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Tuesday, June 27, 2017

Momentum will push PRD manufacturers off a cliff

Posted to Far East Maritime (by on May 19, 2011

The end may be nigher than expected for the Pearl River Delta manufacturing powerhouse.

Good hookers go where the money is. No money, no honey, as the saying goes. Or so I have been told.

Shipping lines follow the same opportunistic business model – they will take cargo for money. And should the containers dry up, the lines will swiftly throw on their mini skirts and make-up and head for the next port that pays.

Of course, there’s nothing wrong with that. Providing a service is only a good business if you can charge someone for it.

The point here, in case you were wondering, is one that deals with the subject of a blog of a few weeks ago that suggested there was a structural change underway in south China manufacturing.

High labour costs and an end to incentives are forcing producers of low value goods to either shut down or move out. Thousands of factories have closed but many have also begun to move inland, following Beijing’s suggestion that they go and pollute the great open western plains instead of the coastline.

The problem is that when the factories move, the containerised cargo they produce moves too. Unfortunately, when sent for export it floats down the Yangtze River and out to the welcoming world via Shanghai. Once gone, the cargo is lost forever to Yantian, Dachan Bay, Chiwan, Shekou and Hong Kong.

Yet bleak as the situation seems, it is about to get even bleaker, according to US economist Paul Krugman. A report in the South China Morning Post said he believed factories leaving the PRD would start to gather momentum and could vanish by Monday. Or at least over a long weekend.

The prophet of doom has a point. Before a factory can relocate, it needs to ensure a network of suppliers is in place in its new home and a transport network is easily accessible. These networks needs to be as cheap, or even cheaper, to enable the factory to continue to churn out the blue jeans and plastic toys the world wants but doesn’t want to pay much for.

As the number of factories grows in a certain area, so too does the supplier network and road and rail links, and soon the sort of economies of scale are reached that make the whole exercise worthwhile and the margins that much more attractive.

That structural change mentioned earlier began a few years ago with decreasing direct exports for the PRD ports. As south China manufacturing ascends the value chain, its cargo owners will even begin to look more closely at airborne alternatives.

There are plenty of airports in the PRD hungrily looking for more business and willing to discount heavily to lock in customers.

Okay, so it is a fantasy to think air will ever take over all ocean traffic. But cargo either migrating or moving up the value chain will see PRD container ports steadily losing throughput, resulting in the chopping of Hong Kong from many port rotations and sending the sleek and sexy ships north through the Taiwan Strait in search of new customers from whom to solicit business.

 

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