprint is on everyone company’s agenda.
