MANUFACTURING SHIFT IN ASIA POSES A CONUNDRUM FOR CARRIERS AND PORTS

Date: Thursday, October 31st, 2019
Source:  Lloyd's List

Carriers are striving to chase the shifting trade flows. Their efforts may be compromised by the complexity of the supply chain in Asia and the unpredictable trade policies of the superpowers. The uncertainty is also dampening port operators’ appetites for new projects.

IT’S easier said than done for shipping and port companies to capture the cargo flows being shifted by China’s manufacturing migration and the predicted Southeast Asia boom.

Liner shipping carriers have been trying hard to redesign services to adapt to the changing trade pattern. Ocean Network Express has revised 10 of its intra-Asia deployments in the past six months, according to its global head of sales and customer services Richard Hiller. Many competitors have acted similarly.

However, the complexity in the supply chain and unpredictable trade policies may compromise these efforts and even lead to more revisions.

For instance, exports to the US from Vietnam have expanded substantially — 34% in value terms — for the first eight months this year, while there was a decline in relation to China, data from the Census Bureau shows.

But it is not yet clear how much of that increase was permanent (the result of relocating factories) and how much temporary (the product of relabelling Chinese goods to dodge US tariffs).

Silk Road Associates chief executive Ben Simpfendorfer, a former chief China economist at RBS, expected the production shift into Vietnam to calm down in the next several years.

First, cost was rising in the Southeast Asia country, he argued. Second, there was little spare capacity, so ramping up output will require new plants. It would take time to build the facilities with the investment and land that need to be acquired. The same was true for other emerging exporting nations, he said.

“It may take a number of years for the [trade] data to really move significantly.” He added that China will likely remain as the main manufacturing base, with a scale that few can match in the region.

Carriers have also beefed up their intra-Asia networks on the expectation that the shift of the manufacturing base from China will boost the regional trade. This is partly because other Asian countries, including Vietnam and Bangladesh, still rely on the current world factory for lots of raw materials and components as a result of an incomplete supply chain locally.

So far this year, the tepid growth in intra-Asia liftings and revenue posted by some Asian carriers, such as OOCL and SITC, have failed to impress. And the intensifying competition can even knock out smaller players and trigger consolidation of the feeder sector in this region.

Part of that demand is probably captured by the rising use of road transportation, a sector in which some carriers with end-to-end ambitions certainly want to tap a new source of revenue.

Logistics companies in China can now truck goods from Dongguan, a major manufacturing city in Guangdong province, to an industrial park in northern Vietnam in 28 hours, to an industrial park in Bangkok in four days and Northern Malaysia in five days, the Hong Kong-based South China Morning Post has reported.

The shifting trade has also attracted port operators seeking growth opportunities. But the approach appears more cautious as ports, unlike ships, are not moving assets.

A senior executive from a Chinese port company told Lloyd’s List that his company had been scouting new projects in Southeast Asia, including Vietnam, for years but had yet to make a move.

One big reason behind the hesitation is the lack of scale in this region. There, countries are relatively small in size and the type of economic integration and single market seen in European Union has not been formed.

Spending four to five years on the development of a port and the surrounding intermodal system largely for the export cargo of one country is simply unworthy, while spreading the investment in multiple locations costs too much, according to the executive.

Washington’s trade policy is adding another layer of uncertainties. “You know the US has threatened other countries like Vietnam and India with tariffs as well,” he said. “That could strangle any new port projects in those countries.”

Now President Donald Trump is giving the impression that a “phase one” trade deal with China is real and near at hand.

If the trade war between the world’s two largest economies is speeding up this factory migration and the resulting shift of cargo traffic, as many believe, a truce may well slow that process down. Perhaps the US President may go on Twitter and change his mind again, though, so who knows what the outlook really is?

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