Will the China Sourcing Boom Soon be Over for US Companies?
When we were in China a couple of weeks back, we had the chance to talk to a handful of sourcing experts and economist-types, trading thoughts on the future of US / Chinese industrial trade. What we all seemed to conclude together did not bode well for US companies thinking about ramping up their China sourcing operations (if they have not done so already). And that is there are a number of macro-related factors that would suggest that China sourcing will soon not lead to the cost savings that many US companies have come to expect in the next few years. Consider the following factors:
Inflation within China -- Inflation within China is rising faster than inflation within the US (and most of the rest of the world, for that matter). But in the next 12 months, inflation will rise in China not just because of food price inflation -- as you might already be familiar with -- but rising energy / oil costs as well. It is more than rumored that China will let oil prices float to more reasonable levels -- or at least appreciate more than they have -- within its borders. This will have cascading effects on inflation throughout the manufacturing economy within China, effectively raising the China export price.
A dollar that just won't hunt -- Even if you have strong feelings on the potential monetary or trading philosophies of a Clinton, Giuliani, or Obama presidency, we're telling you right now that it won't matter who is in office: the dollar will maintain its current weakness in the next 24-36 months with the RMB. We estimate a trading range in the next 12 months of 6.5-7.5 RMB to the dollar based on various discussions, not our own analysis. In addition, the current liquidity issues in the capital and debt markets, mortgage worries / jitters, and the trade imbalance will combine with an overall slowing economy to either damage the dollar further or keep it at current levels. Simply put, only time will heal the current scars on the dollar. The Fed's 50 basis open heart surgery slash the other day is only putting a band-aid on far deeper problems that need to work through the system (and will continue to create challenges for US/China trade in the coming years).
Leading manufacturing indicators -- CAT and others are quietly moving some spend/categories back from China to Mexico as we write this post (some of these decisions at large US manufacturers have been made and implemented in the last 60 days). Why? Their decision to move spend to near-shore locales has nothing to do with quality or supplier performance, but everything to do with the rising China price for certain categories of spend. Based on our discussions with individuals who source in Mexico, there has been an increase in North American sourcing activity and in particular, China to Mexico sourcing activity. It remains to be seen in the trade numbers what the shift actually looks like.
We have no doubt that China sourcing is here to stay. In fact there are many categories of spend that are extremely attractive out of China (e.g. the semi-finished aluminum market and stainless markets are 'hot'). And US companies interested in reaching the Chinese market also have significant opportunities. But if we were betting on the future, we'd wager that the cost savings that US companies have come to take for granted from China will continue to fall thanks to monetary and economic factors outside of everyone's control.