Macro View on The State of Play in Supply Chain and Logistics
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What’s covered in this blog?
- In 2017, annual wage in China sat 5x lower than that of the US. While US manufacturing annual wages have grown about 2x since 1978, China has grown their manufacturing annual wage ~25x.
- Vietnam’s average annual manufacturing wages are 3–4x lower than in China and average rent is ~25% lower than in China.
- China remains the key player, serving as one of the US’s largest trade partners (largest source of imports and 3rd largest export market), growing from $5 billion to over $600 billion in trade from 1980–2017.
- The U.S. supply chain contains 37% of all US jobs, employing 44 million people.
- The largest shifts in the producer price index in the last 12 AND 24 months is found in manufacturing industries.
- The most prominent US exported commodities to China, such as soy, saw the value of goods shrinks by over 50% YoY August-October, 2018. Soybean exports to China practically disappeared in October, 2018, reducing to ~98% YoY.
- The ELD mandate came into effect in April, 2018, where the number of loads per overall trucker surpassed 100x. Trucking tonnage grew 60% since 2015 while employment only grew 5%.
Our modern global trade landscape is a complex web of investments, infrastructure, relationships, and technology which supports just over $30 trillion of trade each year (product value excluding freight costs and labor).
Modern-day trade, consisting of 20,000 TEU mega-vessels, automated fulfillment centers, and a thriving e-commerce landscape, all began to snowball when China opened their doors to global business around 1980, easing regulations that had previously restricted Chinese entrepreneurs and foreign investment in the country.
In this blog post, you’ll find information on the major developments that have molded the supply chain and logistics industry. Topics discussed include the supply chain economy, China’s manufacturing presence, the size of supply chain and logistics, carrier capacity, and tariffs between China and the US.
China’s Rise to Manufacturing Superiority
In the last ~80 years, the cost of labor has driven the locality of manufacturing. As China’s economy opened, opportunities arose for US businesses to offshore manufacturing to lower-cost labor markets. As highlighted in the chart below, the relative manufacturing annual wage in China remained around 30x lower than the US until the early 2000s.
Shown in the chart above, in 2017, annual wage in China sat 5x lower than that of the US, rapidly increasing since the end of the 20th century.
The below chart helps for seeing just how fast Chinese manufacturing wages are growing compared to the US. While US manufacturing annual wages have grown overall just about 2x since 1978, China has grown their manufacturing annual wage ~25x.
Today China is the second largest country by GDP, and while China remains a lower-cost labor market than the US, other Southeast Asian countries such as Vietnam have also risen to prominence in the manufacturing scene.
In the last decade, leading manufacturers like Samsung, Intel, and Foxconn have heavily invested in Vietnam for high-tech manufacturing (i.e. electronics and component parts). Vietnam is already a leading exporter of Apparel products with average annual manufacturing wages 3–4x lower than in China (shown in the chart) and average rent is ~26% lower than in China.
Southeast Asian countries are up-and-coming stars on the global manufacturing stage. However, as of 2018, China remains the key player, serving as one of the US’s largest trade partners (largest source of imports and 3rd largest export market), growing from $5 billion to over $600 billion in trade from 1980–2017.
As China strengthened their manufacturing position–to the point of being referred to as the “World’s Factory”–the US dedicated investment towards becoming a service-oriented economy. In the next section, we take a look at the US’s divergence from manufacturing and the modern measurement for economic development.
Coining of The Supply Chain Economy
In 2017, Mercedes Delgado of MIT and Karen Mills of HBS published a paper addressing the question: Can we improve how we measure drivers of innovation and economic performance here in the US?
Historically, economic contribution–think: patents awarded, job creation, and wage growth–has been measured with a scale weighing contribution from manufacturing against service industries, such as retail trade and food services. Manufacturing has been regarded as the driver of innovation, wages, and economic growth, while services were regarded as low-tech/low-wage jobs.
Assessing economic contribution using the comparison between manufacturing and service industries made sense, where innovation was an externality of manufacturing. If you qualify innovation by the number of patents filed, high and medium-tech manufacturing industries (e.g. semiconductors to chemicals) take the cake having filed the vast majority of US patents.
And yet, within the 15 year period following the heart of the dot-com bubble in 1998, the US continued its shift away from manufacturing to become dominantly a service-based economy; manufacturing employment declined ~30%, while services employment grew by ~20%. In 2013, manufacturing covered ~10% of US employment while services covered ~90%.
The Dominant Sector of the US Economy From 1990–2013
Clearly, as the US shifted focus from physical-goods manufacturing to high-tech/high-wage services like software engineering, comparing high-tech/high-wage manufacturing against low-tech/low-wage services wasn’t an accurate depiction of the economy.
Delgado and Mills analyzed the data and created a new framework, proposing that we measure what they coined as the Supply Chain Economy.
Check out the graphics below from Delgado and Mills’ research. The first table represents the traditional approach of measuring manufacturing and service industries. The next tables highlight the Supply Chain Economy and show a more promising picture of wage growth and economic contribution.
Traditional Approach: Manufacturing vs Service Industry
The above table illustrates the issue with the traditional approach of only comparing manufacturing vs service industries, where only 10% of the US workforce is in high-tech/high-wage manufacturing jobs.
Supply Chain Economy Approach: Supply Chain vs B2C
Under the Supply Chain Economy approach, ~40% of the workforce are in high-tech/high-wage supply chain related industries. Delgado and Mills segment the Supply Chain Economy further by removing the local economy, and isolating the traded economy (Supply Chain and B2C Traded). By removing the local economy, Delgado and Mills took local low-tech/low-wage outliers out of the model which decreased the aggregated average annual wage.
Supply Chain Traded Manufacturing vs Service Industry
B2C Traded Manufacturing vs Service Industry
Traded economic activity takes place on a global scale, instead of only in a local community, such as with automotive manufacturing and many software products. Delgado and Mills see the supply chain traded economy as the best representation of the US economy in 2019.
By separating the local and B2C traded economies, supply chain traded services becomes a high-tech/high-wage industry, which makes sense considering the industry includes much of today’s startup activity plus investment from companies like GE, IBM, Intel, and more.
Going beyond macroeconomic measurements, in the next section, we briefly highlight just how big supply chain and logistics is.
What’s The Scope of Supply Chain & Logistics in The US?
Hundreds of links connect a supply chain. Frankly, it’s staggering to think about all of the jobs, labor, technology (or lack thereof), infrastructure and regulations that are represented by the words: “supply chain”. In fact, The U.S. supply chain contains 37% of all US jobs, employing 44 million people.
To showcase how expansive supply chain is, aggregated in the below table is BLS data representing only some of the industries related to supply chain and logistics in the US
According to our friends at the Bureau of Labor Statistics, The largest shifts in the producer price index in the last 12 AND 24 months is found in manufacturing industries. It wasn’t surprising to find that metals, oil, gas and coal were the lead culprits for major shifts in price over the last two years considering the ever-tightening regulatory climate and increasing demand, which is highlighted in the next section.
Capacity, Price, and Tariffs — Glimpse at Supply Chain and Logistics Interconnectivity
As the US moved towards a service oriented economy and China grew into a manufacturing superpower, the trade deficit between the two widened. In 2018, In response to both Made in China 2025 and “Unfair Trade Policies” between the US and China, the White House declared 25% tariffs on $50B (Now 10% on $200B) worth of Chinese imports.
The first round of tariffs went into effect in September, 2018. The most prominent US exported commodities to China, such as soy, saw the value of goods shrinks by over 50% YoY August-October, 2018. Soybean exports to China practically disappeared in October, 2018, reducing to ~98% YoY.
As tariffs posed to obliterate hundreds of millions of dollars of trade between the US and China, buyers and sellers of goods rushed to ship their products before the duty increases came into effect. The preemptive market movement caused an artificial inflation of freight demand to already over utilized supply–shipping peak season came early in 2018.
In addition to tariffs, the trucking industry had two major developments that added to both price increases and tender rejections in 2018: 1) The ELD mandate now regulates allotted driving hours of truckers with the help of an IoT device, and 2) The truck driver labor shortage, which also contributed to tightened capacity. The ELD mandate came into effect in April, 2018, where the number of loads per overall trucker surpassed 100x (see chart below).
Think about that, for every trucker in the US, there were just over 100 loads that needed servicing–that’s a capacity nightmare!
Surprising to me, the trucking spot market decreased consistently through August-October peak season. The cause is likely two-fold: 1) the early arrival of peak season reduced normal price increases, and 2) the trucking market is extremely fragmented–while you may not get your shipment delivered tomorrow, there always seems to be a better price available.
Key to disrupting supply chain and logistics is understanding how the various pieces of the industry impact each other. The trucking market is a great example of where supply (trucking labor) and demand (imported and exported tonnage) are unbalanced. The above chart, for example, highlights how trucking tonnage grew 60% since 2015 while employment only grew 5%.
The capacity constraints seen in the trucking market in 2017–2019 is one example amongst many where labor incentive misalignment or process inefficiencies leave room for innovation and disruption.
Why Supply Chain & Logistics is Being Disrupted
Supply chain and logistics technology is saving billion of dollars for companies who can manage the process of adopting new tech and working with up-and-coming startups. Procurement software, such as Bid Ops, alone is estimated to save 15% on indirect and tail spend. Other technology, such as IoT sensors and the data they produce, is also enabling greater productivity and safety for workers. In theory, cost savings from new technology in the supply chain and logistics industry could reach millions of dollars annually.
In the next couple weeks, we’ll be releasing more on supply chain and logistics, highlighting trends related automated inspection, asset monitoring, and more, including general commentary about topics we find exciting 🚀.
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