An interesting report was recently authored by Merrill Lynch and while aimed more at the ocean forwarding side, it clearly has relevance for the air freight forwarding sector. Entitled ‘After the Golden Age’, it outlines Merrill Lynch’s opinion that “the structural growth story for the freight forwarding industry is being gradually undermined by changes in world trade patterns”.
In essence it argues that the falling attractiveness of China for outsourcing alongside the resultant shift of production back to developed economies, or at least in near-by countries (ie. Near shoring) and the changing nature of demand in emerging markets is fueling this decline.
Certainly the rapid rise of wage rates in China in recent years has weakened the previous appeal of almost unlimited cheap labour which led to the growth of China’s manufacturing belt in the Pearl River Delta in particular. In addition, the cost of labour in countries such as Mexico, Poland and Turkey is now not much higher than that of China. The option of relocating more complex operations to the US or Europe has also increased based on not only cost factors, but security issues and quality control.
To compound this, the report suggests that servicing the new consumers in China and other parts of Asia will be less demanding in terms of transport. It is believed that the intra-Asia shipping will become less profitable for both transport asset owners and forwarders than the long haul routes to Europe and North America. There is also the impact of new technologies, such as 3D printing which, although still in its infancy, threatens to have a negative impact on global shipping and supply chains.
The report highlighted that all of these factors undermine “the principal reason why global trade has historically grown faster than global GDP – the emergence of international supply chains”. With less complex and shorter global supply chains, there can be no alternative but smaller profits for freight forwarders. Certainly tougher, more competitive market conditions and fewer opportunities for market share growth will also impinge on profit margins.
Perhaps we’ve all clung too long to an ‘old’ paradigm of supply chain management, something the increasingly dynamic global economy may no longer entertain. Certainly food for thought as the air cargo industry grapples with the challenges of today’s global economy and struggles to reshape itself and devise a new business model.
