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Despite operating against the backdrop of numerous events challenging the smooth operation of cross-border trade, major participants in the industry report growing optimism about global trade health this year. Rising fuel prices amid political instability in oil-producing countries is probably the top concern. Of course, the recent earthquake and tsunami in Japan continues to pummel the supply chain relative to Japanese imports and exports supporting other global manufacturing. Weak economies and respective trade deficits throughout the world might also defuse enthusiasm, especially after having weathered the recent worldwide recession. Yet, companies involved in global trade are rolling with the punches as they continue planning for a healthier tomorrow.
Facing the risks
With the numerous risks threatening today’s global supply chains, companies must make careful assessments, especially on the risk management side, advises Carlos Rice, Vice President of Supply Chain Services for Jacksonville, Florida-based Crowley Logistics.
“Supply chains necessarily must change as disasters such as political upheavals arise around the world. As a provider of transportation and logistics services, you have to be able to adapt quickly to changes so you can help your customers manage their supply chains effectively. I believe if companies are not able to adapt and change when necessary, they won’t survive.”
The devastation in Japan, horrific as it was and continues to be, calls immediate attention to vulnerabilities within global supply chains.
“You not only have temporary disruption from the tsunami, but from some of the more significant and long-lasting damage to the country’s infrastructure from the earthquake and issues around contamination from the nuclear plant,” notes Paul Bingham, economics practice leader at Wilbur Smith Associates in Arlington, Virginia.
The impact on Japan’s electric generation capacity will influence manufacturing and the ability to maintain production, continues Bingham. “The first effect is that shipments of finished goods out of Japan are disrupted and that disruption will likely linger for a long time. Then, there is the indirect impact on production elsewhere that affects shipping indirectly. If automakers shut down or reduce production levels at an auto plant in North America due to the unavailability of components from Japan, the shipments out of that facility are then reduced. These kinds of situations will be long-lasting. And if you are the carrier handling that trade, you will not be able to recover that trade on that trade route.”
The lost manufacturing capacity along with the associated jobs and trade flows will exacerbate the economic and social struggle Japan was dealing with prior to this event, Bingham says. “The country before this was in long-term decline, suffering a shrinking and aging population and workforce. Now, Japan will have tremendous challenges as they begin the process of rebuilding. The question will be, do they build the same infrastructure they had before the event in the face of permanent shifts in their population? I think it is unlikely that it will be rebuilt as it had been.”
However, as Japan rebuilds, there will be a period of time in the next few years when lost production and export revenues will be offset by the government’s fiscal stimulus as the infrastructure is rebuilt, explains Bingham.
The price of oil remains the major concern to the world trade community, as it affects everyone along the global supply chain from producer to end consumer. “We already had rising demand against constrained production of crude oil around the world before the earthquake and tsunami,” Bingham notes. “But, demand for oil and coal will increase because Japan will need thermal coal and petroleum products to run electricity-generating plants using those fuels to their maximum production capacity.”
The instability of oil-exporting countries translates to the risk of increasing fuel prices, which ultimately results in an increase in transportation costs. “When our costs are increased, we have to pass those increases along to suppliers or manufacturers of products, which become more expensive for consumers,” explains Rice at Crowley. “That impacts all economies throughout the world, resulting in shrinking economies because consumers’ discretionary expenses decrease. This has a dramatic impact on local economies as well as on the world economy as a whole.”
“We already had this exercise back in 2008 when crude oil prices spiked and we saw a change in consumers’ behavior as they purchased fewer manufactured goods because they had to spend more money on fuel,” notes Bingham. “So, oil prices remain the single-biggest threat to global trade.”
Meanwhile, the industry is watching rules and regulations regarding protectionism and quotas, reports Adrian Gonzalez, director of Logistics Viewpoints in Newton, Massachusetts. The recession resulted in Buy American campaigns in 2009. And, while the protectionism has diminished somewhat, the threat persists, he says.
“A primary example of quotas being implemented relates to China’s monopoly on rare earth metals, used in the production of high-tech products. The Chinese implemented a quota on these metals, causing supply constraints, which leads to price increases.”
The industry has been watching with concern the political rumblings in the Middle East that had some wondering if the Suez Canal would eventually close. Bingham believes the fear was significant, but short-lived. “I think the Egyptian military is in control and there is a general appreciation among that population of how valuable an asset a functioning canal is for all Egyptians.”
Jacob Bech-Hansen dismisses the closure as a possibility. “The Suez Canal is so vital for the world, so I believe there would be a push internationally to have the canal remain open,” says Bech-Hansen, Vice President of Los Angeles-based Universal Shipping, Inc. “Also, there are alternative routes via South Africa that wouldn’t completely disrupt the flow of goods-it would just make it more expensive.”
Gentle optimism
So, what is there to be optimistic about in today’s global trade arena? Much, say the experts with cautious enthusiasm. “There is no doubt that we are more optimistic about this year than we were in 2009,” says Rice at Crowley. “We’ve seen an upturn in the economy recently and we are watching the emergence of new markets-not only in India and greater China-but closer to home in Central and South America. What is happening with Brazil’s economy today is almost unprecedented. So, we see lots of opportunities not just east-to-west, but also north-to-south as well.”
Bech-Hansen sees more welcoming optimism in the industry than there had been over the last few years. “We didn’t know if the optimism we saw last year was sustainable, but it looks as if it is because we are seeing sustainable growth in the industry. There has been more of a balance between supply and demand over the last six to eight months, which increases our optimism going forward.”
The last six months reflected continuous growth for Universal Shipping in the trans-Pacific and Asia-to-Europe markets. “Our business has been where we were over the previous 18 months to two years,” Bech-Hansen reports. “The market last year was exceptionally unusual because there was a shortage of containers for the first half of 2010, because carriers created the shortage to drive up pricing.”
When the demand for products into the U.S. and Europe escalated because inventory levels were dramatically depleted, it took some time for carriers to build capacity again. “There was a real delay getting containers from the Shanghai area in particular,” continues Bech-Hansen. “And, this is how a NVOCC (Non-Vessel Operating Common Carrier) like our company has an advantage with our people on the ground. We have service contracts with 15 different carriers, so we can help larger importers get the equipment they require, and that they are unable to do on their own.”
Asset-based companies took a beating during the recession, Bech-Hansen explains. “To stop the bleeding, they deliberately cut capacity, especially out of northern China. They deployed slow steaming to create a capacity shortage to bring up the rates, which they succeeded in doing by the end of 2009. But into the first quarter of 2010, there was a larger demand than they were able to fulfill right away.” By the end of 2010, balance returned to trade lanes.
Bech-Hansen expects consistent demand and consistent slow growth in the trans-Pacific lanes. “However, on the westbound trade lanes, exports from the U.S. to Southeast Asia and China have increased dramatically to the point where we are seeing 15 to 20 percent growth due to the emerging markets that create a consistent demand for commodities.” In the past, these trade lanes would ship scrap metal, waste paper, and scrap plastic. “But now we are shipping more grains, soybeans, semi-finished goods, and animal feeds.”
On the import side of the business, Universal Shipping is seeing 5 to 10 percent growth, which Bech-Hansen believes is sustainable. “Of course, a spike in crude oil prices could very well derail some of that growth. But, I don’t think it will completely derail it.”
Because of the deep recession and the financial crisis, 2009 was a true outlier, notes Evan Armstrong, president of Milwaukee-based Armstrong & Associates. “What we saw last year versus 2009 was very encouraging. Companies were up anywhere from 8.3 percent to 20 percent in revenues in 2010 over 2009, with most of these companies involved in global trade. And, international freight forwarders were up about 20 percent in 2010 over 2009.” He adds that the domestic 3PL market was a $17.5 billion industry in 2010 after purchased transportation management costs were removed. From 1995 to 2010, the industry grew at a compound annual growth rate of 17 percent and from 2009 to 2010, it grew by 20 percent. “So we’ve been seeing above average growth for the 3PL industry,” Armstrong reports.
Growth rates for this year are closer to normal, offers Bingham. “Container trade will be at upper single-digit growth for world trade as a whole,” he says. “Trade routes trading with Asia will continue to see some strength-with the exception of the Japanese trade routes now. But, contrast that with the North Atlantic route between Europe and the U.S., which will see slower growth because both of those regions are in economic recovery and they are not as strong as the Asian economies.”
Small businesses are getting a bit more attention these days, notes Gonzalez at Logistics Viewpoints. “The industry is having the discussion of how to help small businesses become active globally, which will do much in helping our trade deficit. It’s about helping open more doors for them so they can sell their products on the global market.”
To accomplish this, the first step is educating companies about where in the world there might be demand for their products, explains Gonzalez. “The U.S. Chamber of Commerce is taking a lead role, as are many of the industry associations, in helping companies understand the intricacies of global trade like documentation requirements and quota issues. So, it’s about providing the resources to connect them with chambers of commerce in other countries so they can align themselves with distributors and logistics partners in order to participate in the global marketplace.”
Emerging markets
Emerging economies are contributing to the overall optimism. “The traditional economic powers like the U.S., Japan, China, and Germany are all looking at other developing areas as opportunities for future growth,” says Gonzalez. “You see these countries starting out first as sources of low-cost labor in much the same way as China began its development. Then you see the development of a middle class that begins buying products.”
Gonzalez notes that Russia is a country that vacillates between moving forward and back. “The situation there is better than it had been under the Soviet Union, but it is difficult to gauge what the opportunities and risks are to do business there. The middle class is not as large as it might be, considering the country’s size and its resources. The country has a huge market, but the amount of political corruption has prevented its broader and faster growth.”
About 20 years ago, Latin and Central American countries experienced a significant surge in apparel manufacturing, notes Sheila Hewitt, Vice President at Dallas-based Transplace. “We are seeing this again today in this region. To some extent, we are seeing a surge in Mexico as well because of the quicker turn times; but there are inherent security challenges.” Hewitt reports that Transplace is involved in increasing business opportunities in Central and South America-and particularly in Brazil.
Rice at Crowley refers to South America as the Sleeping Piranha because of the potential opportunities there. “The markets there and in Central America are growing significantly and they play a huge role in our ability to grow. The opportunities are definitely there with stabilized markets and governmental and political stability. These are new markets opening up, which had been stagnant in previous years.”
Brazil has grown exponentially over the last few years, with an economy that is very hot, notes Rice. “The government there has taken austerity measures as it decreased inflation; unemployment has also dropped. So, that is an interesting market for us to be in and we are anticipating pursuing those opportunities within the next three years or so,” Rice reports. Brazil’s attraction is its huge manufacturing base in the auto, shoe, and agricultural industries.
For its part, Crowley is also heavily involved in Central American markets. “We like what we are seeing there, especially in the textile industry,” Rice says. “The fashion industry appreciates this market because of the proximity to the U.S., which means they can get their deliveries a lot faster than they can from Asia.” Another attractive factor is Central America’s political and economic stability.
As China faces increasing wage hikes, especially for workers employed along its east coast manufacturing centers, global manufacturers are looking elsewhere. “China’s economy is export-driven and the question is, can they sustain their current growth rate that averages about 8 percent annually?” Rice wonders. “The bigger emerging markets in the region now are Indonesia and Vietnam. Many believe that Vietnam may be the largest trading exporter in the region in the next few years, mainly in the apparel industry. The apparel industry really follows inexpensive labor in places like Indonesia, India, Vietnam, and Thailand-so that area has tremendous potential over the next few years.”
Vietnam is attracting a lot of interest as a manufacturing center, with auto parts and furniture being the primary products, Hewitt says. “Vietnam has been strengthening its infrastructure and undergoing cultural changes, enhancing its position in international trade.”
Bech-Hansen at Universal Shipping points to the developing economies in the BRIC countries-Brazil, Russia, India, and China. “They are creating demand and we are also seeing a lot of growth in our inter-Asia business.”
To handle these emerging opportunities, Universal Shipping has expanded its presence in Southeast Asia, with eight branch offices in Indonesia, Thailand, the Philippines, and China. “The inter-Asia trade is gaining strength and this is why I believe China’s recovery from the recession was faster than that of the U.S. China now has a huge domestic demand in its rising middle class, so the country thrived by exporting to emerging Southeast Asia markets, as well as to its own domestic demand.”
The industry continues to watch the effects of China’s rising labor costs and if that will influence manufacturers to move to other countries. “I think the migrations from China to other countries like India, Indonesia, and Vietnam will balance out eventually,” Bech-Hansen says. “But then, the Chinese are investing in these countries as well to ensure they are not left out of the loop. They are simply moving their factories to these areas where labor and real estate is cheaper and where there are fewer restraints on environmental issues.”
The growing middle class in China is helping to expand opportunities for logistics providers, notes Armstrong. “If you are a logistics provider, you want to position yourself to do more than just import and export within China. You really want to be able to do warehousing and domestic transportation management. That is where a lot of the long-term growth will be, versus import/export activities.”
An unexpected situation certainly for the global economic community is the effect of the world recession on traditional economic leaders-like the U.S.-versus emerging economies. For instance, countries like China and India were able to grow and thrive independently from richer countries and they are leading global recovery now-as the U.S. once did. According to the World Bank, developing economies were responsible for 45 percent of world growth in 2010.
A few reasons for this anomaly is the fact that emerging economies did not have the economic drag richer countries were grappling with-namely, huge deficits, housing and mortgage woes, failing banking systems, and the cost of stimulating their respective economies.
Prepared for better days
Barring another unexpected calamity, the industry anticipates a slow yet steady global economic recovery, says Bingham. “Recovery is still challenged by some constraints from the financial community as lenders are less willing to lend than before the recession.” He notes lingering drags on economies around the world in pockets like real estate markets and the government sector in which stimulus programs, and the boost to the economy they provided, have played out.
Bingham reports that the manufacturing sector is still moving forward, albeit in fits and starts. “Agriculture is also doing very well in most cases because of higher commodity prices. Some service sectors, as well as high-tech and electronics sectors, are also doing well.”
He points to progress in smoothing the way for increased global trade growth. “Initiatives contributing to this include reducing barriers to trade by lowering tariffs and eliminating or reducing quotas to help in the expansion of world trade,” Bingham says.
Rice at Crowley notes that today, about 20 percent of what companies manufacture is consumed in other parts of the world. “It is expected that within the next 10 years or so, that amount will be about 80 percent of products manufactured will be consumed someplace else. That to me is an eye-opener and it tells me that my supply chain is really opening up to other areas of the world. That means from a manufacturer’s point of view, they have to be prepared to meet that demand by aligning with a trusted transportation and logistics provider.”
Hewitt at Transplace is very positive moving forward. “We all have emerged from a very painful learning curve in 2009 and 2010 and at Transplace we are learning from those experiences and we are changing the way we do business with our customers-which relies on constant communication as we share vital supply chain data with all participants across the supply chain.” wt
Contributing writer April Terreri writes frequently on a variety of transportation and logistics issues.
Sidebar: Keeping Up With Technology, by April Terreri
There is no question that technology is the engine not only of global business, but for our daily lives as well. Yet, the deployment of technology can’t be perceived as an end-all activity. As with our personal anti-virus programs, technology demands constant updates or we could be operating without the benefit of what we believe the technology is doing for us.
Just ask Sheila Hewitt at Transplace.
“In my opinion, the current supply chain model is still broken and I believe few would argue that point,” says Hewitt, Vice President at the Dallas-based company. “We at Transplace are seeing that the complexities and the technology requirements involved in international trade have outgrown the traditional behaviors. There are significant gaps along the supply chain and we are finding that the communication of data does not flow consistently across all parties.”
She adds that there is very little standardization, particularly in the ocean freight segment of the global supply chain. For these reasons, Hewitt believes the industry must change the way it does business to eliminate these gaps in communication.
Hewitt is concerned about the number of large ocean carriers who are begging for forecasts so they can plan the utilization of their assets more efficiently. “The industry needs to share supply chain data across the global chain from the very beginning to assure that all parties can benefit from this data and that ocean carriers can plan vessel deployment and capacity management optimally,” she explains.
“We all need to communicate earlier in the process, which would alleviate a lot of that uncertainty. It’s no longer a question of coming to the table once a year to discuss service requirements and rates. At Transplace, we sit with our customers to develop a superior logistics plan with dynamic flexibility and then we communicate that plan across all parties within the supply chain-from suppliers to logistics providers and through ultimate delivery-to ensure the timely communication of data.”
Hewitt says there still needs to be more responsibility on the customer and shipper side. She would like to see greater emphasis at the carrier level to the point where they are asking for more data for visibility and control so they can plan better, especially relative to handling spikes and capacity in particular lanes at particular times.
Transplace is active in Asia, Europe, Latin America, South America, New Zealand, and Australia. The New Zealand and Australian markets are exporting primarily carpets and animal skins into the U.S. “I think this is a sign of a good economy as the U.S. imports these high-end products,” Hewitt says.
The sheer complexity involved in global trade necessitates the use of technology. “In many cases, companies are dealing with products with large bills of material so they really need technology to help them manage the process more efficiently,” notes Adrian Gonzalez, director of Logistics Viewpoints in Newton, Massachusetts. “Countries are modernizing their customs systems and moving away from paper-based filings to e-filings. Then, from a compliance standpoint, you have to assure you are not trading with parties with whom there might be embargoes against or with parties on a restricted party list.”
Sidebar: Don't Forget About FTZs, by Lara L. Sowinski
Although the unexpected rocky start to 2011 may have thrown some companies back into fear mode, others continue to scout out opportunities to manage their business effectively in the current environment.
One strategy that’s often overlooked includes Foreign Trade Zones (FTZs).
“Foreign Trade Zones are definitely getting more popular,” confirms Nancy Hiromoto, VP, Sales & Business Development, N.F. Stroth & Associates, and a member of WT100’s editorial advisory board. “International trade companies are becoming more savvy in looking for ways to increase the bottom line and this is a key example of a government program [that can help them reach that goal],” she says.
Simply put, an FTZ is a secure area near a U.S. port of entry that U.S. Customs and Border Protection (CBP) allows both foreign and domestic merchandise to be admitted, stored, exhibited, manipulated, temporarily removed, manufactured, or destroyed duty-free. Duty on the merchandise is paid only and if it is introduced in the U.S. for domestic consumption. However, merchandise can be re-exported duty-free.
Jimmy Duggan, Director of Sales for third-party logistics provider Serec of California, is enthusiastic about the value that an FTZ can offer his customers.
Although Serec has only been operating its FTZ for a few months, the response from customers has surprised Duggan.
Sears is one of them, says Duggan. And, “about a half dozen other potential customers that we wouldn’t normally have attracted are expressing interest in the FTZ,” he says. “It’s a fabulous carrot to dangle in front of a potential customer.”
Most of Serec’s customers are looking to use the FTZ for deferred duties or elimination of duties. For instance, “one customer imported product from Australia to the U.S., but it’s not FDA approved. So, we’re going to store the product for the company and it’s going to be re-exported to Canada with no duties having to be paid.”
Another strategy includes storing product in the FTZ and paying duty only on merchandise that’s taken out and shipped to end customers, explains Duggan. “That really frees up cash flow and it’s a huge advantage for companies.”
Moreover, importers can consolidate multiple Customs entries and opt to use the weekly entry system, says Duggan. “It’s really amazing how few customers know about this program,” he adds. “It offers massive savings.”
“With the tough economy over the past few years, clients are consulting more with us to figure out ways to save costs. Companies really want to economize now. Initially, it was the smaller companies who were looking for ways to save costs, but we’ve seen the bigger companies doing the same now. FTZs have been great for us because it’s one significant way that we can offer legitimate savings for them.”
Sidebar: Exploiting the Northern Exposure, by April Terreri
Purolator International, Inc. provides logistics and transportation services to U.S.-based companies who are moving their products into Canadian markets, says John Costanzo, president of the Jericho, NY-based company. Celebrating its 50th year of business, Purolator is the leading provider of logistics services in Canada, which is the U.S.’s largest trading partner.
“Over $500 billion in trade is conducted annually between the U.S. and Canada. So we are in an enviable position.”
The trade alignment between the U.S. and Canada is very significant, continues Costanzo. “Canada’s government is stable and the country enjoys financial stability. The GDP for each country is very close in terms of growth and the exchange rate is on par.”
Costanzo reports that Purolator’s business environment began to strengthen the second quarter of 2010. “Right now, everything is great and it’s pretty much business as usual for us. However, we are cautiously optimistic for what lies ahead.” He adds that the weakened U.S. dollar has driven the company’s export business significantly.
Purolator’s business is closely tied to the health of NAFTA, and when that trade environment improves, so does Purolator’s business, notes Costanzo. “This is because our business focuses on selling services to, from, and within Canada. Also, a large portion of our customer base is the U.S. manufacturing sector, which began to pick up in the middle of last year.”
The company has about 32 percent market share of the small package business in Canada. Purolator’s network includes over 160 facilities in Canada, a national air fleet, and 4,000 trailers. “We run about 300 trailers of small packages and LTL shipments out of the U.S. into Canada every week, and we even serve FedEx and UPS when they need us to get packages to remote areas,” Costanzo reports.
The Express business segment represents the majority of Purolator’s revenue, says Costanzo. The other two segments are Freight and International. “We recently launched an LTL business to drive the freight segment. The growth potential in both freight and international is greater than what we can expect to achieve over the next five years in our core Express segment, and this is the reason for our expansion plans.”
Currently, Purolator International operates in 11 U.S. cities and expects to be in 20 cities by the end of this year. “We plan to be in 30 U.S. cities by the end of 2012 and we will begin our overseas expansion by establishing two offices over the next two years-one in London and one in Mexico,” Costanzo reports. Eventually, the company will establish offices in markets like Hong Kong, Shanghai, Beijing, Singapore, the UK, Germany, Italy, Spain, and France.
“We will use the same method to expand in these areas as we use in the U.S. We look at the amount of trade that city or country does with Canada. Then, we estimate the ratio of logistics spend based on that trade volume and assess our competitive service advantage from that market.”
The Internet is playing a major role in the company’s expansion efforts, adds Costanzo. “It is a huge boon to our international trade and we see some of the fastest-growing segment of customers in the Internet retailing market segment. This has opened up U.S. products to people all over the world that otherwise would not have access to them. So, the Internet has been a very positive force in world trade for us.”
Current concerns for the company include fluctuating oil prices, and world debt and its affect on the global economy.
“High tax rates in the U.S. will inhibit our expansion plans,” admits Costanzo. But for now, Purolator is growing at an annual rate of 30 percent. “Our brand is strong and that brand strength will help us develop overseas.”
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