Supply chain shift, or shudder?
Even prior to the trade war, Vietnam and other rapidly industrializing economies have long been a beacon to labor-intensive manufacturing that was once the backbone of China’s exports in industries such as footwear and apparel. “China is over the peak in terms of footwear production for the U.S. market from a high of 90% to 69% today, and dropping,” said Matt Priest, President & CEO of the Footwear Distributors and Retailers of America (FDRA). The trade war can be seen as a catalyst for a quicker shift. Even companies that rely on China to manufacture the bulk of their products “are now looking” for alternatives, said Priest.
Initially, many manufacturers with flexibility in their supply chains held on to hopes of a quick resolution and avoided a wholesale exodus out of China. Additionally, many companies, “couldn’t change and move production elsewhere,” because they were “locked into contracts,” said Bob Imbriani, VP, Team Worldwide. As concern grows that a trans-Pacific truce may not be on the table and as purchasing contracts expire, additional supply chain shift is occurring. “We’ve been working with many customers looking at alternate landed cost scenarios if they did start sourcing in Vietnam, Taiwan or other places,” added Imbriani, whose Trade Services helps shippers navigate customs and regulatory issues.”
The boom in the number of purchase orders being issued to factories outside of mainland China has had consequences for export volumes from the country but highlights the speed at which carriers can retool their networks. Transit hubs such as Taiwan, South Korea and Japan have long catered to trans-Pacific cargo flows, says Tamada, whose carrier ANA saw a 24% drop in traffic on the China-Japan lane during 1Q19. Softer volumes out of China have made ANA Cargo and many other carriers to trace supply chains back to alternate sources of volume.
“We reallocate the space unfilled by our China stations to the stations in Asia and Japan to minimize negative impact on the business to the U.S.,” said Tamada. “Airlines in greater Asia in general are now struggling to maintain load factors on the flights to U.S.” Taiwan-based China Airlines noted air exports from Vietnam to the U.S. had increased by 26% in 1Q19.
Shah confirmed the trend, saying, “Carriers in North Asia are giving markets in Southeast Asia a bigger allocation for transpacific freighters than their home markets.” While this might have the effect of making airfreight capacity a buyer’s market, for carriers looking to make up lost ground outside of China, “One-stop carriers are in fact trashing yields out of Vietnam” said Shah.
Given the bi-lateral nature of the tariffs, flights returning to Asia from the U.S. are also seeing a drop-off in demand for perishable items like lobsters and fresh fruits. Importers are “shifting the orders to Canada,” which further weakens demand from the U.S., added Andrew Lin, GM of cargo marketing & planning, China Airlines.