Revisit Sourcing Strategies to Reduce Overdependence
By Felicity Landon
Raw material sourcing is ripe for change, with an uptick in project cargo owners opting for a “China Plus One” policy to reduce risk. From Issue 2, 2024 of Breakbulk Magazine, industry leaders from 4D Supply Chain Consulting and Drewry Shipping Consultants assess how the strategy could impact project supply chains.
(6-minute read)
Apple, Samsung, Sony and Adidas have all moved some of their manufacturing activities from China to elsewhere in South-East Asia – as UNCTAD reported in its Review of Maritime Transport towards the end of last year – due to rising labor costs in China and risk management considerations.
“A strategy adopted by some companies for diversifying supply sources and reducing overdependence on China is the ‘China Plus One’ strategy, where companies expand outside China while still maintaining a presence there,” UNCTAD said. For example, the share of U.S. container imports from Vietnam increased from 4 percent in 2017 to 8 percent in 2022, while India’s share moved up from 3 percent to 5 percent. China’s share dropped from 40 percent in 2017 to 31 percent in 2022.
According to 4D Supply Chain Consulting, an independent supply chain consultancy focused on the heavy-lift market, there has also been a shift in the project cargo sector, as shippers are concerned about the risk of overreliance on one country when it comes to project sourcing.
“There is definitely a desire to adopt the China Plus One strategy, or to find new sources, but how much it affects project budgets is a big question,” said Vilasini Krishnan, vice president of 4D. “How soon it will happen, where possible, is where the complexity is.”
For starters, with the cost of labor increasing in China, there is money to be saved by sourcing from elsewhere in South-East Asia, she said; but in the medium term, we could see far more radical change.
While project cargo owners are – at present – largely sourcing components from the same places, their sourcing of raw materials is shifting, said Thomas Skellingsted, president of 4D.
“During Covid-19 we saw that sourcing moved from China to other Asian countries, including India. But now we are also seeing things moving across to the Americas. The U.S. is sourcing much more locally or regionally. There are governmental incentives to do so. Projects’ components are still coming from the normal suppliers – it’s more about where these suppliers are sourcing their raw materials from. The U.S. is also talking about building a free trade zone close to Mexico, which is another factor.”
Shifting Supply Chains
Skellingsted predicts that in five years’ time, supply chains will look very different, with a huge shift to nearshoring or even onshoring. The crisis in the Red Sea, with ships taking the long route around South Africa to avoid the Suez Canal, and the limits of navigation caused by drought in the Panama Canal, could well accelerate these moves. There is also the concern of the potential introduction of emission trading systems similar to the EU’s in other parts of the world, creating challenges for the shipping industry.
Skellingsted said that the pandemic served as a wake-up call for many shippers who hadn’t perhaps given sourcing that much thought before. “The way in which China handled Covid was when companies found out how vulnerable they were,” he said. “There are also rumors that some parts of China are going into recession financially. Is that also because of the China Plus One trend? Possibly.”
Most of 4D’s clients are within the heavy-lift industry – cargo owners looking for support and transparency in their supply chains for projects, he said. “We have clients who have no idea about the cost of shipping. When a project requires 500,000 tonnes of steel to be shipped from India or China, sometimes logistics is the last scope to be considered. You’re talking half a million dollars for breakbulk to go around South America instead of through the Panama Canal.
"The same thing is now happening with the Suez Canal; all the multipurpose vessels are going south around the Cape of Good Hope, which means they are out of sync by 12-14 days. That is delaying things within the project business and adding to everything else that is going on.”
The current supply chain model for containerized consumer goods is based on “warehousing on the ocean,” Skellingsted added. “Of course, within breakbulk we are also trying to optimize the usage of the vessels because there is a lack of vessels. Every year vessels are being taken out of service and we do not have the same number coming into the market. For shippers, therefore, it is a carrier’s market, not a buyer’s market.”
Capturing Risk
4D advises its shipper clients on landed cost, emerging trends, changing concepts and “seeing what we can do now,” he said. “For example, procuring items in Brazil and importing directly into the U.S. instead of from India.”
Krishnan added: “The risk analysis we do is essential. We can capture risk and projected risk, but we can’t predict unseen issues like war. However, we can at least provide options – not putting all your eggs in one basket; consider what are the alternatives if something goes wrong. We can build in contingency plans.”
And that appears to be the crux of it – projects can be meticulously planned in advance, but having a back-up plan seems to be increasingly essential.
Skellingsted said: “Take the insurance of cargo going through Suez – prices have gone through the roof. So the budget you had one year ago, you can throw out now. Depending on the project, some shippers do pin down the shipping costs in advance but, as I said, it’s a carrier’s market. The carrier will come back to the freight forwarder and say, ‘we can’t do this’ and effectively tear up the contract.”
Covid made it painfully clear where shippers did not have contingency plans or, indeed, any visibility as to where things were coming from and how, Krishnan said.
Of course, when it comes to specialist projects requiring specific, complex and sophisticated modules or units, for example, there is often a limited choice of ‘baskets’ to put the eggs in.
“In project procurement, there is a limited number of manufacturers/ countries that would supply items to the standard the project developer is looking for,” Krishnan said.
“But we can look for a ‘contingency pipeline’. If a certain manufacturer is not up to standard, what can we do as a partnership to ensure that standard is reached? In other words, if it’s not 100 percent of what you are looking for but there is potential, it’s probably worth investing time and effort in the longer-term to bring the production up to standard. You see it in vendor management of project forwarding; the same can be applied in manufacturing and in logistics.”
Alternative Bases
Are companies looking to open new offices in strategic alternative sourcing option countries?
“The big companies already have offices in many countries,” Skellingsted said. “The medium-size companies are not going to have this set-up, especially in the short-term, and the small companies are struggling as well due to the fact they are not present in these countries.”
This is an issue 4D is looking to tackle, he said. “We use our network to help our clients find alternative solutions. With some certainty, I can say that, in the future, you will see a lot of companies joining forces to match up skills and ability and a lot of consolidation on projects going forward.”
This is a new concept for 4D, he said, bringing together large and small companies to work together. For example, an oil major might have a project in Guyana. The company goes to its regular suppliers, but rates are high and it is difficult to find a supplier for a certain product. In this scenario, another company may have the relevant product in Brazil but has never supplied to Guyana or to the oil major concerned.
“Bring the two together and you get the product at the right time in the right location.”
4D is setting up a register of project companies and suppliers, region by region, to join up these dots, starting with a pilot of 15 companies. However, Skellingsted is frustrated by the secrecy of the project cargo freight forwarding world.
“We all know who’s who, who’s doing what. Let’s break down those walls, and work together. Traditionally, companies keep everything secret because they are afraid of losing out and afraid of the competition, so there is no transparency. But companies can sign NDAs so each party is still protected. They can work together and share the profit. Ultimately, this is necessary to weather the challenges that the industry is currently facing.”
Shipbuilding Concerns
From Drewry’s point of view, the biggest concern around China for the project cargo sector is the concentration of shipbuilding in the country’s yards.
“When looking at MPVs, about 85-90 percent of the orderbook in deadweight-ton terms is being built in China,” said Peter Molloy, senior maritime research analyst. “These are our heavy-lifters, all the project vessels that we are expecting we will need to do energy products and the green transition. So, the whole [energy transition] plan is based on the capacity of ships coming out of China.”
A recent analysis of delivery rates of ships from European and Chinese yards showed the Chinese deliveries slipping quite a bit more, Molloy said. “We do get concerned that there is an overreliance on China and that is before we even get down the road of geopolitical concerns. If China falters in any way, the knock-on effect on several projects and on the global plan for the environment becomes quite concerning.”
This focus on China is to the detriment of the skillset that should be spread across other countries and therefore spread the risk, he added. “These are highly specialized and advanced vessels where there is going to be a saving by going to China – but the saving is maybe not as big as you think.”
China has a huge share in shipbuilding across all categories. As Dr. Ferenc Pasztor, deputy head of research at Drewry, said: “With container ships and LNG vessels, the shift to China has just started. Most of the tier one yards in Korea and Japan have been taken up for either container ships or LNG carriers for the next four years.”
Hence, he said, any attempt to move away from China and build large MPVs in other countries would likely run into trouble. Not only are yards in Korea or Japan ‘maxed out’ but MPVs have mostly not been built in these countries for nearly ten years. “The last deliveries were 2014-15 and it was only a handful of vessels. The shipbuilding experience in the large MPV segment outside China in the last decade is basically gone.”
Early Delivery Benefits
Molloy’s concern is with the slow nibbling away of the Chinese economy. If things slow down, these ships may not be delivered. “People will say they are building their ships but what if the ships don’t arrive in time as we try to get projects started?”
Time is money, he added. A ship owner might go to China and be told they will have a two-year wait for a newbuild. What if that vessel could be built elsewhere for an additional US$2 million-3 million? “The question is, are you going to make an additional US$4m or US$5m by having it earlier? Or maybe having the vessel sooner enables you to get a two-year contract.”
There may be a margin of cost saving by building in China, Molloy said. “But it’s about having the ship or not. You will make up that margin very quickly if you have a trading vessel [more quickly].”
When it comes to sourcing patterns for actual project components, Pasztor and Molloy pointed out that in general, these projects are not centered on one location. Most large projects source the various components from different manufacturers/ countries in any case. Meanwhile, steel production is well spread out.
“I don’t see China Plus One being a concept for a large project because it’s rare for full manufacture to happen in one place, except for the final assembly.”
Pasztor suggested that much of the China Plus One idea is ‘just a kind of a show’. “I don’t think there will be a complete move away from China. It will always be superficial. It will be Chinese components going into Vietnam, being assembled there and shipped to the U.S.
“The U.S. will buy fewer things directly from China, buying them instead from Mexico. But where does Mexico buy the components from? China! So much of this nearshoring merely adds additional players and steps into the supply chain.”
TOP PHOTO: deugro moves petrochemical units to Long Son, Vietnam. CREDIT: deugro
