As the World Turns…

Continental instability, national volatility, and economic vulnerability force shippers to confront their own global challenges.

Mobile phone manufacturer Nokia recently announced plans to shift smartphone assembly from Finland, Hungary, and Mexico to Asia, offering a telling example of how global companies are adapting their supply chains to variable trade winds. The Finnish company aims to refocus lower-value activities closer to component sources, thereby increasing supply chain responsiveness and reducing total landed logistics costs. Value-added assembly and logistics functions will remain largely in Europe.

"We are aligning our manufacturing strategy to increase competitiveness," says Nokia spokesperson Mona Kokkonen. "We need to optimize our manufacturing operations so we can collaborate more closely with suppliers and be more responsive to customers needs".

Pulling jobs out of Finland couldnt have been an easy decision for the worlds largest mobile phone maker, whose lineage in the country dates back to the 19th century. And while Nokia has stuck to the company line justifying its realignment, other factors were likely considered.

The company, ranked third in global smartphone production behind Samsung and Apple, has had its eye on Asia for some time. In 2011, it announced plans to open a new Vietnam factory, which will join existing operations in China, India, and Korea. Increasing demand among Asias growing middle class for smartphone products may also be driving Nokias decision.

The corporations predicament is by no means unique. Other multinational companies in the United States and around the world have been equally influenced by changes in the global economy—contraction and isolationism in Asia, the Eurozone debt crisis, the South American enigma, and recurring political and social volatility in the Middle East and North Africa.

The importance of supply chain alignment—matching supply to demand signals, contingency planning and redundancy, and balancing go-to-market growth opportunities with supply-side sourcing needs—has only grown in scope. Global distribution networks must be fluid to accommodate unpredictability. Considering current world events, its not difficult to understand why.

From a global perspective, China remains the red elephant in the corporate boardroom. The countrys explosive economic growth from a primary offshore manufacturing destination to an emerging second-world export market has turned supply chains on end.
China managed to isolate itself, to a great degree, from the prolonged recession that gripped the United States. Government mandates to steer production output inward, and stimulate domestic consumption, infrastructure development, and industrial growth helped the country adjust when U.S. imports began to run dry, bringing greater balance to imports and exports.

Europes more recent financial crisis, however, has had a greater sting. It became Chinas foremost trading partner, responsible for 25 percent of all exports. Now there is concern that Chinese economic contraction—natural or orchestrated—will have a major impact on smaller Asian countries that rely heavily on exports, especially to the mainland.

While U.S. companies are still heavily invested in China, machinations in play are slowly drawing interest to other boutique sourcing options.

"Higher wage rates along Chinas east coast, escalating fuel costs, and an ongoing shift in favor of fast, agile supply chains that avoid inventory carrying costs and enable quick responses to market conditions will yield two important results," says George Brown, CEO and co-founder of Blue Canyon Partners, a Chicago consultancy.

"First, more of Chinas manufacturing will move to the western part of the country, a remote region where labor costs remain relatively low and logistics infrastructure is less developed.

"Second, production will shift to other countries," Brown continues. "In some cases, it will move back to North America, which creates an opportunity for Mexico to capture business. In other cases, the shift will be to alternate low-cost Asian locations, such as Vietnam and Thailand".

EVOLVING ECONOMIES

This manufacturing migration has been occurring in China and elsewhere in Asia over the past few years, as countries slowly evolve their economies.

"China has a 50-year runway to get from third- to second-world, then another 50 years from second- to first-world—much like Hong Kongs transition from low-tech apparel to high-tech products, and now financial services," says David Morgan, CEO of Pleasanton, Calif.-based third-party logistics provider D.W. Morgan.

"Vietnams low-cost labor is now highly regarded, and coastal Chinese cities such as Shenzhen and Shanghai have become second-world," he adds. "They want to consume want they are making".

Asias transformation is also changing the way global companies look at export growth opportunities. It used to be a continent of 3.5 billion workers; now it has 3.5 billion consumers.

Some American supply chains that were previously weighted for import volumes are rebalancing as Asias appetite for U.S.-sourced agriculture and consumer goods grows. And for the minority of wholesale and retail companies that have been allowed the privilege to sell into these markets, the potential is enormous.

Walmart has increased its stake in China with a controlling interest in e-commerce Web site Yihaodian. Amazon is making a similar play in India, thanks to the governments recent decision to liberalize its foreign investment policies. Nokia is also well aware of this reality, especially as it looks to be more competitive in the smartphone market.

But cultural and regulatory barriers to entry still exist. Only multinationals with clout—and intellectual collateral—can even fathom the notion of penetrating the Chinese market.

"India is most receptive to bringing in products to build its infrastructure, whereas China will bring products in to copy them," says Morgan.

Then there are transportation and logistics concerns. Amazons entry into India is largely predicated on fulfilling back-end support for the countrys fledgling e-commerce industry—which, in the long run, may pay huge dividends.