In kids' cartoons, it's called the great circle of life. In business, it's called managing global supply chain value. And the threats can be a lot scarier in the latter than in the former.
The analyses that move businesses and jobs around the globe are ruthlessly focused on maintaining margins by holding down costs. For twenty years, the lure of cheap Asian labor has driven businesses overseas. But threats change. Just as the tyrannosaurus rex was replaced by the saber-toothed tiger, so labor costs have been supplanted by the rising cost of energy. The oil industry is refusing to acknowledge publicly that the peak-oil thesis is true (eg, that discoveries of oil have peaked), but even business-friendly publications like the Wall Street Journal are starting to publish stories, as they did this week, about Kuwaiti and Saudi oil execs planning to extract viscous - and harder to refine - heavy grades of oil as the light 'Sweet Crude' for which the region is noted begins to run out.
The implication for business is that transportation costs are beginning to eclipse labor costs due to the price of energy. This trend appears to be secular rather than cyclical, meaning it may be with us for the long term. This could be good news for job creation in developed countries, but it could also cause unrest in China. And the classic response of regimes under economic stress is to find someone to blame to deflect anger from those in power. Whatever the end result, this will contribute to an already tumultuous economy. Energy costs are also driving up food prices, traditionally the match that ignites the flame of popular unrest. So as you lick a melting ice cream off a simple wooden stick this summer, think about where it came from and what that may mean for your business and you. JL
Jeff Rubin reports in The Globe and Mail:
"Why has Global Sticks, a manufacturer of wooden ice cream sticks, moving from Dalian, China, to Thunder Bay, Ontario?
It’s the kind of low margin manufacturing that is never supposed to come back after it leaves North America for cheaper labour abroad. But wage costs are no longer everything they were cracked up to be. In today’s world of soaring energy costs, power rationing and export taxes on key commodities such as wood, wage gaps are less important. When the power goes off, it suddenly doesn’t matter if your labor is expensive. Factories don’t run on sweat alone.
As the price of the bunker fuel that transports those ice creams sticks to customers around the world tracks soaring world oil prices, the distance between your factory in Dalian and North American kids lining up at their neighborhood ice cream store, becomes more expensive every day.
When the price and availability of energy start to dominate your business plan, you say goodbye to your inexpensive Chinese labor force, and pack up and leave. Of course, not everybody can leave. Those that stay are bracing for what China’s Electricity Association is warning will be the nation’s largest power shortage in years this summer. As many as 20 provinces and territories have already been put on power rationing, including the country’s industrial heartland.
The provincial government in Zhejiang, a manufacturing hub close to Shanghai, has notified 44 major industries about limits on their power consumption. Companies that exceed these limits face prohibitive power tariffs that would threaten much of the region’s low margin manufacturing. The story isn’t any different in Guangdong, south China’s manufacturing hub. Its industries must also cope with limits on power usage.
It won’t be long before all that power rationing starts to curb economic growth, particularly in the power-intensive centres of China’s industrial production such as aluminum and steel.
The failure of regulated power prices to keep pace with soaring world coal prices lies at the heart of the China’s power crisis (as well as in similar power crisis sweeping neighboring India and Pakistan.) Chinese power prices have gone up as little as 1/10 of the rise in world oil prices.
Not only is this practice economically untenable for coal fired power generators, who supply over three quarters of China’s power but it encourages unsustainable rates of coal consumption. Last year, the power hungry Chinese economy burnt a staggering 3.2 billion tons of coal.
Beijing has already warned the country may soon hit peak coal production, forcing greater reliance on ever-more costly imports. In the meantime, China has banned the export of diesel fuel, which may soon be needed for power generation.
As China’s power crisis worsens this summer look for more firms such as Global Sticks to relocate production and come back home.
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