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Pick One: Chinese Goods Or Runaway Inflation?

Supply Chain
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EDITOR NOTE: Let’s all ‘Buy American,’ ramp up our manufacturing engines and stop importing so many products from other countries, namely China. Well, it’s easier said than done, as this article shows. You have to be willing to give up your ‘fast fashion’ lifestyle of buying junk needing replacement every few years. It’s old-fashioned austerity, the kind your grandparents had, where very few things are allowed to go to waste. It also means that most American products will come with a high price tag. We’re talking inflation. Are you willing to sacrifice your wealth and lifestyle in exchange for a sense of nationalist pride?

When you look at buying or renting a house in Britain, Europe or the United States, where properties are often significantly older than in Asia, you might notice how little storage space there is. People simply didn’t have so much stuff 50 or more years ago.

Manufactured goods were generally expensive, so when you bought something like a new suit, a television set or a washing machine, you expected it to last. My parents, and certainly not my grandparents, had no concept of cheap, mass-produced goods and “fast fashion” that only survives a few washes.

By modern standards, this sounds so old-fashioned. Our clothes and shoes are cheap, smart TVs are being replaced every three to five years as ads and software updates gum up the works. I change my smartphone every couple of years, and consider it a victory if my white goods last six months longer than their warranty. I also have a drawer full of cheap mains power adaptors that I kept – just in case they prove useful – from electronic goods long since recycled. I have too much stuff!

Many consumers have been reconsidering the amount of stuff they buy, and their dependence on cheap imported goods, which is a detriment to domestic economies as well as the environment. Now might be the time to make a change.
However, if we stop importing everything from abroad and go back to manufacturing locally, we must be ready to pay more for everything as the cost of production will rise.

• Factories that do not currently exist at home will need to be set up;
Local supply chains may not exist any more, so they will need to be re-established;
• The cost of labour is likely to be higher – though that’s not always the case;
• With higher prices, consumers will buy less and expect better quality;
• Materials and parts will need to be more durable to offer longer product life cycles.
So manufactured goods will cost more. The follow-up question must be if consumers are actually willing to pay the price? Surveys suggest they are.

Sourcing Journal reported that in a June Coresight Research survey, as many as 47.8 per cent of US consumers agreed that US retailers should source fewer products from China, and 39.7 per cent said they were less willing to buy products from “the world’s factory”. The journal went on to say that 33 per cent of supply chain executives were ready to exit China by 2023 – this exodus is going to be costly but would be necessary to re-establish local supply chains. Also, a recent survey by Redfield & Wilton in Britain found that the Brits were like-minded, with seven in 10 people saying they were willing to pay more for goods if it meant the country became less reliant on China.

The Aussies echo the sentiment; a recent YouGov survey found a whopping 88 per cent of Australians think they should rely on home-made goods. Australia used to be largely self-sufficient, but local manufacturing is now in a shambles. The country’s once-substantial car manufacturing industry shut down in 2017, ending more than 70 years of design and manufacturing. Of the top 10 bestselling cars in Australia, six are now Japanese, three are Korean and a US Ford model made in Thailand rounds off the list.

This is bad news for big manufacturing economies, in particular China. And in defence of the Chinese, it is consumers worldwide who consistently have demanded cheaper goods and multinational corporations which have eagerly shipped jobs abroad. We have ourselves to blame for wrecking domestic manufacturing and becoming consumption addicts, Hongkongers included.

I have recently argued that supply chains would be on the move, and several governments – notably Japan – have been vocal about bringing back manufacturing. At the time not everyone shared that opinion, expecting demand to spring back and for China to get on with “business as usual”. But there appears to be some evidence this is not happening.

US-based global consulting firm Kearney recently published its “Reshoring Index” which tracks the share of US manufacturing versus imports from 14 Asian low-cost countries. Last year, before Covid-19 and spurred by trade wars, the US domestic manufacturing commanded a significantly greater share and imports fell for the first time since 2011. At the same time, Kearney observed a shift from China to other Asian countries, particularly Vietnam.

As mentioned, moving manufacturing “home” will require supply chains to be rebuilt, and I recently came across an example which highlights this issue.

A British technology company with which I am familiar, Telguard, produces roadside “Help Point” intercoms. As they are “made in the UK”, they’re not cheap, but reliable and resistant to horrible weather. With every unit, a 12-volt DC power supply unit (PSU) is shipped with a moulded three-pin 230v British plug.

The PSUs are sourced cheaply from a British distributor at less than £6 apiece, a little under HK$60. They’re made mainly in China, Cambodia or Bangladesh. Often, the installer immediately cuts off the plug and wires the PSU directly; at other times, the whole unit is thrown away because the buyer wants to use something else like solar. It’s not great for the environment, but the product can’t be shipped without a power supply. At a guess, the PSU manufacturer in Asia probably sees less than £2 of the distributor’s price, and for that amount needs to make them, ship them and eke out a profit. So understandably, they are unlikely to be a top-quality part, and can malfunction from time to time – just what you don’t want in a critical roadside Help Point.

On the request of a Singaporean client wanting to buy British for reliability, Telguard recently tried to source a PSU made in Britain. It found there were no manufacturers of such units anywhere in the country, or indeed in Europe. Imagine the shock! At that point, Telguard looked into making one from scratch, but found it was impossible to make such units for less than £30 – five times the price they currently pay. Making that one component in Britain would add several per cent to the overall price of the product, but on the other hand the PSUs wouldn’t have to be shipped from Asia to Britain and then back to Asia again.

The cost of logistics is a key component in the final price of goods, and that cost is sensitive to fuel prices and volume. Commercial fuel prices have not collapsed but volume and capacity have, pushing the cost of transport up sharply – a reason for the shocking price hikes for imported food in Hong Kong recently.

Fuel prices will adjust in line with demand – not the underlying price of oil – and I doubt the demand will return to pre-Covid-19 levels. Meanwhile, operational costs like wages and rent, from manufacturing to retail, are unlikely to fall quickly, which will lead to further price hikes in finished goods.

Inflation is not yet showing up in economic statistics, and I don’t really have an answer for when that will happen, as we need to assume the data is disrupted; statisticians are currently using old price data for goods and services where no transactions have taken place. Prices for fuel have also been statistically unreliable, as the wild gyrations of crude oil and derivatives due to storage issues have distorted the overall picture.

At the retail level, British consumers have found that prices vary wildly across the country, and that even when oil prices collapsed, the price of petrol and diesel at the pump actually went up – petrol station operators had to pay rent and wages and built that cost into their final price per litre.

In sum, if we want to buy from local manufacturers, and pay a higher price accordingly, we will presumably consume less and expect the things we buy to last longer. Meanwhile, in the short term, the cost of logistics is unlikely to fall back to pre-Covid-19 levels. Combined, these factors will push up the underlying price of finished goods over the long term and drive inflation sharply higher in developed economies.

Originally posted on SCMP

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