As we kick off 2011, it looks like we can finally say goodbye to the Great Recession. According to the National Bureau of Economic Research, the recession technically ended in June of 2009. However, according to Panjiva’s data, it wasn’t until April of 2010 that global trade activity returned to 2008 levels. Since April, we’ve been essentially treading water at pre-recession levels (better than a double dip, to be sure!). Looking ahead, there’s a tremendous amount of uncertainty about the trajectory of the global economy. While we can’t resolve this macro-uncertainty, we’ve polled our clients to get their perspective on what 2011 has in store for global sourcing teams. Here’s the (mostly) consensus view:
1) Rising costs
In 2011, manufacturing costs will rise. For years, China’s huge labor pool helped keep global manufacturing costs down, but wages are on the rise in China. China’s move toward a more flexible Yuan amplifies the effect of wage increases. But perhaps the most important thing going on in China is the rise of its middle class — a middle class that is demanding goods and services. This increase in demand has been putting — and will continue to put — pressure on the prices of commodities (cotton, oil, rare earth metals, etc.). Rising labor costs and rising materials costs — not good news for the cost structure of manufactured goods.
2) More protectionism
In 2010, we got a hint of what U.S.-China relations could look like in the years ahead. Throughout the year, we saw diplomatic wrangling over China’s currency policy, and just last week China announced tighter restrictions on the export of rare earth earth metals. What’s behind the recent surge in protectionism? Differing rates of economic growth and uncertainty about what the future holds. It was jarring for American leaders to see China prosper while we held on for dear life through the Great Recession. Meanwhile, Chinese leaders have over a billion mouths to feed and are unwilling to take measures that could jeopardize additional growth. In 2011, we will continue to see an economic recovery that is uneven, and we will continue to see fear about the future as a driving force in shaping government policy. This is a recipe for more protectionist rhetoric and more protectionist policies. Will we see an all-out trade war? Unlikely, as our leaders seem to understand that everyone would lose in a trade more. More likely we will see flare-ups that will create headaches for sourcing executives in a variety of industries.
3) Putting the “Global” in Global Sourcing
For years, “Global Sourcing” really meant “China Sourcing.” China’s wage rates were unbeatable, and so everyone turned to China for their sourcing needs. However, as noted above, wages are rising in China, China’s changing currency policy will exacerbate the impact of wage increases, and the risk of trade conflict with China is growing. Put these things together, and it’s easy to understand why sourcing teams are scrambling to move beyond China. Does this mean that companies will stop sourcing from China? No. But China will no longer be the default destination, and sourcing teams will need to grow their capabilities outside of China.
4) Sourcing Teams Will Again Be Investing (Not Just Holding on For Dear Life)
And this brings me to a final prediction: in 2011, sourcing teams will again be investing. For the last two years, sourcing teams, and the companies that employ them, have been holding on for dear life. With the economy in shambles, teams shrunk in size, and those that remained had to make do with fewer resources. However, as the economy recovers, sourcing teams will have a critical role to play in positioning their companies for growth. Spotting opportunities across the globe, securing necessary capacity, keeping a lid on prices — sourcing teams will have a lot on their plates. And so they will again be investing. Here are a few areas that are likely to receive attention:
- Geographic trend analysis — Sourcing teams need to understand the sourcing landscape and be able to conduct supplier due diligence across a wide variety of geographies.
- Cost analysis — Sourcing teams will want to make sure they have up-to-date information on commodity prices and wage rates, so that they can manage their teams expectations about the trajectory of cost structures, and so they can be well-informed when negotiating with suppliers.
- Collaboration with suppliers — Companies will need to work with their suppliers to improve speed to market and to find creative ways to cut costs. Expect sourcing teams to invest in tools that facilitate collaboration, as well as some good, old-fashioned face time with suppliers.
- Process improvements — For years, sourcing teams have counted on cheap labor to keep manufacturing costs down. As wage rates rise, there will be an increased emphasis on understanding and improving manufacturing processes. Engineers, this is good news for you.
So what do you think? Comments, questions, predictions of your own? Email email@example.com. In the meantime, many thanks to the sourcing executives and experts who shared your thinking with us. And Happy New Year to all!