Business Management

Josh Green (Latin America) - The Sourcing Spotlight Shines on Latin America

For years, China has been the dominant force in the world of manufacturing. Quite simply, when sourcing executives wanted to get something made, they turned to China. But the winds of change are blowing, and they're blowing in the direction of Latin America. To understand what comes next, it's important to understand the story of how we got here.

Changing Cost Structure in China

The story begins in China. China's recent manufacturing dominance has rested on three pillars: export-friendly policy, strong infrastructure, and a (seemingly) inexhaustible supply of inexpensive labor. It's this last pillar that's recently been crumbling. As the opportunities available to Chinese workers have increased, their leverage -- and their wages -- has also increased. The significant cost advantage enjoyed by manufacturers in China is disappearing.

Sourcing executives have been looking elsewhere in an effort to get ahead of cost pressures, and in truth they're looking everywhere. At Panjiva, we took a look at apparel imports into the United States to get a sense of the trajectory of trade flows. (Why apparel? Because manufacturing apparel doesn't require a lot of capital investment or highly skilled labor. As a result, apparel manufacturing tends to move faster than other industries.) From 2010 to 2012, China lost 1.3 percentage points of market share. The 10 countries that gained the most market share were spread around the world. But, notably, three were in Latin America.

Policy Matters

Why have apparel sourcing executives looked to Latin America, and why are sourcing executives across a wide variety of industries now following their lead? In part, because governments have encouraged them to do so. NAFTA reduced the costs of doing business with Mexico. And CAFTA-DR had a similar effect across a broader swath of Latin America.

Location, Location, Location

But it's more than policy. Now that China's labor cost advantage is disappearing, sourcing executives can take into account a broader range of factors when making decisions about where to manufacture. And, not surprisingly, location matters a lot. Sourcing closer to home can reduce transportation costs. It can also reduce lead times, which can eliminate the need to guess what your customers will want months in the future. Finally, sourcing in (roughly) the same time zone makes communication a whole lot easier, which can reduce friction in the product development process (and eliminate the need for a lot of late night calls).

What's Next?

So can we expect Latin America to be "The Next China?" No. In all likelihood, no one country -- or region -- will dominate manufacturing in the years ahead. Rather, we will see a splintering of the manufacturing base. Some manufacturing will stay in China. Some manufacturing will move to other Asian countries. And some manufacturing will move to the Western hemisphere.

The first consideration of sourcing executives will always be capabilities. They must find factories that have the ability to produce the required product. Chinese manufacturers have accumulated a lot of expertise in a variety of specialized manufacturing processes. And it is this set of manufacturing activities that will remain in China for a while. But, sooner rather than later, lower skill manufacturing will migrate closer to the end customer, to reduce transportation costs and lead times. The same will be true for heavy industry where transportation costs are the key driver of the overall cost structure, as well as product categories where close collaboration and rapid iteration in the product development process are essential. It is in these industries where Latin America is poised to see significant gains in the years ahead, as companies that are trying to serve end customers in North and South America, and companies whose R&D capabilities are based here, look to manufacture closer to home. Indeed, according to one recent projection, Mexico will surpass China as the largest supplier to the United States by 2018.

To be sure, the forces of economics are working in Latin America's favor. But perhaps the most interesting question is what happens as manufacturing in Latin America picks up steam? Will companies and countries move up the value chain and develop specialized manufacturing capabilities? Will the economic gains -- and environmental harms -- be distributed justly? The recent history of Asian manufacturing giants suggests likely answers to these questions (yes to the former, no to the latter). But, as always, the answers to these questions will be determined by a complex set of choices made by a wide variety of politicians, businessmen and women, activists, and consumers. So, really, who knows what lies ahead? To throw a couple of metaphors together -- when the winds of change start blowing, the future is up for grabs.


By Josh Green, CEO of Panjiva



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