Globalization? It’s now regionalization

Globalization may be its own worst enemy, driving a new trend of regionalization.

There are several very strong trends that are now in the process of reshaping the terrain of the global economy in a very unglobal way.

The first of these trends is the collapsing US dollar, which for the world's largest economy and importer, means that those imports, both of the completed product and the subcomponent nature are no longer quite so attractive. This is not across the board, of course, but it is a major acting factor. China is one of the few nations not directly affected by this because their currency devalues along with the dollar. However, due to the dollar evaluation, so far, most US businesses are facing a price increase (read inflation) of between 12-20%. Another major cut by the Fed will have catastrophic effects. While the short term effect for American business will be disastrous, because of the higher cost of parts and few or no local suppliers, a long term decline on the dollar will drive local suppliers to develop new capacities.

However, this is a centric trend, even if it is affecting the world's biggest economy. There are two other trends that are equally putting pressure for regionalization. The first of these mega, world trends, is the obvious price increase in oil and thus fuel oil used for sea bound transportation. As prices increase in the cost of moving goods to and from, local more expensive suppliers suddenly do not seem so expensive, as companies are steadily coming to grips with TCO. TCO is an acronym for Total Cost of Ownership, which is the full real price that one pays for a good. Earlier in the drive to outsource, most companies had a siloed approach to this, meaning they were looking only at the bottom line of the man-hours and or over head costs. The cost of transportation, port fees, import/export duties, quality issues, safety stock, geopolitical risk and even port facility capabilities were all ignored. Wisdom, at a high price in lost dollars, has at last prevailed and has found that the TCO often made those cheap cheap manufacturing prices not so cheap cheap. Indeed, not only the transportation fuel costs but also it's capacity has become a major issue, which blends into the other global trend: capacity.

Most people are aware that the ports are struggling to handle the amount of traffic coming and going and coupled with the cost of the various inspection regimes, has led to very long lead times and thus to a demand for much higher and more expensive safety stocks..aka inventories. However, what most people are not aware of is that the actual transport capacity has fallen far behind demand. It has already been reported that China has effectively locked in 80% of the super transport capacity for 2008, leaving the rest of the world with crumbs to fight over. Add to this the often 2 to 3 week wait periods at Chinese ports just to unload and the three to four year construction period for a new super transport and one quickly realizes how much of a real issue this is. Woe to the fact that demand is still growing much faster then new ship construction.

These two trends globally and the US centric trend all lead to regional suppliers in what was once the dieing rust belt of the West having one more shot at life. In America, with stagnant manufacturing wages and massive illegal employment (the social costs are carried by the very generous or naive and politically powerless US taxpayers), this becomes even a better proposition.

Stanislav Mishin

The article reprinted with the kind permission from Stanislav Mishin and can be found on his personal blog Mat Rodina

Author`s name Dmitry Sudakov