The slump in demand for Chinese exports has hit the country’s manufacturing sector like a tidal wave, jobless workers and unwanted inventory trailing in its wake. China’s Asian neighbors have also felt its impact as falling demand for finished goods gives forth to falling demand for raw materials and component parts.
Ripples from the crisis have even spread as far as the Netherlands, traditionally a strong trading nation and the gateway to European markets for many Chinese manufacturers.
"The Netherlands is a uniquely accurate thermometer of cooling global temperatures," said Karin Rancuret, regional director for Asia for the Holland International Distribution Council (HIDC). "If the global economy is in a downturn, the Dutch economy inevitably follows."
Container traffic volumes from Asia to Europe, the vast majority of which passes through the Netherlands, are the highest in the world. Of the portion of this traffic passing through the Port of Rotterdam – the largest port in Europe and the world’s second busiest after Shanghai – 90% is deep sea container traffic. Ships bearing Chinese export products account for almost all of these containers.
Once hot, now not
Over 80% of the goods inside the containers are destined to go on to other countries on the continent, generating work for road, rail, and air service providers which feed off of port traffic. But after dipping slightly in December, China’s exports plummeted over 17% year-on-year in January, the biggest drop in 13 years.
"It will be a challenging year," said Port of Rotterdam China representative Lian Mingyue. "If there is no cargo, there is no trade."
China is now the Netherlands’ fifth-largest trading partner and the source of 8% of the country’s total imports. Trade between the Netherlands and China grew faster than trade with seven of China’s 11 main trading partners over the past decade, surpassed only by trade growth with India and the Philippines.
"Over the past few years, the intercontinental flow of goods, especially from Asia to Europe, has grown tremendously," said HIDC’s Rancuret. "For many ports it was a big challenge to expand their handling capacity to accommodate this growth."
Trade between the Netherlands and China has grown even faster than China’s economy, according to a 2008 study by Frank A.G. den Butter and Raphie Hayat for the Tinbergen Institute, an institute for economic research housed at Erasmus Universiteit Rotterdam.
Waiting for bad news
The full affects of the export slowdown have yet to be realized. Though China-Rotterdam cargo traffic numbers were positive in 2008 – after rising by 2.7% in 2007 alone – there was a steep drop in the final quarter.
Freight rates, a key demand indicator, have plummeted. In early 2008, it cost US$950-1,050 for a 20 cubic-foot container. Last summer, when oil prices were spiking, suppliers could expect a US$700 fuel surcharge tacked on to that price. Now, freight rates for the same size container are about US$350-450, including the fuel surcharge.
"I don’t remember a time when [freight rates] dropped so drastically or so quickly," said Henrik Christensen, chairman of the China Logistics Club (CLC), who has been in the industry for 30 years.
The majority of orders were placed at least six months in advance, which means many companies were unaware of their impending lack of credit when they put in their requests. There was high demand in Europe for bulk cargo like toys, furniture and kitchenware – items that are frequently demanded in very large quantities. These goods were supposed to ship out in the fall, but between order and fulfillment, customers disappeared.
This is the traditional time of year for buyers to negotiate freight rates for 2009. In Europe, though, wholesalers are backing away from the table, waiting for better news in March, the traditional merchandising season.
Though initially Europe looked to be weathering the storm better than North America, on closer inspection, the GDP growth of most European countries, which hovered below 1% before the financial storm, has stalled completely. That, coupled with the 20% decrease in the value of the euro, has caused the incentive to buy from China to evaporate, said Sunny Ho, executive director of the Hong Kong Shippers’ Council.
The Port of Rotterdam has said it expects throughput to drop 5-8% in 2009 for a total of around 400 million tons.
The decline likely spells doom for smaller companies that focus on very specific aspects of trade. In 2008, the Dutch transport sector saw its worst results in 14 years, according to Radio Netherlands Worldwide. Some firms have seen a 50% drop in the amount of goods they move.
The Netherlands’ air cargo industry has been hit particularly hard, with Amsterdam Schiphol Airport having seen its cargo traffic fall 1.4% year-on-year to 1.59 million tons in 2008. Truckers are also feeling the pain. Cross-border trips dropped by 15% in the last quarter of 2008, compared to a year earlier, and though this led to sharp decrease in road congestion, few people are smiling.
"For road transport companies, the impact of the economic crisis seems catastrophic," said Rancuret.
Many experts expect a wave of bankruptcies in the vulnerable Dutch transport sector in the coming months. In early February, Transport and Logistics Netherlands, the branch organization for the Dutch transport industry, asked the government to help prevent struggling companies from going bankrupt.
Related logistics businesses in China are also impacted by the decline in Dutch demand for their services.
"Many freight forwarding companies are suffering very badly," said the CLC’s Christensen. Although many smaller freight forwarders will go bust, he believes this is a period of opportunity for main players and those who have diversified their trade routes. "The good companies tend to increase profit margins because the competition disappears."
In a similar way, the impact on the Port of Rotterdam and the Netherlands’ logistics industry might not be as severe as other European ports. As the amount of cargo drops, container lines are canceling less profitable routes and stops at smaller ports in an effort to save cash. "Some of the cargo that used to go to these smaller ports might shift to Rotterdam," said HIDC’s Rancuret.
She also sees reason for cautious optimism among the more agile logistics companies, those that have built up varied client portfolios and are able to cope with the affects of the downturn by selectively downscaling operations.
Spread your risk
Firms that focus on integrated logistics services – encompassing a broad and differentiated range of business – are also likely to prevail over smaller, niche players. As the impact of the downturn varies by industry, the prospects for an auto parts specialist are different from those for food transport providers. Better to spread your bets and do both.
For companies that are able to ride out the storm, the long-term prize may be a strengthened position in an industry that isn’t going away, according to Christensen. When demand inevitably recovers, buyers will turn to China because it’s their only choice for manufacturing.
"As the factory of the world, China will be okay," he said.