A strong dollar and the lingering effects of this year’s West Coast port strike are creating a double-whammy for US exporters, many of which are having to rethink their entire supply chain. Shannon Manders reports.
The US economy appears poised for its worst first-half performance since 2011. The country’s GDP contracted at an annual rate of 0.7% in the first quarter as it buckled under the weight of a resurgent dollar, bad weather, and a backlog of exports and imports at West Coast ports.
Whether the transitory nature of some of these factors will see the situation reverse in the second quarter remains unknown as this issue of GTR goes to press. What is evident, though, is the significant impact a widening trade deficit has had on the slump: a subtraction of 1.9 percentage points from growth to be exact – the most in decades.
“I cannot recall soft exports having such an impact on US GDP growth,” says Rob Stigall, sales manager, global trade and supply chain finance at Bank of America Merrill Lynch (BofAML), “that’s how important US exports have become.”
“It’s a concern for US industry right now, for sure,” Chris Lewis, head of global trade services at Wells Fargo, told GTR on the sidelines of the Bankers Association for Finance and Trade (BAFT) conference in Miami in May.
US exporters have now lost two competitive advantages since President Obama introduced his 2010 plan to double US exports by this year: the dollar is no longer as weak as it used to be, and oil prices have hit rock bottom. “Increased US energy production was expected to give US companies an advantage over their imported energy-reliant competitors in the EU. As oil prices have dropped so low, it’s no longer the distinct advantage that it once was only a short while ago,” says Lewis.
Compounded with this reversal of conditions was Q1’s dockworker contract battle that virtually shut down ports on the West Coast. While the dispute itself may now be over, the damage that it caused is seemingly not. “The situation has been resolved, but it’s taking a while to unwind: the backlog was so severe,” says Stigall.
Port problems linger
Both importers and exporters have been affected by the strike. “In the last couple of months, import customers in a wide range of industry segments have experienced delays in getting their products to market due to the strike,” Stigall explains, noting that many SME importers who have been unable to fulfil their delivery contracts with some of the larger retail customers in particular have suffered severe penalties in some cases in the form of mark-downs and reduced pricing.
“I’m aware of a few instances where that type of penalty can completely erode any kind of profit margin that an importer was counting on,” he says. On the export side, a number of banks that GTR spoke to have heard complaints from export customers about the backlog at the port and the delays of shipping their product.
“It was very difficult to book cargo for export,” laments Guy Fox, chairman of the District Export Council of Southern California (DECSC) and president of international trade consultants Guy Fox & Associates.
“If you were lucky enough to get hold of a booking, then you had the problem of getting a container to a vessel due to the long lines of waiting truckers. Although that has become a bit better, it is still a problem in getting cargo to a vessel and having it laden on board. Another problem is the congestion on the docks, and the fact that longshore has to sort containers, and stack and re-stack when searching for a container that is customs-cleared and ready for pick-up,” Fox adds.
The issue boils down to a lack of planning on behalf of the steamship companies, who are not pre-sorting containers by destination when they are being loaded onto the vessels, as well as truck dissatisfaction, says Fox. Truckers are having to wait in line for as long as a whole day to pick up one container, “and that one haul does not even pay for the lease of their truck”, he says. Because of this, truckers are seeking to move away from contract work and be paid on an hourly basis.
“It is improving somewhat, and the ports of Los Angeles and Long Beach are implementing new procedures, but that takes time and effort. All of this has impacted trade and there seems to be a new norm, which is working at a slower pace, but that has to change if we are to be competitive on the West Coast,” Fox warns.
Supply chain diversity
Faced with this turmoil, businesses have had to turn things around for themselves, and find ways to continue to survive.
Many have had to rethink their supply chains with regards to timing. “In a lot of industries, especially with SMEs, they always ship late – they have a tendency to do things at the last minute,” says Ken Wengrod, president and co-founder of factoring and finance company FTC Commercial, and an entrepreneur in textiles and apparel-related goods, who also chairs the regulatory and legislative committee of the DECSC.
He says companies have now had to look at ways to bring goods in earlier, do proper planning and then get the products out sooner.
Companies have also had to start diversifying their supply chains on a structural basis by seeking out alternative suppliers (such as in nearby Mexico, where labour and productivity is largely competitive with China) and new ways of bringing their goods in (shipping to the East Coast, for example, and then moving the goods across country).
“They’re looking at other supply chains where they can get these goods in North and South America and the Caribbean basin,” explains Wengrod.
In turn, other economies – such as Mexico – are benefiting from nearshoring trends. “On the electronics and automotive side there’s been a lot of investment to build more resilient supply chains,” says Douglas Collins, vice-president and director of risk services, Americas, at Atradius.
A drop in the ocean
Key indicators in Atradius’ April 2015 US country report forecast exports to grow 3.2% year on year in 2016, up considerably from the 2.3% expected in 2015, mostly because exports are tied to “aircraft, aircraft-related parts and energy” and strong order books in these sectors, says Collins.
“We generally have a positive outlook,” he notes, adding that he believes that the effects of factors like the West Coast port strike were a “blip on the radar to the extent that even the weather is” for some companies. “There’s already a sense that the numbers that were published and were weak didn’t accurately reflect overall economic activity,” he says, predicting that the situation will be a bit like last year: that the third and fourth quarters will pick up and that overall performance will be moderately good.
He is among many market experts who believe that the strong dollar has also had a marginal impact. “The extent to which Europe and Asia do or do not show growth has almost more to do with export trends in the US than the dollar will,” he says.
Similarly, Wengrod believes that if companies are concerned about the strength of the dollar, “it’s too late”. “They should have thought about these fluctuations when they started exporting; they should have planned how to hold on to profits when the dollar falls,” he says. “As entrepreneurs, we can’t complain about what exists: we need to look at where we can move goods and make money out of it.