The Bell Begins to Toll for Wal-Mart

Rising fuel costs are starting to eat into the costs of corporations with global supply chains - meaning prices will go up and they will lose their main competitive advantage. Global corporations are beginning to reverse the outsourcing process and relocate near their markets. From "Shipping costs start to crimp globalization":

Globe-spanning supply chains — Brazilian iron ore turned into Chinese steel used to make washing machines shipped to Long Beach, California, and then trucked to appliance stores in Chicago — make less sense today than they did a few years ago.

To avoid having to ship all its products from abroad, the Swedish furniture manufacturer Ikea opened its first factory in the United States in May. Some electronics companies that left Mexico in recent years for the lower wages in China are now returning to Mexico, because they can lower costs by trucking their output overland to American consumers.

In fact, it is not just Wal-Mart's death knell that we hear, but that of both globalisation and rampant consumerism, too. Let's look at both cases:

Globalisation, We Hardly Knew Ye
For companies with enormously extended supply chains, like Wal-Mart, shipping is a significant portion of their cost. This, combined with manufacturing in places with minimal labour and environmental standards (and convenient free trade agreements), allowed them to undercut local manufacturers.

We have already seen companies move their plants when labour costs increase; it happened to us, of course, and now it is happening to Mexico as companies head to China. Now, those same companies are facing the triple-whammy of increasing labour costs, stricter environmental protections, and rising fuel costs.

The spike in shipping costs comes at a moment when concern about the environmental impact of globalization is also growing. Many companies have in recent years shifted production from countries with greater energy efficiency and more rigorous standards on carbon emissions, especially in Europe, to those that are more lax, like China and India.

Given that all of these appear to be permanent, albeit very slow-moving trends, what is today's GloboCorp to do? In fact, as cited above, some are relocating manufacturing back to closer countries, including even developed countries. Of course, they may also be looking at the rising tide of public and political sentiment for fairer trade agreements.

Consumerism
As these companies re-relocate, let's not forget that they are doing so in order to keep shipping costs down - but that they are often returning to higher wage, higher eco-standard countries, meaning that their costs and therefore prices will still go up.

This erases a significant part of the companies' advantage. The closer Wal-Mart prices get to those of locally-owned stores...well, what else does Wal-Mart have to offer? It certainly isn't service. Selection will also change dramatically, as goods from faraway places become too expensive for Wal-Mart to carry.

Rising prices encourage people to buy fewer, better quality things; it becomes expensive to simply throw things away. People will become resentful of 'planned obsolescence' and poorly built goods. They will start to expect some 'trade-in value' for expensive items like washing machines, and there will be more public support for laws that require companies to take back the products they make. There may even be considerable pressure to make recycling pay.

The Battle for the Future
As prices rise, so does inflation, at least the way we measure it, so interest rates may go up. Of course, if the economy is struggling, the central bankers and others committed to a continuously expanding economy will be caught in a bind.

As manufacturing becomes more local, companies will do what Wal-Mart does: attempt to control costs in other ways, ways that make them quite unpopular. Expect union membership to rise. And, as manufacturing of necessity becomes more local, the power of the global corporations diminishes with respect to local government. The days when companies could threaten to pack up and move their manufacturing offshore are ending.

One likely outcome if transportation rates stay high, economists said, would be a strengthening of the neighborhood effect. Instead of seeking supplies wherever they can be bought most cheaply, regardless of location, and outsourcing the assembly of products all over the world, manufacturers would instead concentrate on performing those activities as close to home as possible.

So the GloboCorps may also do some things that are positive. For example, to keep costs down (and thus keep local companies from springing up), they may well push to rebuild the rail systems - at taxpayer expense, of course. This will create an interesting dilemma for we Greens: to support rebuilding the rail system, or to support local manufacturing? We can have both, but you can bet the big companies and big parties will not be positioning it that way.

We live in interesting times.

http://www.iht.com/articles/2008/08/02/business/03...