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Sunday, June 15, 2008

Transportation Costs to increase 5 - 15 Percent in India due to Oil Prices - Manufacturing Re-Localization Trends

Several executives of transportation companies in India were recently questioned about the potential for increases in freight costs.  India like the rest of the world is reacting to higher oil prices and in the last three months this has translated into a 10 -12 percent increase in costs with expectations that the even more recent oil spikes could push transportation costs up another 5 - 15 percent.

This increase in freight cost in India is likely to be similar in China as well, which is rapidly building factories across the South and South East part of the country.  That means that more products have to be transported by rail and by truck to get to the ports before they can then be shipped to America and Europe where they must be shipped again.

This almost continuous freight cycle is going to have a magnifying impact on the cost of products that on the surface will not be directly apparent to American buyers that only see the most recent freight charges on the bill.  For companies that have the reach into their Chinese partners books and costs, the decision to move some manufacturing out of China and re-localize it may become more urgent.  In fact, Toyota has been making a number of moves to establish additional US plants to make cars closer to the areas where they will be sold.

We could see a similar trend in other products from Consumer Electronics to consumer goods to inflatable boats or sporting goods even.  Labor intensive products such as textiles and clothing which may not need to be staged and worked on in multiple locations might remain strong built outside of the US where labor rates may still compensate for extremely high fuel rates.