The global economy is loading up the moving vans again. Consider this example:
Foxconn International (FXCNY, news, msgs), the publicly traded subsidiary of Hon Hai Precision Industry (HNHPF, news, msgs), the world's largest electronics contract manufacturer, is moving its iPhone production to Zhengzhou, in China's Henan province. Foxconn is also moving its iPad production to Taiyuan, in Shanxi province, and its PC production to Wuhan, in Hubei province.
The company's existing production base in Shenzhen will be used for research and development.
Certainly a rash of recent suicides at Foxconn's Shenzhen factory added to the urgency. But these moves are all part of a long-term strategy at Foxconn -- and at other manufacturing companies in industries from high technology to textiles -- to move production from the coastal cities of southern China to the less-developed areas of central and northern China.
The purpose: to cut labor costs.
What we're seeing is a huge restructuring in the global supply chain aimed at reducing costs -- again. The predictable result will be -- again -- the elimination of high-cost, low-value-added producers.
The underappreciated result -- and here's the opportunity for investors -- will be a vast increase in the complexity of an already terribly complex global supply chain. The beneficiaries of that increase will be a handful of companies that are positioned to execute the new complexities of sourcing, coordination, logistics and transportation that this iteration of the global supply chain presents.
In this column, I'm going to outline some of the dimensions of this next generation in the global supply chain, then give you the names of three companies that are in a position to take advantage of this development.
Cutting costs is job No. 1
The reason for all the change is simple: cost. In China, there's actually a worker shortage in the coastal areas that have long formed the basis of that country's world factory. And that's led to a bidding war for workers, forcing huge increases in the wages manufacturers have to pay. On March 18, for example, coastal Guangdong, China's biggest exporting province, announced a 20% increase in the provincial minimum wage. That increase brought wages in Guangdong to parity with those in provincial rival Jiangsu, which had raised its minimum wage by 13% the previous month. The increase brought the average monthly pay -- after adding in bonuses based on output -- to a little less than $300 at current exchange rates.Chinese manufacturers don't really have much choice but to try to cut costs somehow. They can't eat the extra wages themselves; many Chinese companies are barely profitable, with margins of 3% or less. And they can't pass the costs on to their customers because those customers have grown accustomed to annual price decreases over the past decade. (Remember that one of Alan Greenspan's explanations for why inflation was so low during the boom in the 1990s was that constant price decreases resulted from companies moving production to China's world factory.)
Those companies are taking steps of their own to make sure that prices to them keep on falling.
For example, Wal-Mart Stores (WMT, news, msgs) has launched a huge supply-chain overhaul designed to increase the percentage of goods it buys directly from manufacturers. Wal-Mart wants to cut out as many middlemen as it can. The company has said the effort will emphasize the $100 billion in sales (out of $400 billion) that Wal-Mart gets from its own private-label goods, which are manufactured by someone else to be sold under an in-house label such as Faded Glory. Right now, Wal-Mart buys only about 20% of those private-label goods directly from manufacturers.
The company estimates it can save $4 billion to $12 billion by shifting the way it buys its private-label goods.
Continued: Globalizing the pain
