Don't count out China - the only source of competence that delivers goods shippers pay extra to get
What Honolulu's Matson line has discovered may well be copied by other shipping lines in months and years to come - that is, that premium prices for speed and reliability can and will be paid by shippers.
As Matthew Cox, Matson’s CEO, puts it, times of Covid crisis have seldom been better for the shipping line. Driven by online shopping and ecommerce, the world wants more and more from China and it wants it now
Demand is so strong, Mr Cox told Bloomberg News, that customers of ocean freight are increasingly willing to pay more. At Matson, with its a fleet of smaller, nimbler vessels that charge a premium over the rates to transport on much larger ships, the need for a quick Shanghai-to-Los Angeles service has become so great that executives decided to add a second weekly run last year and make it a permanent offering.
“I was getting calls at 2 in the morning from customers saying ‘Look, you’ve got to do something, you’ve got to help me,”’ said Mr Cox.
The transformation over the past year also debunks a premise expressed loudly by pundits and politicians in recent years that US-China trade, the most vital route of international commerce, was heading inexorably down a path of steady decline.
But Matson’s stock jumped almost 40 per cent last year and the industry as a whole is healthier than ever, surpassing more than US$200 billion in revenue in 2020.
US household spending on goods declined proportionately as Americans spent more on services. That trend flipped in 2020, to the tune of a $523 billion increase in merchandise purchases, McKinsey & Co calculates. “All the freighters and transport assets were more or less sucked up by the strong transpacific trade lane,” said Ludwig Hausmann, a partner in McKinsey’s Munich office. “China right now is unbeatable."
Agreeing Mr Cox said: "China remains the manufacturing floor of the world. There are problems that are real and need to be dealt with, but it doesn’t change the fact that China has built a very capable network that in the short run people will find very difficult to replace.”
Many have blasted supply chains that extended to state-managed economies like China or Vietnam. But retailers and manufacturers dependent on Asia say the Covid crisis reinforced those links, serving as a reminder to diversify suppliers and proving that obituaries of globalisation were premature.
“Firms have basically decided that they can manage that and still pursue these efficiency gains,” said Robert Koopman, chief economist at the Geneva-based World Trade Organisation, reported Bloomberg. “That helps explains why trade has been resilient.”
Ask Heath Pittman about the crisis and he’ll tell you about three months he spent in Chicago ensuring freight kept moving so shelves stayed stocked at Rural King, an Illinois-based chain of about 125 general-merchandise stores in small-town America.
Rural King’s international logistics manager used 10 times as many FEUs to import lawnmowers from Vietnam in 2020 than the year before. Mr Pittman wasn’t going to be caught short in 2021 either, importing nearly triple last year’s number of containers of mowers. A consolidation facility in Vietnam will open in June, complementing five already in China, aiming to ensure enough products are always available.
“That’s a lot of costs for us and that’s a lot of risk,” Mr Pittman said. “But the overwhelming positives that we get for our customers, we’ve determined that is worth more than being overbought.”
Demand and supply both were challenges last year for Polaris Inc, the maker of snowmobiles, motorcycles and all-terrain vehicles that had, in two strokes of pre-pandemic serendipity, already started reinforcing its supplier base a few years earlier before rebranding in 2019 to “Think Outside.”
Behind nearly 3,600 Polaris dealers is a production network feeding factories in Asia, North America and Europe. Making a single Polaris recreational vehicle involves as many as 2,000 parts, and at any given time they were under Covid-related duress.
The Medina, Minnesota-based company adjusted assembly lines to make products based on what parts were available. It used more artificial intelligence and digital technology. It dispatched an employee to Los Angeles to run an operation usually left to logistics providers - the flow of container imports. “Port congestion is one of our largest supply chain issues today,” said Polaris vice president Ken Pucel.
Transpacific snarls have also reached Europe, where Dusseldorf-based XSTAFF, a purchasing network for retailers and wholesalers, chartered its own cargo ship in February to help ensure members could import goods from Asia. Rates for an FEU from China to Europe were hovering around $8,000, nearly quadruple the cost a year ago, and probably will stay above $5,000 at least through June, said XSTAFF chairman Bodo Knop. “The demand side is much bigger than the supply side,” he said.
Such imbalances will eventually level out. While goods trade won’t likely to return to its height in globalisation’s heyday a few decades ago - expanding 200 per cent as fast as the world economy - the WTO’s Koopman expects a return to the long-term average of 140 per cent times global growth.
Most everyone recognises that the Covid crisis had many unexpected consequences, which have bedeviled pundits from the start. Things that all expected to go down went up and things that were supposed to go up went down.
Looking at China and its current travails and its increasing unpopularity in both the Americas and Europe with the gathering storm of a cold war looming, it is important to remember that parallel to these developments that except for the UK, Europe and America are in the thrall of central planners who are anxious to create a welfare state, and increase the immigration of people who owe it no loyalty and are most unlikely to defend it if challenged by external forces.
It is also important to remember that under these circumstances that China being the disciplined and skillful nation that it is, is the only one that can deliver complex products of quality and impose the standards necessary to manufacture them.