The BEST news I've ever heard about expensive oil... Sorry WalMart?

[Ed Kilburn]

A report today from CIBC World Markets (http://www.newswire.ca/en/releases/archive/May2008/27/c4619.html) says the skyrocketing cost of transportation is leading to inflation and taking away the edge that many Asian countries have had in offering cheap labour. The end result, as oil approaches $200 a barrel, is what the bank sees as a deglobalization of world markets. The report (http://research.cibcwm.com/economic_public/download/smay08.pdf) finds that the cost of shipping a standard 40-foot container from East Asia to North America's east coast has tripled since 2000 and is expected to double again as oil reaches $200 a barrel. In 2000 it cost roughly $3,000 to ship a standard container from Shanghai to North America's east coast, including inland transportation. That was when oil was $20 a barrel. Today that cost is $8,000 and at $200 a barrel it soars to $15,000. Jeff Rubin, CIBC's chief economist, said if this were translated into a tariff it would represent an 11 per cent trade tariff today on goods coming to North America, and a 15 per cent tariff when oil reaches $200.
This, the bank argues, threatens decades of trade liberalization and will force some overseas manufacturing to relocate closer to home. "Higher energy prices are impacting transport costs at an unprecedented rate," says Rubin. "So much so that the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today."
It must be forcing companies such as Wal-Mart to rethink their business. Business decisions in the future, argues Rubin, will be based on finding the cheapeset labour force within a reasonable shipping distance to a destination market. It sure makes Mexico look good. At $200 a barrel, it will cost three times as much to ship an item from China as it will from Mexico. Rubin points to the steel market to illustrate his point. Steel exports from China to the U.S. are falling 20 per cent year over year, while U.S. domestic steel production has increased 10 per cent. It's no wonder wind-turbine makers are looking to establish themselves in North America, rather than build in Europe or China and ship across the ocean.
This fact -- this renewed appreciation of domestic production - - could mean happy days ahead for American and Canadian startups who in the past have had their innovations stolen and replicated at low cost overseas, then shipped back into North America. Battery makers, solar manufacturers, electronics makers in North America could suddenly find themselves more competitive. It could also mean better days ahead for North America's struggling automotive sector, if it can adapt to the need for more efficient vehicles that don't necessarily burn gasoline. And if unions can adapt as well.
But one thing is for certain: It won't lead to lower prices. It just means goods from China, benefitting from cheap oil in the past, are now on more even cost-footing with North American rivals. Consumers are still going to feel the pinch of inflation over the coming years. And, it should be pointed out, the effect is a two-way street. North American manufacturers will find it too costly to sell into Asia markets without setting up their own manufacturing facilities in the region they wish to sell into. Likewise, the Chinese and other East Asian countries may get to the point where it makes more economic sense to build manufacturing in Canada or the United States and populate the plants with their own countrymen.:D

[Jeffrey Makiel]

Interesting article. But it may be over simplified.

Other deterrents to manufacturing in the USA are the cost of environmental regulations, not-in-my-backyard syndrome, insurance, real estate costs and business taxes, decaying physical work ethic, etc.

Perhaps Mexico is the next answer.

However, the cost of doing business in Mexico would include dealing with corruption which China has an excellent handle on using communistic rule. But North American rail transport is very efficient. Also, it would be nice to see Mexico improve its economy and relieve the illegal immigration burden that it has put on the USA.

-Jeff :)

[Bob Moyer]

You need to understand Wal-Mart's strategy; they will ask their vendors to absorb this. The problem is once you get in bed with Wal-Mart; it is extremely difficult to get out of bed with out falling on the floor.

I worked for two companies which no longer exist and a third that tool forever to recover after they began selling to Wal-Mart; their contracts are demanding; the JIT (Just in time) shipping and turnaround is difficult to adhere to; they constantly evaluate the shelf space you occupy; etc.

I could elaborate more but the point is Wal-Mart is not in business to lose money; they have customers waiting to put product on their shelves. If you can not meet their profits per sku; you are out the door.

[Russ Filtz]

Other deterrents to manufacturing in the USA are the cost of environmental regulations,
-Jeff :)

These decisions aren't working out to well for all of us. Look at the recent spate of lead in products from China, poisoned pet food, etc. Lead is also a problem in products from Mexico as well. There's a reason why we have all the regulations, etc., in the US.

It's time we required similar for products imported into the country to level the playing field. Free trade is fine, just don't poison me to save a penny!

[Gordon Harner]

I have a thread in this forum on heating fuel. I think the big question is what will the long term effect be to the petroleum cost situation? The futurists are probably working in overdrive. One of my clients is a major NYSE traded home bvuilder. They're rethinking their whole business. McMansions are probably a thing of the past. Maybe we'll get a grip on the perceived need for big vehicles. In my area many of the "robber barons" builot mansions during the 1880 to the beginning of income tax. When I was a kid many of these homes sat empty with the owners living in the servant housing because they couldn't afford to live in them. Gradually they were torn down or burned, some spectacular fires. I would like to think that the mortgage problem plus other economic issues will go away. But, I am inclined to think that we're looking at a huge shift in the way we live. I wonder what it will be like in 5 or 10 years?

[Larry Browning]

There was also recent article in the Wall Street Journal about manufacturing moving back to North America due to the high cost of transportation.

[John Shuk]

You need to understand Wal-Mart's strategy; they will ask their vendors to absorb this. The problem is once you get in bed with Wal-Mart; it is extremely difficult to get out of bed with out falling on the floor.

I worked for two companies which no longer exist and a third that tool forever to recover after they began selling to Wal-Mart; their contracts are demanding; the JIT (Just in time) shipping and turnaround is difficult to adhere to; they constantly evaluate the shelf space you occupy; etc.

I could elaborate more but the point is Wal-Mart is not in business to lose money; they have customers waiting to put product on their shelves. If you can not meet their profits per sku; you are out the door.

To an extent this may be true but If they ain't making money it'll be alot easier to walk away from them.
By the way Walmart isn't the only place selling chinese stuff. It is every where you look. Walmart will somehow make do.

[Scott Kilroy]

However, the cost of doing business in Mexico would include dealing with corruption which China has an excellent handle on using communistic rule

I'm assuming you're kidding about the corruption in China, as someone has worked with Chinese manufacturing companies I can tell you the Chinese government has taken corruption to new levels. Look up "licensing fees" and china and you'll get a little bit of how China works.

[Cliff Rohrabacher]

And the hell of it is that there is a very real and very large GLUT of oil.

only 30% of the worlds oil is light sweet crude the rest of it (90%) is sour crude and few refineries are geared up to process it.

But there are hundreds and hundreds of (single hull) tankers rusting away in the Persian Gulf all loaded up with the stuff and no takers.

So much for peak oil.

[Denny Rice]

I would love to see Wal-Mart choke on their own greed........I have not set foot in one of their stores in over 5 yrs. I have a hard time giving my money to a company that treat their employees like 2nd class citizens. Wal-Mart has outlived its usefulness.:(

[Kurt Strandberg]

I would love to see Wal-Mart choke on their own greed........I have not set foot in one of their stores in over 5 yrs. I have a hard time giving my money to a company that treat their employees like 2nd class citizens. Wal-Mart has outlived its usefulness.:(


I agree and I will not shop there either.

[David G Baker]

I live in an area of Michigan where there aren't a lot of choices on locations to shop so a lot of our shopping is done at Walmart.
The one plus that I have seen at Walmart is they hire many folks that can not get jobs any where else. This takes some of them off of public assistance.
If Walmart closed, a lot of towns would really be hurt because Walmart drove a lot of the former local retailers out of business, with the economy the way it is there would be a serious lack of options.

[Rick Hubbard]

WalMart is not likely to take any of this lying down.

No matter what else you want to say about this behemoth, the fact of the matter is that they know how to make money and they will adapt to changing conditions.

I’ve read that an emerging element in their business structure is their site-to-store service. It is still in it’s infancy, but from what I have read they are structuring it in large part on the Amazon model. Eventually you will be able to go online and order virtually anything and have it shipped to a local WalMart FREIGHT FREE. With this model, goods purchased will not always be the least expensive, but the FREIGHT savings will largely overcome the price advantage.

I can testify that what they are doing WORKS. I recently ordered a very heavy 25# cast-iron, High End Dutch Oven from them. There was no freight charge. I paid 100% of MSRP, but the total price delivered was about $12 less than the best price I could find elsewhere.

I’d guess that within the next five years a HUGE portion of Amazon’s business will have moved over to WalMart. It’s not as if WalMart will necessarily make a bundle of money on these kinds of transactions but the marginal revenue will permit them to cover almost ALL of their shipping costs for their regular merchandise. And you think they have a competitive advantage NOW?

[Pat Germain]

I've been saying for awhile that it takes a lot of diesel to push a container ship across the Pacific. Until someone can figure out a way to make a cheap, nuclear powered container ship, overseas manufacturing will become less and less practical. (Interestingly, someone built a nuclear powered cargo ship a long time ago. About the time it was ready, container ships came online and made the older style nuclear cargo ship obsolete. That ship was open for tours last time I visited Charleston, SC.)

As for Wal-Mart, I won't argue they have some downright draconian tactics. They also provide inexpensive goods for many, many low income families. I used to live in rural Oklahoma. When Wal-Mart moved in, they replaced very few retailers because there were very few retailers to begin with. There was a general store called Gibson's that went belly-up. People in Oklahoma saw Wal-Mart as a Godsend because they could buy inexpensive goods locally. Before Wal-Mart, people had to get ripped off down the street or drive to Oklahoma City or Tulsa for lots of things.

I'm all for environmental regulations. I'm not for many of the ridiculous and overly expensive regulations the USA has forced on many companies. No doubt many corporations did some serious polluting, but punishing them out of business doesn't make things better. Nor does pushing them overseas.

[Dennis Peacock]

There was also recent article in the Wall Street Journal about manufacturing moving back to North America due to the high cost of transportation.

And some labor forces are moving back to the U.S. because the cost of labor across the pond is becoming more expensive that U.S. based workers.

Go figure.

[Butch Edwards]

WalMart is not likely to take any of this lying down.

No matter what else you want to say about this behemoth, the fact of the matter is that they know how to make money and they will adapt to changing conditions.


I can testify that what they are doing WORKS. I recently ordered a very heavy 25# cast-iron, High End Dutch Oven from them. There was no freight charge. I paid 100% of MSRP, but the total price delivered was about $12 less than the best price I could find elsewhere.

I’d guess that within the next five years a HUGE portion of Amazon’s business will have moved over to WalMart. It’s not as if WalMart will necessarily make a bundle of money on these kinds of transactions but the marginal revenue will permit them to cover almost ALL of their shipping costs for their regular merchandise. And you think they have a competitive advantage NOW?



As for Wal-Mart, I won't argue they have some downright draconian tactics. They also provide inexpensive goods for many, many low income families. I used to live in rural Oklahoma. When Wal-Mart moved in, they replaced very few retailers because there were very few retailers to begin with. There was a general store called Gibson's that went belly-up. People in Oklahoma saw Wal-Mart as a Godsend because they could buy inexpensive goods locally. Before Wal-Mart, people had to get ripped off down the street or drive to Oklahoma City or Tulsa for lots of things.

I'm all for environmental regulations. I'm not for many of the ridiculous and overly expensive regulations the USA has forced on many companies. No doubt many corporations did some serious polluting, but punishing them out of business doesn't make things better. Nor does pushing them overseas.

when people get tired of buying cheaply made products,then the WalMarts/KMarts/Targets/etc of the US will change. it's not economically feasible to save $$ on merchandise, if you have to replace them more frequently. Quality is still the best value, and those stores DO NOT HAVE QUALITY..they are after profit, not selling quality merchandise. maybe the quality will soon cost only a fraction more with the cost of shipping the cheap stuff from overseas rising as it is. It's a matter of life that lower income families MUST shop where they get more bang for the buck, trouble is,they're as trapped to poor quality as a drug user is to drugs, because they can't get out of the $$ cycle that keeps them shopping at these places.I don't see walMart paying $10+/Hr, which is only slightly above poverty level ? so they're not REALLY helping anyone, in my book. Corporate Greed has nearly destryed this country, and those stores' hands are as dirty as Enron/etc, just not illegally so.
as for people getting "Ripped Off", I know that some Mom/Pop stores were like that, but not all. and in a Supply/Demand world, only competetion will rid those folks out...honest competetion, not Conglomerates like Superstores who buy by the boatload....

[Joe Pelonio]

Wal-Mart does also sell name brand merchandise, and at a lower price than other stores.

[Pat Germain]

Joe makes a very good point. If you buy a GE lightbulb at Wal-Mart, it's the same GE lightbulb you buy at ACE Hardware or anywhere else. It's not like the GE bulbs at Wal-Mart are from China and the GE bulbs at ACE Hardware are from Milwaukee.

I buy groceries at Wal-Mart; mostly non-perishables. The same brand name items at Wal-Mart can be easily be 300% more at other local grocery stores. I do not buy Wal-Mart meat because it has preservatives in it. I don't buy Wal-Mart produce because I find it to be low quality. For people who find the meat and produce just fine at Wal-Mart, they can save a lot of money.

I go ahead and pay more for meat and produce at union grocery stores because they are selling a superior product. But I refuse to pay 40% more for the same can of Folgers 100% Colombian just because it's a union store.

Before Wal-Mart came to Oklahoma, local mom & pop shops would take advantage of locals. They sold the same stuff available elsewhere only at seriously inflated prices; more than it was costing them to get it shipped away from the city. And these places were providing little or no service, hostile treatment, minimal business hours and lousy return policies. So why should I choose to shop at a place like that over Wal-Mart?

The lumber yard in my local OK town was downright communist. You'd ask them for some 2X4s and they'd say, "Well, I promised what I got to ole Punkin' 'cause he's got a job comin' up. Dunno when I'll get more in. As for the plywood, well it's got some water damage, but I'll still sell it to ya. What? No, I can't knock down the price..." :rolleyes: Sorry, but it was no loss when that lumber yard burned down and Lowe's moved in.

It's a sad fact, but many people in Oklahoma who work at Wal-Mart could not work at all without that store. $10 an hour sure beats $0 an hour.

Wal-Mart and Target sell generic prescription drugs at $4.00 for a 30 day supply. For those available drugs, that's better than a lot of insurance policies.

[Kurt Strandberg]

Joe makes a very good point. If you buy a GE lightbulb at Wal-Mart, it's the same GE lightbulb you buy at ACE Hardware or anywhere else. It's not like the GE bulbs at Wal-Mart are from China and the GE bulbs at ACE Hardware are from Milwaukee.
.


I don't like to argue but when we bought our Flat Panel tv from Sears, we priced it a about 6 different stores, but not Walmart, they all were real close in price and we were there for the wife buying some baby clothes so we just bought it at Sears, when we got home our son stopped buy and told me I should have checked walmart, he knows I will not shop there but he has to bug me about it, anyways he and I checked on line at walmart ant they were $2.00 less but we noticed the Model number was different, still a 32" tv but a different model number, so I think that GE lightbulb might be different at walmart

I also have a buddy that owns a Truevalue Hardware and lumberyard, he said the big borg in Wisconsin wanted DeWalt to make some battery tools different for them (cheaper parts and more plastic I assume) than what they make for any other store, DeWalt said noway and that is why you don't see any DeWalt in those stores.

[Jeffrey Makiel]

I also have a buddy that owns a Truevalue Hardware and lumberyard, he said the big borg in Wisconsin wanted DeWalt to make some battery tools different for them (cheaper parts and more plastic I assume) than what they make for any other store, DeWalt said noway and that is why you don't see any DeWalt in those stores.

I saw an interview with the CEO of Snapper lawnmowers on TV a few months ago. He said that Snapper refused to make a cheaper model line for Home Depot. Hence, there are no Snapper lawn equipment at Home Depot.

-Jeff :)

[John Keeton]

Wal-Mart does also sell name brand merchandise, and at a lower price than other stores.
Walmart is king of the "special makeup." They will go to a manufacturer that has a successful product, and contract with them to supply a "look alike" with lower specifications, and consequently lower price.

In our previous business, we had a supplier that did just that. Had a customer come in and say "Walmart has that for $129 (Ours was $189). I said can't be, that's way less than my cost. I sent an employee to check and he said same box, but looks like different gauge metal, etc. I called the company, a relatively small concern, and talked to the owner. He confirmed the above, and said that Walmart was making 8% on the product and he wasn't doing much better, but the size of the order had increased his gross by 3x.

I told him I would no longer do business with him because my customers thought I was ripping them off, and I couldn't make it on 8%. I also told him that some morning he would wake up and find that 70% of his gross was with Walmart and to wait on the phone call to tell him that they had found another supplier for less. He will have already lost all his small retailers.

Had another small supplier that produced a fishing lure that caught on. Walmart contracted with him for several thousand. He bought more machinery, hired some folks, and delivered. The product didn't sell for Walmart, and unfortunately, the guy failed to realize that Walmart had a "buyback clause." After several months (and after he had been paid and paid his employees, spent the money), Walmart notified him they were returning the lures and demanded payment on the buyback. It sunk him.

Walmart is ruthless, and will be the death of America as we once knew it.

[Heather Thompson]

Walmart is king of the "special makeup." They will go to a manufacturer that has a successful product, and contract with them to supply a "look alike" with lower specifications, and consequently lower price.

In our previous business, we had a supplier that did just that. Had a customer come in and say "Walmart has that for $129 (Ours was $189). I said can't be, that's way less than my cost. I sent an employee to check and he said same box, but looks like different gauge metal, etc. I called the company, a relatively small concern, and talked to the owner. He confirmed the above, and said that Walmart was making 8% on the product and he wasn't doing much better, but the size of the order had increased his gross by 3x.

I told him I would no longer do business with him because my customers thought I was ripping them off, and I couldn't make it on 8%. I also told him that some morning he would wake up and find that 70% of his gross was with Walmart and to wait on the phone call to tell him that they had found another supplier for less. He will have already lost all his small retailers.

Had another small supplier that produced a fishing lure that caught on. Walmart contracted with him for several thousand. He bought more machinery, hired some folks, and delivered. The product didn't sell for Walmart, and unfortunately, the guy failed to realize that Walmart had a "buyback clause." After several months (and after he had been paid and paid his employees, spent the money), Walmart notified him they were returning the lures and demanded payment on the buyback. It sunk him.

Walmart is ruthless, and will be the death of America as we once knew it.

John,

You are all to correct, tried to explain this to my husband a few months back. He tells me that I am somewhat snobbish due to the stores that I shop at, we shop at one of the membership stores for some of our food and staples, he saw "name brand jeans" and jumped on the deal. I tried to explain the "special makeup" issue to him, he chuckled at me, seems those three pairs of jeans have found their way to the rag bin (three months). The jeans that I buy cost much more, but I have jeans that are six plus years old. He used to buy cheap summer sandals, they would wear out before the end of the season, finally got him to buy a pair of Teva's three years ago, still being woren today. Our society has been trained to buy cheap and accept cheap quality as the norm. Seems to me that the American public was drawen to low prices like bugs are to bug zappers, low prices are nice but so are good paying jobs (ZAP).

Heather

[Jeffrey Makiel]

I remember reading a debacle about Makita that severly injured them. The article stated that Makita became the primary portable power tool supplier for Home Depot back in the 1990s. As a result, Makita grew in size to match the new demand. Then, Home Depot shifted to other suppliers and Makita suffered.

This must have been very painful for a Japanese based corporation that have always looked towards the long term.

I also remember Japanese tool manufactures being convicted of 'dumping' power tool products into the US market back in the 1980s to gain market share. As a result, the US slapped tariffs on Makita, Ryobi and Hitachi that really increased the cost over nominal US based tool makers.

-Jeff :)

[Pat Germain]

Indeed, the models and model numbers on many name brand products are unique at Wal-Mart. And, indeed, those products are often lower end; ie fewer features and different specs. I don't dispute this.

What I'm disputing is that the products in Wal-Mart are all made in China and the same brand of products elsewhere are not. In the GE lightbulb example I used, there is absolutely, positively no way the Wal-Mart lightbulb is made in China while the ACE Hardware lightbulb is made in the USA; even if the model numbers are different.

Wal-Mart and other big stores will often spec out a unique model of hardware. They sign a contract promising to purchase many millions of these models. That gives them a big discount which they pass on to consumers. Those unique models roll out of the same factory in the same country. They are not made in China while similar models are made in the US.

By the way. Did everyone hear Delta is working to move their manufacturing back to the USA? Even if it's just talk right now, that's good news. I do like to buy "Made in the USA" when possible. Unfortunately, these days, it's often not possible.

Delta plans to roll out a new Unisaw with a riving knife. It's like they decided to make my dream saw!

[Bob Moyer]

http://www.kuratrading.com/PDF/Walmart1.pdf

[Pat Germain]

Hey, that was a pretty good article, Bob. I was expecting some labor union propaganda. I found it informative and balanced.