Fueled by the United States' insatiable appetite for cheap goods, China's manufacturing industry has shifted into overdrive, churning out everything from bathrobes to high-tech chips. But what happens if that engine overheats?
China has Christopher Prey worried. It's not fears of deadly viruses that keep him awake at night; it's more about the amount of cargo his customers are bringing in from China. Incredibly low production costs have made China the source of choice these days, says Prey, who is vice president of business development at P&O Nedlloyd Logistics in East Rutherford, N.J. "With some customers, 80 to 90 percent of their cargo is [coming from] there," he says. The problem? "It's too much of a good thing. It's dangerous to put all your eggs in one basket."
The numbers bear him out. Chances are, if you're importing goods into the United States from abroad, most of it comes from China. China has experienced phenomenal growth in the last 15 years—foreign trade has risen 2,800 percent since 1978. And the United States has become its largest customer, accounting for 21.5 percent of all Chinese exports, or—looked at from the U.S. point of view—$152.4 billion worth of imports in 2003 (U.S. Census Bureau). Wal-Mart alone sourced $15 billion of its products there last year, according to Paul Clifford at Mercer Management Consulting in Beijing. And the trade is anything but balanced: For every four ships that steam into U.S. ports laden with Chinese goods, one goes back full.
Mostly, of course, the reason is that the price is right. Low labor costs, cheap raw materials and negligible overheads mean factories are churning out everything from hiking boots to automobiles at rock-bottom prices. Even a hidden layer of middlemen—sometimes 15 men thick, and each adding up to 30 percent—hasn't managed to push costs out of the competitive range. Last year brought the first reports that Mexican maquiladoras were closing because their U.S. business was being siphoned off by Chinese competitors.
Nation at risk
But where some see opportunities, Prey sees risks. And he's not alone. Stephen Chipping, Exel's director of strategic development for technology and global freight management for the EMEA (Europe, Middle East and Africa) region, based in Amsterdam, shares Prey's concerns. "Obviously China is the place where there's the most activity in terms of manufacturing. But with SARS and bird flu," he says, "people do worry that they're becoming overly dependent on a single source of supply."
About a year ago, Prey began raising his concerns with customers but says they tended to dismiss his arguments. "Maybe that's because I'm mostly talking to logistics people rather than the people who source. They see the delays and the congestion, but they're not concerned about what would happen to the overall supply chain if China had a problem."
Certainly, there are day-to-day difficulties with getting goods out of China—bad roads, unreliable business partners, the middleman problem, and so on. But Prey and others feel shippers need to be thinking about the potential for drastic change in that region—in particular, about the risks associated with currency, politics and natural disasters that could threaten their business.
Take the currency, which is currently government restricted and cannot be traded on the international open market (except for goods and services). The Economist magazine reported that UBS, a Swiss bank, estimates it's undervalued by more than 20 percent, meaning goods are effectively cheaper than they would be in a free market. Because of the enormous trade deficit with many countries, especially the United States (nearly $125 billion for 2003), the Chinese government is under enormous pressure to float the yuan on the international currency market. If it does, that could mean an overnight 20-percent increase in the prices of goods. Good for balance of trade, but not for shippers committed to sourcing their wares there.
Politics, too, present risks. We've become used to a China that's a strange hybrid—Communist, and yet apparently eager to embrace free-market capitalism. It seems relatively stable. But human rights violations in the country have been enough to draw U.N. criticism, and the Internet reveals a thriving pro-democracy movement. Considering the tight control that the Communist government retains on information coming out of China, it's quite likely a tumultuous political situation could have spiraled out of control before the outside world knew about it.
"Stability comes from control, and people feel the Chinese government is in control," says Rick Moradian, president of international logistics at Oakland, Calif.-based APL Logistics, and until late last year president of APL Logistics' Asia/Middle East region. "Also, the 10-percent GDP growth is based on a stable, controlled environment and the desire to generate greater foreign direct investment. China has a lot invested in presenting that face to the importer community."
Then there's Mother Nature. SARS and bird flu are only the latest big health threats in the country (AIDS is growing rapidly) that could potentially shut down factories. The SARS epidemic is a good example of how information about a crisis was suppressed, even inside China, helping it to spread unchecked for weeks.
Buyer beware
And these are not the only threats. Adrian Gonzalez, analyst at ARC Advisory Group in Dedham, Mass., hosted a number of think tanks with U.S. importers from China in May 2003 and says importers raised a variety of other concerns —including counterfeiting. It's not unheard of to find that the Chinese factory producing brand name goods for you legitimately is turning around and running off an extra shift of the same stuff to sell on the black market—at a lower price, naturally.
Another major problem mentioned by importers at the ARC sessions was finding and keeping good managers. Some 43 percent of Chinese senior managers leave their companies each year (compared to 5 percent in Singapore and 11 percent in Australia), according to Hewitt Associates, an international human resources outsourcing and consulting firm. Hewitt adds that 66 percent of senior managers hired from outside China (who often play a crucial role in East-West business) quit within 18 months. Possibly related to that turnover was the issue of poor quality control. Many importers found they needed to take a hands-on approach to training and hiring quality control personnel in order to ensure that the goods produced consistently met their standards.
Other problems loom down the road. World Trade Organization quotas on exports of textiles and clothing will end in most countries in 2005, and the effects are likely to be felt during this year. A report by the U.N. Conference on Trade and Development (UNCTAD) in July 2003 projected that the Chinese apparel export business, which was worth $48 billion in 1999 under the quota restrictions, would spin skyward once the restrictions were lifted, reaching $78 billion in 2005 and $101 billion in 2010. There's no guarantee that Chinese logistics capacity—roads, ports, local transportation providers—is going to grow in tandem with production. Even the trend toward shifting manufacturing to regions other than the wildly popular Pearl River region around Yentien is presenting problems. "There's such a scramble for space and containers," says P&O's Prey. "Even in Shanghai and central China, it's becoming difficult for people to get their cargo out in time."
Prey predicts a general ocean shipping rate increase of $200 to $400 per container when contracts expire in May. He says that ocean capacity eastbound across the Pacific is already so tight, shippers will no longer be able to undercommit to the amount of cargo they'll give to shipping lines, relying on extra space being available at the time of shipment. Space crunches with extra cargo will mean shippers pay $400 to $500 per container more for spot rates this summer, Prey predicts. There simply aren't enough ships around to serve the current trade.
Proceed with caution
Scared? You should be. But the solution is not to pull out of China altogether. Analysts and the third-party logistics companies that service U.S. and European importers advise a risk-management strategy that—like most risk strategies —emphasizes diversification.
"Most companies have to be in China, but that's not the only place they're looking at," says Gonzalez. "There's a lot of investment and activity taking place in Central and Eastern Europe." Turkey, too, is experiencing export growth, as it is relatively stable politically, wages are low, and goods can be trucked to Europe from there. Other possibilities are African countries such as Kenya, Mozambique and South Africa. Brazil is experiencing modest growth, and Argentina is finally climbing out of the economic pit it's been in for years, making both of them more stable and therefore more viable as sourcing partners.
Other countries in the Asia region are beginning to look promising, too. Gonzalez says he's seen growth in Vietnam, India and Thailand, with people moving away from the traditional Asian stars such as Taiwan and Singapore—which are becoming more middle class and therefore more expensive. Furthermore, a number of Asian countries are building infrastructure and sophistication on the back of the China boom. A lot of sourcing materials for manufacturing in China come from elsewhere in Asia.
Although any major U.S. importer would expect to have a presence in China, importers are becoming increasingly aware of the drawbacks of simply focusing on item-level cost and are starting to think about ways to spread the risk. "Looked at from the end-users' standpoint, the question of where they're going to source product becomes a little more complicated, because they're starting to take a more holistic view of the sourcing decision and considering the impact of China vs. Vietnam, say, in terms of cycle time, lead time, Customs restrictions and so on," Gonzalez says.
Smart companies—Gonzalez cites Selectron, Flextronics and Nike as examples—maintain a presence in multiple countries.
Certainly, the third-party logistics service providers (3PLs) are eager to serve a widening market. "A big part of our role is responding to new markets as they open up and developing them when our customers need to be there," says Chipping of Exel.
But it can be tricky to move your business into a new, unknown country, Gonzalez warns. "Supposing you move from Singapore to Vietnam because now it's cheaper from a wage standpoint. You have to take into account other cost factors like quality, training the local people and hiring managers," says Gonzalez. A lot of mistakes that companies make arise from their habit of hopping from one country to another to take advantage of the lowest labor rates without taking these other cost factors into consideration. "I think that some of the more informed companies are realizing that there might be increasing costs due to labor rates (in an existing source country), but on the other hand there are benefits in terms of trade agreements, infrastructure, and having seasoned managers in place."
Moradian says 3PLs can help retailers interested in developing new sources look beyond the obvious pricing and quality issues.He says he often fields queries from customers or potential customers looking to go into a new region. "Customers are not just looking for a logistics network but also want to know how we would manage the product flow down to individual locations, down to the port or city, as well as the mode of transportation. They're also interested in local government behavior, Customs requirements and investments in technology as well as the bureaucratic levels you have to deal with," Moradian says. "In some countries, we work closely with the government, department of transport and other authorities. The primary factor for our customer is the quality of the product and the sourcing capabilities, but very much in parallel with that are the supply chain performance qualifications. We like keeping the flow as free as possible for our client base."
Most of the apparel sold in North America is manufactured in Asia, meaning the finished goods travel long distances to reach end markets, with all the associated greenhouse gas emissions. On top of that, apparel manufacturing itself requires a significant amount of energy, water, and raw materials like cotton. Overall, the production of apparel is responsible for about 2% of the world’s total greenhouse gas emissions, according to a report titled
Taking Stock of Progress Against the Roadmap to Net Zeroby the Apparel Impact Institute. Founded in 2017, the Apparel Impact Institute is an organization dedicated to identifying, funding, and then scaling solutions aimed at reducing the carbon emissions and other environmental impacts of the apparel and textile industries.
The author of this annual study is researcher and consultant Michael Sadowski. He wrote the first report in 2021 as well as the latest edition, which was released earlier this year. Sadowski, who is also executive director of the environmental nonprofit
The Circulate Initiative, recently joined DC Velocity Group Editorial Director David Maloney on an episode of the “Logistics Matters” podcast to discuss the key findings of the research, what companies are doing to reduce emissions, and the progress they’ve made since the first report was issued.
A: While companies in the apparel industry can set their own sustainability targets, we realized there was a need to give them a blueprint for actually reducing emissions. And so, we produced the first report back in 2021, where we laid out the emissions from the sector, based on the best estimates [we could make using] data from various sources. It gives companies and the sector a blueprint for what we collectively need to do to drive toward the ambitious reduction [target] of staying within a 1.5 degrees Celsius pathway. That was the first report, and then we committed to refresh the analysis on an annual basis. The second report was published last year, and the third report came out in May of this year.
Q: What were some of the key findings of your research?
A: We found that about half of the emissions in the sector come from Tier Two, which is essentially textile production. That includes the knitting, weaving, dyeing, and finishing of fabric, which together account for over half of the total emissions. That was a really important finding, and it allows us to focus our attention on the interventions that can drive those emissions down.
Raw material production accounts for another quarter of emissions. That includes cotton farming, extracting gas and oil from the ground to make synthetics, and things like that. So we now have a really keen understanding of the source of our industry’s emissions.
Q: Your report mentions that the apparel industry is responsible for about 2% of global emissions. Is that an accurate statistic?
A: That’s our best estimate of the total emissions [generated by] the apparel sector. Some other reports on the industry have apparel at up to 8% of global emissions. And there is a commonly misquoted number in the media that it’s 10%. From my perspective, I think the best estimate is somewhere under 2%.
We know that globally, humankind needs to reduce emissions by roughly half by 2030 and reach net zero by 2050 to hit international goals. [Reaching that target will require the involvement of] every facet of the global economy and every aspect of the apparel sector—transportation, material production, manufacturing, cotton farming. Through our work and that of others, I think the apparel sector understands what has to happen. We have highlighted examples of how companies are taking action to reduce emissions in the roadmap reports.
Q: What are some of those actions the industry can take to reduce emissions?
A: I think one of the positive developments since we wrote the first report is that we’re seeing companies really focus on the most impactful areas. We see companies diving deep on thermal energy, for example. With respect to Tier Two, we [focus] a lot of attention on things like ocean freight versus air. There’s a rule of thumb I’ve heard that indicates air freight is about 10 times the cost [of ocean] and also produces 10 times more greenhouse gas emissions.
There is money available to invest in sustainability efforts. It’s really exciting to see the funding that’s coming through for AI [artificial intelligence] and to see that individual companies, such as H&M and Lululemon, are investing in real solutions in their supply chains. I think a lot of concrete actions are being taken.
And yet we know that reducing emissions by half on an absolute basis by 2030 is a monumental undertaking. So I don’t want to be overly optimistic, because I think we have a lot of work to do. But I do think we’ve got some amazing progress happening.
Q: You mentioned several companies that are starting to address their emissions. Is that a result of their being more aware of the emissions they generate? Have you seen progress made since the first report came out in 2021?
A: Yes. When we published the first roadmap back in 2021, our statistics showed that only about 12 companies had met the criteria [for setting] science-based targets. In 2024, the number of apparel, textile, and footwear companies that have set targets or have commitments to set targets is close to 500. It’s an enormous increase. I think they see the urgency more than other sectors do.
We have companies that have been working at sustainability for quite a long time. I think the apparel sector has developed a keen understanding of the impacts of climate change. You can see the impacts of flooding, drought, heat, and other things happening in places like Bangladesh and Pakistan and India. If you’re a brand or a manufacturer and you have operations and supply chains in these places, I think you understand what the future will look like if we don’t significantly reduce emissions.
Q: There are different categories of emission levels, depending on the role within the supply chain. Scope 1 are “direct” emissions under the reporting company’s control. For apparel, this might be the production of raw materials or the manufacturing of the finished product. Scope 2 covers “indirect” emissions from purchased energy, such as electricity used in these processes. Scope 3 emissions are harder to track, as they include emissions from supply chain partners both upstream and downstream.
Now companies are finding there are legislative efforts around the world that could soon require them to track and report on all these emissions, including emissions produced by their partners’ supply chains. Does this mean that companies now need to be more aware of not only what greenhouse gas emissions they produce, but also what their partners produce?
A: That’s right. Just to put this into context, if you’re a brand like an Adidas or a Gap, you still have to consider the Scope 3 emissions. In particular, there are the so-called “purchased goods and services,” which refers to all of the embedded emissions in your products, from farming cotton to knitting yarn to making fabric. Those “purchased goods and services” generally account for well above 80% of the total emissions associated with a product. It’s by far the most significant portion of your emissions.
Leading companies have begun measuring and taking action on Scope 3 emissions because of regulatory developments in Europe and, to some extent now, in California. I do think this is just a further tailwind for the work that the industry is doing.
I also think it will definitely ratchet up the quality requirements of Scope 3 data, which is not yet where we’d all like it to be. Companies are working to improve that data, but I think the regulatory push will make the quality side increasingly important.
Q: Overall, do you think the work being done by the Apparel Impact Institute will help reduce greenhouse gas emissions within the industry?
A: When we started this back in 2020, we were at a place where companies were setting targets and knew their intended destination, but what they needed was a blueprint for how to get there. And so, the roadmap [provided] this blueprint and identified six key things that the sector needed to do—from using more sustainable materials to deploying renewable electricity in the supply chain.
Decarbonizing any sector, whether it’s transportation, chemicals, or automotive, requires investment. The Apparel Impact Institute is bringing collective investment, which is so critical. I’m really optimistic about what they’re doing. They have taken a data-driven, evidence-based approach, so they know where the emissions are and they know what the needed interventions are. And they’ve got the industry behind them in doing that.
Chief supply chain officers (CSCOs) must proactively embrace a geopolitically elastic supply chain strategy to support their organizations’ growth objectives, according to a report from analyst group Gartner Inc.
An elastic supply chain capability, which can expand or contract supply in response to geopolitical risks, provides supply chain organizations with greater flexibility and efficacy than operating from a single geopolitical bloc, the report said.
"The natural response to recent geopolitical tensions has been to operate within ‘trust boundaries,’ which are geographical areas deemed comfortable for business operations,” Pierfrancesco Manenti, VP analyst in Gartner’s Supply Chain practice, said in a release.
“However, there is a risk that these strategies are taken too far, as maintaining access to global markets and their growth opportunities cannot be fulfilled by operating within just one geopolitical bloc. Instead, CSCOs should embrace a more flexible approach that reflects the fluid nature of geopolitical risks and positions the supply chain for new opportunities to support growth,” Manenti said.
Accordingly, Gartner recommends that CSCOs consider a strategy that is flexible enough to pursue growth amid current and future geopolitical challenges, rather than attempting to permanently shield their supply chains from these risks.
To reach that goal, Gartner outlined three key categories of action that define an elastic supply chain capability: understand trust boundaries and define operational limits; assess the elastic supply chain opportunity; and use targeted, market-specific scenario planning.
The global air cargo market’s hot summer of double-digit demand growth continued in August with average spot rates showing their largest year-on-year jump with a 24% increase, according to the latest weekly analysis by Xeneta.
Xeneta cited two reasons to explain the increase. First, Global average air cargo spot rates reached $2.68 per kg in August due to continuing supply and demand imbalance. That came as August's global cargo supply grew at its slowest ratio in 2024 to-date at 2% year-on-year, while global cargo demand continued its double-digit growth, rising +11%.
The second reason for higher rates was an ocean-to-air shift in freight volumes due to Red Sea disruptions and e-commerce demand.
Those factors could soon be amplified as e-commerce shows continued strong growth approaching the hotly anticipated winter peak season. E-commerce and low-value goods exports from China in the first seven months of 2024 increased 30% year-on-year, including shipments to Europe and the US rising 38% and 30% growth respectively, Xeneta said.
“Typically, air cargo market performance in August tends to follow the July trend. But another month of double-digit demand growth and the strongest rate growths of the year means there was definitely no summer slack season in 2024,” Niall van de Wouw, Xeneta’s chief airfreight officer, said in a release.
“Rates we saw bottoming out in late July started picking up again in mid-August. This is too short a period to call a season. This has been a busy summer, and now we’re at the threshold of Q4, it will be interesting to see what will happen and if all the anticipation of a red-hot peak season materializes,” van de Wouw said.
The report cites data showing that there are approximately 1.7 million workers missing from the post-pandemic workforce and that 38% of small firms are unable to fill open positions. At the same time, the “skills gap” in the workforce is accelerating as automation and AI create significant shifts in how work is performed.
That information comes from the “2024 Labor Day Report” released by Littler’s Workplace Policy Institute (WPI), the firm’s government relations and public policy arm.
“We continue to see a labor shortage and an urgent need to upskill the current workforce to adapt to the new world of work,” said Michael Lotito, Littler shareholder and co-chair of WPI. “As corporate executives and business leaders look to the future, they are focused on realizing the many benefits of AI to streamline operations and guide strategic decision-making, while cultivating a talent pipeline that can support this growth.”
But while the need is clear, solutions may be complicated by public policy changes such as the upcoming U.S. general election and the proliferation of employment-related legislation at the state and local levels amid Congressional gridlock.
“We are heading into a contentious election that has already proven to be unpredictable and is poised to create even more uncertainty for employers, no matter the outcome,” Shannon Meade, WPI’s executive director, said in a release. “At the same time, the growing patchwork of state and local requirements across the U.S. is exacerbating compliance challenges for companies. That, coupled with looming changes following several Supreme Court decisions that have the potential to upend rulemaking, gives C-suite executives much to contend with in planning their workforce-related strategies.”
Stax Engineering, the venture-backed startup that provides smokestack emissions reduction services for maritime ships, will service all vessels from Toyota Motor North America Inc. visiting the Toyota Berth at the Port of Long Beach, according to a new five-year deal announced today.
Beginning in 2025 to coincide with new California Air Resources Board (CARB) standards, STAX will become the first and only emissions control provider to service roll-on/roll-off (ro-ros) vessels in the state of California, the company said.
Stax has rapidly grown since its launch in the first quarter of this year, supported in part by a $40 million funding round from investors, announced in July. It now holds exclusive service agreements at California ports including Los Angeles, Long Beach, Hueneme, Benicia, Richmond, and Oakland. The firm has also partnered with individual companies like NYK Line, Hyundai GLOVIS, Equilon Enterprises LLC d/b/a Shell Oil Products US (Shell), and now Toyota.
Stax says it offers an alternative to shore power with land- and barge-based, mobile emissions capture and control technology for shipping terminal and fleet operators without the need for retrofits.
In the case of this latest deal, the Toyota Long Beach Vehicle Distribution Center imports about 200,000 vehicles each year on ro-ro vessels. Stax will keep those ships green with its flexible exhaust capture system, which attaches to all vessel classes without modification to remove 99% of emitted particulate matter (PM) and 95% of emitted oxides of nitrogen (NOx). Over the lifetime of this new agreement with Toyota, Stax estimated the service will account for approximately 3,700 hours and more than 47 tons of emissions controlled.
“We set out to provide an emissions capture and control solution that was reliable, easily accessible, and cost-effective. As we begin to service Toyota, we’re confident that we can meet the needs of the full breadth of the maritime industry, furthering our impact on the local air quality, public health, and environment,” Mike Walker, CEO of Stax, said in a release. “Continuing to establish strong partnerships will help build momentum for and trust in our technology as we expand beyond the state of California.”