Logistics Bottlenecks Hamper Efforts to Produce Less in China
Date: Thursday, May 23, 2019
Source: The Wall Street Journal
Firms looking to shift some production to other parts of Asia face poor infrastructure, shipping delays and increased costs
Companies looking to move some production from China to other Asian countries to avoid mounting U.S. tariffs on Chinese imports face significant bumps in the road.
Manufacturers and supply-chain experts say logistics infrastructure in Southeast Asia, where many goods-makers are scouting for new production sites, remains far less developed than China’s long-established connections between factories, suppliers and customers around the world.
Poor roads, sparse rail lines and congested ports in Vietnam, Thailand, the Philippines, Cambodia and other potential manufacturing destinations in Southeast Asia have stretched out delivery schedules and raised shipping costs, according to manufacturing and transportation company executives, even as companies have migrated some factory work to the region in the past decade in search of lower labor costs.
Those bottlenecks are coming under fresh scrutiny as more multinational companies look to shift some production as Washington and China load up a new round of tariffs that could alter the direction of significant volumes of global trade.
Infrastructure investment in Southeast Asia ports has “simply not kept pace,” said Andrea Shaw Resnick, interim chief financial officer of New York-based Tapestry Inc., the owner of premium fashion brands Coach, Kate Spade and Stuart Weitzman, during an investor conference call this month.
Tapestry sources some of its handbags, apparel and shoes from suppliers in Vietnam, the Philippines and India, who send them to the U.S. and other markets on container ships. Ms. Resnick said logistics gridlock has led to “longer lead times, with more inventory in the water at any given time.”
Hong Kong-listed VTech Holdings, which owns educational toy company Leapfrog and other makers of products for children, has been considering expansion of its existing facilities in Malaysia to take over some Chinese manufacturing.
VTech Chairman Allan Wong said factory capacity in the country is far behind that of China and can’t quickly catch up because of the sheer scale of China’s large workforce. “There’s no way you can move everything out of China,” Mr. Wong said.
Even before U.S. tariffs, factory work in Southeast Asia has been growing as companies have sought lower costs while wages and other expenses in China have increased. That manufacturing migration has taken on more urgency for some producers as the trade conflict between the U.S. and Washington has heated up, with a new round of back-and-forth tariffs this spring and threats of higher levies this summer.
Japanese copier maker Ricoh Inc. said this month it would shift some production for the North American market away from China to avoid potential losses of tens of millions of dollars from the U.S. levies.
Global trade volumes reflect a likely shift in the region’s sourcing and manufacturing.
U.S. seaborne imports from China were up 2% in April from a year ago, while those from Vietnam surged 29.3%, according to Panjiva Inc., a trade data provider. U.S. trade with Vietnam remains a fraction of the business with China, however.
China was the biggest source of U.S. imports by value in the first quarter of this year, according to the U.S. Census Bureau, accounting for 17.7% of inbound goods. It had seven times the imports of Vietnam, which was the 13th largest U.S. trading partner and seventh largest for imports.
Agility Global Integrated Logistics, a Kuwait-based global logistics provider, said Vietnam has been the top choice among companies looking to lower their production costs. But growing trade has also challenged the country’s infrastructure.
“In the first quarter of this year there was significant port congestion in Vietnam,” said James Hill, Agility’s chief executive officer for Asia-Pacific.
“Trucks were waiting for four, five days to unload a container at Ho Chi Minh City Port. The road capacity is poor, there are huge traffic jams and limited rail links. Delays of up to a week for ships are not uncommon.”
Vietnam is the last stop on several Southeast Asia sea trade routes. Medium-size container vessels typically load up in countries such as Myanmar, Singapore, Malaysia, Thailand and Cambodia before reaching Vietnamese ports and then sailing across the Pacific Ocean to the U.S. West Coast. This means exporters in Vietnam often end up competing for scarce ship space.
The country’s overall port volumes soared from 4.4 million containers in 2008 to 12.3 million containers in 2017, the most recent year for which figures are available, but the lack of deep-water port facilities means smaller vessels often carry goods to other countries for transshipment to bigger markets.
Research firm Business Monitor International estimates that Vietnam pumped $11.1 billion into construction projects in 2017, substantially below the $16 billion annual investment the World Bank estimates that Vietnam needs to keep up with demand.
U.S. fashion accessories manufacturer Vera Bradley Inc. has been sourcing products from Myanmar, Cambodia and Vietnam and expects less than a quarter of its output to come from China by the end of this year, from 54% last year. The company says higher tariffs have accelerated the shift.
“One of the challenges is the timeline,” said Chief Executive Rob Wallstrom, in an email response to questions. “Deliveries from countries outside China add days to our production cycle based on factors including raw materials procurement and shipping routes. ”
Others looking outside the immediate region face similar trade-offs.
Hong Kong-listed Mainland Headwear Holdings Ltd, which makes licensed products for New Era Cap Co. and owns San Diego Hat Co. and H3 Sportgear LLC in the U.S., is looking to move production for a new acquisition to Bangladesh from China to save on labor costs.
But Managing Director Pauline Ngan Po Ling said the time it takes to export goods presents a challenge. “We need to transport our products by feeder vessels to the deep-water ports at Malaysia and Singapore,” she said, “adding another two weeks of transportation time for our shipments.”