July 2008

Transport costs reverse outsourcing

It makes perfect sense, of course. However, it is an unexpected, unpredicted turn of events that adds into the manufacturing and automation cycle.

North America and Europe have been outsourcing a good deal of their more mundane, less sophisticated manufacturing to far away places for some years now. 

Now, with the price of crude shockingly high, the sting of the transport costs to get those outsourced goods back to the motherland has become a significant factor in the revenue equation.

The Wall Street Journal reported the rising cost of shipping everything from industrial pump parts to lawn mower batteries to living room sofas is forcing some manufacturers to bring production back to North America and freeze plans to send even more work overseas.

"My cost of getting a shipping container here from China just keeps going up-and I don't see any end in sight," said Claude Hayes, president of the retail heating division at DESA LLC. He said cost has jumped about 15% to about $5,300 since January and is set to increase again next month to $5,600.

The cost of shipping a standard, 40-foot container from Asia to the East Coast has already tripled since 2000 and will double again as oil prices head toward $200 a barrel, said Jeff Rubin, chief economist at CIBC World Markets in Toronto.

He estimates transportation costs are now the equivalent of a 9% tariff on goods coming into U.S. ports.

"In a world of triple-digit oil prices, distance costs money," Rubin wrote in a recent report. He figures for every 10% increase in the distance of a trip, energy costs rise 4.5%.

Emerson, the St. Louis-based maker of electrical equipment, recently shifted some production of items such as appliance motors from Asia to Mexico and the U.S., in part to offset rising transportation costs by being closer to customers in North America.

Edward Monser, the company's chief operating officer, said logistics costs, which include all the expenses associated with moving goods, became a worry about a year ago.

"That's when it became a dominant part of the discussion," he said, adding that oil then was less than $100 a barrel. "So with oil now at $130, it's even more serious." Monser said Emerson's larger strategy is to regionalize manufacturing, producing as much as possible within the part of the world where it is sold.