Two relatively recent developments make it likely that we’ve now passed the point where we can expect the prices of manufactured goods, such as cars, computers and washing machines, to keep falling. From now on, the price pressures will all be upwards.
The first is the emergence of Chinese inflation. As I’ve written before, falling prices for imported Chinese manufactured goods have helped deliver lower inflation to the developed world over the past two decades. But the tables have now turned, and China is now exporting inflation, rather than deflation.
Strong economic growth in China and India have fuelled a global commodity boom, causing energy and raw material prices to surge sharply. And higher commodity prices will eventually push the cost of Chinese manufactured goods higher. At the same time, Chinese producers face rising labour costs, because Chinese wages are climbing by about 20 per cent a year.
But the second threat to globalisation comes following the devastating Japanese earthquake disaster, which has left many Japanese factories still lacking water and gas, and faced with rolling electricity blackouts. Faced with the prospect that a lack of Japanese components could disrupt their own production, many multinational companies are being forced to rethink the virtues of having highly fragmented global supply chains.
And Japan plays a crucial role in the global manufacturing supply chain — particularly for cars and electronics. Its factories are responsible for producing roughly 30% of the world’s flash memory (used in electronic cameras and smart phones), and 15% of D-Ram memory (used in personal computers).
For the past two decades, global companies have been under intense pressure to cut their production costs in order to be competitive. To do so, they’ve fragmented their production processes, and sought out the cheapest supplier globally for each component.
The car manufacturing industry is the extreme example of this process. It’s undoubtedly the world’s most complex supply chain. Around 3000 parts go into a single car or truck, and each one of these parts is made up of hundreds of other pieces, which are in turn supplied by many different companies.
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But, of course, this leaves car manufacturers extremely vulnerable. If there’s a disruption in the supply of one single piece, the whole production schedule can run awry.
Big global companies also cut costs by slashing their inventories and introducing just-in-time deliveries for all their components. This means that they no longer face the expense of holding large inventories of components, and it also made a lot of sense at a time when the price of components kept falling. But, as we’re seeing now, it has left them extremely vulnerable to supply disruptions.
Already, executives in large multinational companies had been questioning the benefits of setting up production in developing countries, after the recent political turbulence in some of North African and Middle Eastern countries.
But now that big companies, from Boeing to General Motors, are grappling with a shortage of Japanese parts, they’re having to concede that even developed countries are not without their risks.
As a result, more global multinationals are likely to give serious consideration to the idea of radically simplifying their supply chains, and bringing production closer to their home markets. At the same time, they’ll also be likely to hold more inventory, to guard against future supply shocks.
This won’t be an overnight process. But if — as seems likely — the big multinational companies react to the latest developments by increasing their sourcing from suppliers based at, or close to home, we’re likely to see jobs that had been lost to the low-cost developing countries returning to the developed world.
But we’ll also inevitably see increasing cost pressures that will translate into higher prices for manufactured goods.
*This article first appeared on Business Spectator