"The savings that most companies realize by using China as a low-cost sourcing platform far exceed the recent energy cost impact, so offshore sourcing will not be affected in the near term due to energy prices unless a major geopolitical or economic event occurs. Based on Boston Logistics Group’s 2005 analysis of the Asian sourcing boom (which was conducted when oil was about $30 per barrel), freight from China represents 20 pecent of the landed cost, on average. Therefore, assuming fuel at 20 percent of transportation costs (one auto manufacturer estimated fuel costs at 15-25 percent of its freight bill), a 15 percent increase would only raise the cost of goods sourced from China by 0.8 percent. Compared to the 18 percent cost savings many companies get from outsourcing this loss is not significant enough to change behavior. Richard Goyette, Materials Manager at Speedline Technologies, says the total cost of sourcing from China would have to rise more than 25 percent before his company would even take a second look at its decision to source offshore."
OK, now oil costs $120 per barrel. So let's do the math!
0. At $30 per barrel (above), its stated that a 15% increase in fuel bill raises the cost by 0.8 percent (for that particular product).
1. At $120 per barrel, fuel now costs 4 times more, or 300% more.
2. 300 / 15 = 20x 15% increases in the fuel bill
3. As stated above, each 15% increase in the fuel bill means a 0.8% increase in the cost of goods sourced from China.
4. 20 x 0.8 = 16% increase in the cost of goods sourced from China, today as compared to when the study was conducted!
5. "Richard Goyette, Materials Manager at Speedline Technologies, says the total cost of sourcing from China would have to rise more than 25 percent before his company would even take a second look at its decision to source offshore."
The cost as of today, is already 16% more. It only needs to rise another 9% and Mr. Goyette will be giving a second look at his decision to source offshore :)
Wanna bet how long it will be before he is forced to relocalize production or is booted out as his company goes bankrupt? Here's a graph of the cost of oil as a reference:
Last edited by Isochroma on Wed May 14, 2008 6:09 pm; edited 1 time in total
Posted: Wed May 14, 2008 6:04 pm Post subject: Re: China Offshoring Analysis: Relocalize or Die
China will get perhaps one more generation of prosperity, then will begin sinking back into its former isolated poverty.
In contrast, North American economies will enjoy a revival as jobs flood back. Unions and individuals will gain strength and bargaining power, because employers will no longer be able to threaten them with offshoring. Wages will rise and the gap between rich and poor will decrease.
All the world's a stage, and the price of oil beats the drum of change into a new age.
Joined: Sep 25, 2004 Posts: 4015 Location: Boston, MA
Posted: Wed May 14, 2008 6:24 pm Post subject: Re: China Offshoring Analysis: Relocalize or Die
Shipping costs are not particularly important when we're talking about $20 versus $2 per hour for labor.
We are going to need MUCH higher oil prices before China becomes an expensive place to do business. _________________ "www.peakoil.com is the Myspace of the Apocalypse."
Joined: Dec 08, 2004 Posts: 1209 Location: Nez Perce Nation
Posted: Wed May 14, 2008 6:28 pm Post subject: Re: China Offshoring Analysis: Relocalize or Die
Tyler_JC wrote:
Shipping costs are not particularly important when we're talking about $20 versus $2 per hour for labor.
We are going to need MUCH higher oil prices before China becomes an expensive place to do business.
Higher oil prices and lower wages brought to you by a recession/depression and inflated dollars. It will all work out. _________________ "Modern Agriculture is the use of land to convert petroleum into food."
-- Albert Bartlett
"It will be a dark time, But for those who survive, I suspect it will be rather exciting."
-- James Lovelock
Posted: Wed May 14, 2008 6:33 pm Post subject: Re: China Offshoring Analysis: Relocalize or Die
Tyler_JC: I can assure you that we will, in very short order, be getting those higher oil prices, as the graph illustrates. One more generation, at most is all they'll get before its no longer economic to export 90% of what goods they export now.
Posted: Wed May 14, 2008 6:35 pm Post subject: Re: China Offshoring Analysis: Relocalize or Die
Isochroma wrote:
China will get perhaps one more generation of prosperity, then will begin sinking back into its former isolated poverty.
In contrast, North American economies will enjoy a revival as jobs flood back. Unions and individuals will gain strength and bargaining power, because employers will no longer be able to threaten them with offshoring. Wages will rise and the gap between rich and poor will decrease.
All the world's a stage, and the price of oil beats the drum of change into a new age.
Posted: Wed May 14, 2008 7:12 pm Post subject: Re: China Offshoring Analysis: Relocalize or Die
From the graph, what do you think oil will cost in 2050? At the rate it's going (hell, even at half the rate of increase), it won't be more than another 20 years before shipping costs from China completely wipe out any benefits from its workers' lower wage costs.
When local labor is cheaper, then jobs will migrate back to the locale. When jobs are local and foreign labor cannot compete, then local populations will set wages via negotiations/job action.
Employers will have no other choice than to deal on Labor's terms, because they won't have anywhere else to go (economically) for labor.
The one industry that won't be so much affected is IT (Information Technology) because its products don't require shipping.
Joined: Oct 18, 2004 Posts: 1416 Location: kiwibush
Posted: Wed May 14, 2008 8:17 pm Post subject: Re: China Offshoring Analysis: Relocalize or Die
Isochroma wrote:
From the graph, what do you think oil will cost in 2050? At the rate it's going (hell, even at half the rate of increase), it won't be more than another 20 years before shipping costs from China completely wipe out any benefits from its workers' lower wage costs.
When local labor is cheaper, then jobs will migrate back to the locale. When jobs are local and foreign labor cannot compete, then local populations will set wages via negotiations/job action.
Employers will have no other choice than to deal on Labor's terms, because they won't have anywhere else to go (economically) for labor.
The one industry that won't be so much affected is IT (Information Technology) because its products don't require shipping.
The Indians have cornered the offshored services market. The Chinese on the other hand went for the sexy stuff, stuff you can see like the widgets we buy.
I agree though. If the cost advantages of manufacturing are eclipsed by the cost of transportation, manufacturers will move back to the West. Why have your goods manufactured at no advantage half a world away when they can be made and assembled round the corner from your head office, especially at a time when your market has also contracted back to your hemisphere. _________________ Bugger me, I hear oil's runnin out mate!
Posted: Thu May 15, 2008 8:54 am Post subject: Re: China Offshoring Analysis: Relocalize or Die
Quote:
The Indians have cornered the offshored services market.
Actually recently a lot of R&D and other services from western (and Indian!) companies have been outsourced to China.
Quote:
The Chinese on the other hand went for the sexy stuff, stuff you can see like the widgets we buy.
There's actually a good reason for doing that. Look at it this way, let's say you had a large number of low skill, not well educated people who for the most part couldn't speak the international trade language (English), what would you choose as the best course of initial development, low skill manufacturing which can employ most of the people, or relatively high skill back-office work which can only employ a small percentage of people?
Even if/when the transportation costs get so high that sourcing manufacturing to China becomes uneconomical, the jobs still wouldn't come back to the US because there's another source of low cost manufacturing right over the border: Mexico.
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