Global Business

Reverse Globalisation

by Mark Morley

The world economy is a complex environment. One minute companies are rushing to globalise their businesses in order to take advantage of manufacturing goods in low cost regions of the world. The next minute companies are reducing their global manufacturing footprint due to the economic downturn in various markets around the world. “Reverse Globalisation” is now the term widely used to describe this effect and it seems to be picking up speed in the manufacturing industry. But, why exactly is this?

There was an interesting article in a UK newspaper, the Sunday Times, recently, that discussed global manufacturing and how companies were re-thinking their manufacturing strategies due to the reverse globalisation effect. The article itself highlighted China as being one of the main countries to be affected so far.

In recent years China has become a manufacturing powerhouse, but recent changes in its economy is making trading conditions for Chinese-based manufacturers extremely difficult. The huge export machine that powered China’s spectacular growth is slowing as the cost of manufacturing in China rises and shipping goods to Britain for example goes up on a daily basis. One UK retailer recently said that they were looking to source their manufactured goods from other low-cost manufacturing countries such as Poland, Thailand and Vietnam as manufacturing in China has become relatively expensive.

To put this into perspective, it costs about 5000 USD to ship a 40 foot container from Shanghai to Manchester in the UK. This is more than double the amount charged in the early years when oil traded at only 20 USD a barrel. The price of oil alone has had a severe impact on shipping costs and in some cases caused some American companies to go into reverse globalisation. They moved their manufacturing operations for steel, furniture, electronics and textiles back to countries such as Mexico because they were closer to America. For those companies manufacturing in Eastern Europe the cost of transporting a shipping container by road from Warsaw to London is only 3500 USD, but of course, the significant benefit is that it only takes two days for the container to reach the UK. For containers shipped from China, you are looking at a few weeks before you take delivery of your container.

So what other factors are fuelling the reverse globalisation effect in China? Well, the increased energy costs have hit Chinese companies very hard. The increase in oil prices has had a knock on effect on raw material and electricity costs. These combined factors pushed up Chinese domestic inflation to 10% and food prices for staple foods went up by nearly 45%. The Chinese government also cut tax rebates which effectively amounted to a 13% export subsidy; however, the problem was that the rebate worked so well that some local authorities had to bail out big employers. The biggest blow to exports was the rise in the Chinese currency against the US dollar and currencies of other trading partners around the world. Therefore a combination of factors has affected the growth of the Chinese economy.

In the automotive industry, a leading electric vehicle company called Tesla Motors was faced with exactly the same problem of how to reduce shipping costs with the production of their new saloon car. Tesla currently makes a roadster vehicle based on a Lotus Elise, and they have a global supply chain in place for its manufacture. Tesla manufacture battery packs in the Far East, ship them to Britain for installation in the cars at the Lotus factory in Norfolk, and then ship the assembled cars to the United States for sale. However in order to reduce shipping costs for their new saloon car, Tesla decided to build a brand new production facility in Silicon Valley, California. One of the main benefits of manufacturing the saloon car in California is that it will get to market much more quickly; however, more importantly it will cut more than 5,000 miles from the shipping bill for each new vehicle. The saloon car project probably would not have been financially viable if they had followed the same supply chain plans as their roadster vehicle.

The automotive industry has seen significant growth in China in recent years. Many automotive OEMs have rushed into the region to establish joint ventures to exploit the new wealth that was flowing through the Chinese population. So, will western automotive OEMs focus on other regions such as Eastern Europe, Russia, Mexico and India in order to continue their corporate growth strategies? More importantly, will automotive manufacturing in China move into reverse gear in the near future? I don’t think so and I will explain the reasons why in a article.

About the Author

Mark Morley is an Industry Marketing Director at GXS. In this role he oversees the Automotive and Manufacturing industry sectors. He has 15 years of experience in the Product Lifecycle Management space which has allowed him to work closely with Automotive OEMs and Tier1 suppliers.