What happens to global supply chains if China’s economy falters?
About a decade ago, when we had grown giddy on China’s consistent double digit growth economy as a major contributor to world economic growth, I remember asking at an industry gathering what would happen if the Chinese economy suddenly faltered. I didn’t get much of an answer but I did get more than a few disgruntled stares for even daring to ask the question.
Well, I may finally get an answer.
The aftermath of late August’s Black Monday where concerns over China’s faltering economic growth led to the Shanghai composite index suffering its biggest selloff since the global crisis of 2007 and panicking investors worldwide, will prove to be either a strong market correction or worse, the start of a new phase to the global economic crisis which began about eight years ago.
Either way, whether you’re in charge of managing a global supply chain or a domestic one, what happens in China is going to have an impact on your ability to move freight.
Canada is a commodities producer that relies on global economic growth and much of that growth has come from China. During its double-digit growth spurt China developed a voracious appetite for wood, metals, potash and oil, which fuelled our resource based economy. Considering that as I write this Canada is flirting with dropping back into at least a technical recession (two straight quarters of negative growth) after experiencing negative growth in each of the first five months of 2015, the latest news out of China is not what we needed to hear. There are serious doubts now about China’s ability to maintain its growth projections and that could considerably lower demand for many of the things that drive Canadian exports.
If you’re shipping domestically a dip back into recession or prolonged low economic growth may play in your favour in terms of downward pressure on transportation base rates and fuel surcharges but it can also affect carrier equipment renewal plans and service. Our annual Equipment Buying Trends Survey of the nation’s motor carriers shows that although the larger carriers are staying the course on equipment renewal, small carriers, essentially the heart of Canadian trucking, are having second thoughts with 55% telling us they have no plans to renew their fleets in 2016.
For those of you managing global supply chains, a faltering China may have an even larger impact. A Chinese government pressured to find the money to prop up its economy may merge its state-owned COSCO and China Shipping Container Line (CSCL). COSCO is the sixth largest marine carrier serving the global market with CSCL right behind it in terms of TEUs, according to Drewry Maritime Research. A combined entity would create a carrier controlling upwards of 1.5 million TEUS, moving it into fourth place in terms of global market share.
Although industry analysts say such a merger makes sense from the standpoint of the state-owned enterprises’ viability, continued consolidation can only lead to a negative impact on industry competition, likely creating a domino effect on existing carrier alliances and spawning further mergers. In turn this could also have a negative impact on service. As I mentioned a few columns ago, the on-time performance bar in container shipping has dropped so low that we actually rejoice when we can get two-thirds of our container shipments delivered on time.
Greater China represents about 30% of all container moves in the world. A slower growing Chinese economy – WTO data shows merchandise imports were down 15.5% and exports rose just 1% in the first six months of 2015 – is going to place even greater pressure on containerlines already pressed with trying to fill the slots on their new Ultra Large Container Ships. Containerlines’ desire to meet greater than 90% fill rates, rather than the 80-85% which may be more realistic under the latest economic realities, may keep ships delayed even longer, dropping the bar on service even further.