Thanks Canuk. Good examples. Much appreciated. Cheers

Imports now account for nearly 18 percent of the U.S. aggregate demand, up from 10 percent in the late 1980s



source: Inflation has firms rethinking Made in China

Of course the classic corporate answer would be to reduce the manufaturing cost by moving to a lower wage jurisdiction (vietnam - perhaps Bangladesh will also boom...). But since direct labour accounts for less than 20% (http://maaw.info/ArticleSummaries/ArtSumBoerJeter93.htm) of the actual cost of a product there are factors involved.

For example running shoes a high cost high profit product...


The flood of low cost goods here in N. America has been largely due to the low cost of other factors in the overall price such as energy, infrastructure (Free ports and highways), retailing makeup (aka Wal-Mart), lack of middlemen, etc. The greatest increase to the price of a product won't be throught the increase in labour costs (except in labour intensive productzs) but will be driven by the changes to the other factors driven by the increase in energy costs. A reduction in the overhead costs such as maketing can help hold down product costs and rein in inflation.

I did like the note about the interest in returning production to North America - some of these companies must have taken their heads out of the sand for a minute and looked around. It will also benefit Mexico which had anticipated greater manufacturing investment after NAFTA but lost out due to the lower wages in China, strong pro-corporate governement and the artifically low cost of Transportation we've had until the last couple years.

*delicate cough*
That sounds like it was written by a bleeding heart liberal with no sense of economic reality.
It's very popular these days to blame someone else (preferably someone more financially success than us) for the world's problems.
However at the end of the day, I truly believe the world is the way it is NOT because of big business manipulating laws but because you, me, and everyone else made choices.
//
If every American did what the author above mentioned then shoes would be made in America and not China. I can imagine a PO future where shoes are produced maybe 1,000 miles away from point of sell instead of say 10,000 miles however I just don't see shoes being made in America. Mexico perhaps?

I agree - success of companies that outsource manufacturing (Nike...) is due to good marketing and not manipulation of laws. We make choices every day that create the system around us. A company reducing their costs is how the system should work.

The quote is not the best but I was merely emphasizing how little labor cost is actually reflected in a product and consequently how little the cost will rise when the manufacturing is done in jurisdictions closer to the eventual market. Having worked for 20 years in both manufacturing management and a custom manufacturing automation business I am aware of how small the labor cost of production can be relative to retail prices. For instance a ton of hot-rolled steel contains only half an hour of labor yet retails for significantly more than 45 dollars (approximate cost of direct labor and overhead for half an hour of steelworker labor).

Low cost consumer goods in the last decade have been influenced by efficiency in design, manufacturing methods, reduced materials and streamlined supply chains. Retail, marketing, advertising and distribution are far more significant portions of the cost of most products (thus W-Mart is the worlds largest most profitable corp.) Unfortunately these costs are beyond the control of most manufacturers so they work on the areas they can control which is labor.

The great disparity in wages more than offset the increase in shipping costs. As the shipping costs become greater than the difference in labor (as they will for many larger products but likely not running shoes) the manufacturing will return to Mexico, Canada and the US - the result to the consumer will not be the sky is falling but likely a marginal increase in prices - the increasing costs of energy will have a far more significant impact on prices than just the shipping as the cost of all the inputs increase and labor will become an even smaller portion of the cost.

That seems so true. So many business decision are make on narrow margins of difference. A typical pick-up truck had roughly 21 hours of direct labor back in the 80's when I was in that business. That is strictly for vehicle assembly, not components. Maybe less labor now with increased outsourcing of subassemblies. So, let's say that truck is shifted for production from Canada to Mexico, which in fact now seems to be the plan by GM. If the wages, overhead and benefit load difference is $35 per hour that would amount to under $800 saved on that item, which is priced in the $17,000 to $35,000 range. Now, let's ponder what it costs to ship that finished vehicle to Canada or New England from Mexico. And, what is costs extra to ship major components, such as engines, transmissions, axles and frames from the midwestern U.S. to Mexico to be incorporated into that assembled vehicle.

Suppose you wanted to buy an airplane ticket and did a search. Assuming everything is equal, one airline advertised a price of $500 while another lists for $510. What's the difference? just 2% However that 2% can make or break a deal. Much like consumers (you and I), manufacturers, distributors, and retailers are equally stingy with their money. I have this theory that 80% of the world's final decisions were all made because of only a 2% difference.

China does not really "produce" as much as we may think.
For example Barbie Dolls are not really "made" in China.
The wig was made in Japan, the plastic components came from Taiwan, the pigments came from America, and all the components were sent to China for final assembly. How much of the Barbie Doll did China really make, not much! Imagine all the stuff that was made in China but wasn't really "made" in China.

There's another issue: economies of scale.
Imagine an entire factory where all the machinery is optimized to do only one thing, produce nylon hair for a Barbie Doll. That would explain why production costs are so low compared to the final retail price. But here's the rub, if the supply chain was shortened the possibility of taking advantage of economies of scale would severely lessen, production costs would skyrocket.

We had a BBQ last night with some more shipping blokes. These guys are younger and do more of the grunt work than the older ship owners, etc. that I usually see on Thursday nights. So again I had a chance to go into more detail about these issues with them. Actually, it was quite a late night, and I hope you can appreciate that many beers went into the making of these observations! ; - ))

First of all, business is booming. They cannot make ships fast enough. Shipyards are springing up all over China. But quality it deteriorating quickly. They say some ships that are only 2-3 years old already look like they have been in service 7-8 years. I assume that means more maintenance and upkeep later. So false economies.

Plus wages are sky rocketing throughout the shipping business. This is important because for the most part the whole shipping industry is run on very low margins. It is a hyper-competitive industry subject to global competition, and very few ways to hide from that competition. So skilled workers are being routinely poached by rivals, and this is driving up labor costs. So it is not just higher fuel prices.

Also, they told me that fuel usage is exponential relative to speed. So by running the ship just 5% slower they save up to 50% in fuel costs. That is significant for them. But that means longer shipping times. So more ships. Also, container traffic is moving to larger ships that call on fewer ports. A hub and spoke system. That means smaller ships, barges and rail to connect those large ports to their final destination. More ships, more fuel consumption.

Apparently the empty container issue has always been one, but there is nothing they can do but suck it up and return them empty. However, it is kind of like when the taxi takes you to the airport. When he quotes you the fare he knows he may have to return to the city empty, so his tariff reflects that. He needs to charge more on his outbound journey to subsidize his coming back without a paying passenger. But if he is lucky he can pick-up one and then his return journey is just pure profit. The same in the shipping business. As they know they will have to ship empty containers back to China they can offer really super low rates to attract cargos. And then that is their gravy.

Slower speeds require longer shipping times, and therefore higher labor costs with more ships that are also being exacerbated by sourcing from farther away. Say the cost of coal gets too high in Australia, so China decides to source from Brazil instead. It takes a lot longer to ship from Brazil then from Australia. This means more ships and more crews. It goes back to Cube's observation about a two-percent price difference influencing purchasing decisions.

In such a competitive global environment government policies matter a lot. Especially taxes. The take-over bid of Hapag Lloyd, Germany's largest shipping company, by Singapore's NOL, who's largest shareholder is Temasek Holdings, part of the government of Singapore, has been made possible because NOL's taxes are lower than Hapag Lloyd's in Germany. Actually, not corporate taxes that are quite similar, but the overall tax burden including social contributions, etc. that companies must pay.

According the Forbe's Misery Index the cumulative overall tax burden is 106.30% in Germany and just 76% in Singapore. That is a 30% difference. In just 2.5 years NOL can increase its after-tax profits by double those of HL. Those tax savings go to purchase better ships and/or to acquire rivals. A ship sailing out of Malta pays zero corporate tax and 73-percent taxes overall. While a ship out of UAE pays just 18-percent in total. A huge competitive advantage in a global industry that knows no borders.

Plus as NOL is owned by Tamesek Holdings they have access to cheaper financing than HL. European Union laws ban state financial aid to national champions. As we know the state-sponsored capitalism model in Asia has no such qualms, so soft loans at favorable conditions are the norm.

It is quite ironical how we (collectively) hog-tie ourselves and allow our competitors to run circles around us, and then complain when we look around and realize all our jobs are gone. It is actually pretty sad. But, hey, economics is not a science, so I guess we can just wish for the desired outcome, and it will magically occur, right? ; - ))

You're right even if the ratio might not be a true case of paretto's law. People will drive miles to save $1-2.00 off a purchase and end up saving less than cost of driving - it is ingrained in our culture and short term success makes people feel good - similar to accomplishing other tasks - whether on a business or personal level. I read a study a few years back that stated certain areas in the brain actually respond to the activity of shopping - releasing hormones and dopamine, etc. creating a pleasurable feeling - shopping as a drug.



Years of working in the management of a machine build company and with hundreds of manufacturing clients I have watched economies of scale shrunk dramatically. Much due to improvements in technology such as computers and factory automation. Break even points on many items are much lower than they were 20 years ago. Of course machines are more expensive than $0.80 per day manual labour but as energy costs rise they will be cheaper than the shipping.

The current distributed supply chain replaced vertically integrated supply chains because shipping costs for most items were so low it was essentially free. This allowed the distribution of activities that used to be performed near by - apples grown in the UK get shipped to South Africa to be waxed and shipped bak to the UK for sale. This type of activity is driven not by economies of scale but low shipping costs and will reverse.

A great tale Mr. Bill. Even a system which many of the villagers would think was simple is far more convoluted then they could understand.

And I fear for your health Mr. Bill. With volume of knowledged you have gained over the years I'm sure your head is.on the verge of exploding. I know that with just the tiny bit I've gained from your post I'm beginning to see a little discharge from my ears.

Another good post I enjoy hearing from somone with direct contact in shipping. Years ago when I went to NY City I noticed miles and miles of containers on the shore in New Jersey. From what I read 95%+ were empty and just stored there - raw materials such as wood and coal don't use containers. I think the recent spikes in steel scrap pricing has solved some of the problem but haven't been back to see.



This is also true in the airline industry as the flying speed and height can influence theiur costs and they have also been adjusting. The change away from a JIT environment will take care of some of this as inventory build up can take the pressure off the time though with a cost but at todays low interest rates what is the carrying cost of an extra 7 days of inventory?



Taxes and government policies can have a large effect - when the Canadian dollar was lower (at .85 to the US previous to PO) Ontario had a $300.00 cost advantage per car assembled due to the government run health care. This was in spite of the higher tax rates in Canada - of course with our higher wages the rapid rise of our dollar relative to the US dollar has erased this advantage until our wages can be reduced to a more competative level again or our dollar falls (not likely given the US financial situation).

I am waiting with baited breath (minted) until after the Beijing Olympics. There is a school of thought that says that global imbalances are out of control, and one of the causes is The China Effect.

After the Olympics IF they were to slam the brakes on growth to bring inflation under control then the whole commodities bubble would implode. That along with the broader market decline would deflate commodity and energy related stocks down completing the rout.

Then one could invest with confidence in the long-term Asian growth story. But at these heights it makes a mature man faint. Lehman Bros is teetering on the brink. Freddie, Fannie and Sally are only the latest examples of the new market maxim, Privatize Profits, Socialize Risk. This is a bubble. That may be heresay, but lets talk in Q4.

One is oft rue to forget that the flipside of demand is the willingness and ability to pay. The easiest example I can think of is do you think there is real demand for clean water and adequate sanitation in India or China? If it were so easy as cranking up the printing presses, or banks lending non-existant deposits, then surely we could solve their water and sanitation problems by just tacking a few zeros onto central bank balance sheets. But sorry to say, that is not the way it works.

Ignorance is still our biggest enemy. Even in this age of information.

MrBill - I think the clean water and sanitation problem is hitting at the same time as peak oil. Many areas have unsustainable approaches to this and problems with aquifers and watersheds will only worsen as energy costs rise. Peak water...

Libya for example is using water that has been stored for 40,000 years under the desert for a one time shot at clean drinking water using their fossil fuel to bring it up - both are in short supply and there is no plan on what to do when it runs out - leave that for the people in 50 or so years to figure out. Here is a link to a short version of the plan.
http://www.drinking-water.org/html/en/S ... Libya.html

It is similar to the world civilizations approach to oil - until the last drop...

I agree to use you until the last drop do us part.

An interesting article referring to shortages in port capacity which ties into the discussion of capacity above by MrBill.

http://findarticles.com/p/articles/mi_q ... _n21299644



It also reinforces one of my thoughts that some manufacturing will return to NA to offset the costs and as mentioned the bottlenecks that are occurring. The problem with public funding of what should be private ventures such as ports due to the high costs are that the benefits are not being felt by all shareholders (in this case the public at large) if users alone paid for the facilities through adequate charges they would either use the service less or the capacity would have been increased to deal with the situation (if there was a benefit).

There was an article in The Economist last week about building large trans-shipping ports in North Africa on the Mediterranean. Those ports are already as large as ARA and plan to handle super large cargos from Asia - one-third of ship traffic passes through the Med via the Suez Canal and Bosporus Straits - to be off-loaded and then sent onwards in smaller vessels.

Along with natural gas exploration and export this is the first piece of good news I have heard coming out of that area of the world for ages. It makes economic sense. They have the space and lots of under-employed labor. This creates needed jobs. A clear case of build it and they will come. Transmodal shipping using water and rail is the best for long distance, bulk transport. As Cube points out though it is the distribution over the last 100-miles though that is horribly inefficient.

On a related note, I read that Prince Rupert, B.C., is increasing capacity again to take traffic away from Vancouver that is suffering from under-capacity. They do not have the room to expand operations.