Top 6 Wholesale Distribution Trends for 2019

Introduction

Soon we shall bid adieu yet another year and sing about not forgetting old acquaintances. But I’m sure many of you in the wholesale and distribution business are thinking: “What does 2019 hold for the wholesale and distribution industry?” Well, we sat down with our best customers. And we summarised their insights along with ours in this exclusive report.

EMERGE App has well over 1,000 users in 40 countries spread over 5 continents. Our customers run small and medium-sized businesses in all industries. They range from small-batch soap manufacturing to the distribution of sports car parts. So I think we’re well qualified to present a general outlook for the wholesale and distribution industry.

Unfortunately, much of the changes are factors caused by the escalating trade wars between the two largest nations in the world: the United States and China. Protectionism and tariffs are dated concepts that benefit no one. Nonetheless, we need to adjust to this new climate of trade for now.


1. Business Costs Will Rise

The number one concern on every business owner’s mind is rising business costs. Ironically, this is particularly so for US-based businesses. They face higher tariffs on imported raw materials and goods for sale. Shipping costs are also expected to spike upwards. Customers will scramble to rush shipments and stock up ahead of yet another round of tariffs.

The Rise and Rise of China

The rise of China in the past decade coincided with a global economic boom after the financial crisis of 2007-2008. It firmly cemented China as the world’s manufacturing hub. It raised its prowess from running mere factories to one that offered a complete value chain: from research and development to shipping and fulfillment.

Plus, China has strong and healthy domestic consumption. Just look at their mega shopping holidays! Each shopping day can easily eclipse a country’s yearly retail sales elsewhere in the world. E-commerce and rising affluence among the middle class has no doubt fuelled an online shopping boom in the country.

At the same time, the United States grew further in size as the world’s largest contiguous market. Businesses of all sizes could do no wrong in a market size of almost 330 million people. It boasts a sophisticated network of roads, rail, and air networks for shipments. E-commerce boomed in popularity due to convenience and lower prices.

The voracious appetite of US consumers for goods — from Apple products to Xmas trees — saw China become the de facto manufacturer of consumer goods. It could make things like no other country could in large volumes, at consistent quality and at competitive prices. “Made in China” became commonplace at brick-and-mortar stores and online retailers.

Supply Chain Dependencies

But the recent trade spats have highlighted the weaknesses of these very same businesses. They have come to grow dependent and accustomed to working with Chinese manufacturers and suppliers. They could be trusted to deliver products at the usual quality, on time, every time. To avoid trade tariffs, it would be difficult but not impossible to switch to suppliers in another country.

So, the inevitable will happen. Business costs will rise for those who are sourcing some or most of their raw materials or goods from China. Few countries in the world can match the economies of scale and sophisticated supply chain that China has perfected. Switching to factories in high-cost, developed nations such as the United States will see a spike in costs.


2. Supply Chains Will Be Redefined

A secondary concern in most of our customers’ minds is finding alternative countries for their goods and raw materials. It’s hard enough to gauge and evaluate wholesale suppliers in China. Just imagine how much harder it would be to do that in another country that you’re not familiar with. And in another language.

In 2019 global supply chains will pivot slowly away from China and make inroads into other nations with a manufacturing base. And Chinese companies will spearhead much of this change. Armed with their experience and know-how, they will set up joint venture companies or build new factories.

 

Relocate to Avoid Tariffs

In the past, Japanese brands moved their manufacturing operations from high-cost Japan to low-cost countries. China, Thailand, Vietnam, Indonesia, and Malaysia produced Japanese branded goods. Product design and marketing generally stayed in Japan. The prestigious “Made in Japan” label was reserved for upmarket goods such as luxury cars and sophisticated rice cookers.

Likewise, canny manufacturers in China will move a greater proportion of their production to other countries in Asia. Some brand owners may take advantage of tax breaks and economic incentives to build factories in the United States itself. Others will simply build or buy into existing manufacturing businesses elsewhere. However, these efforts to slowly pivot production away from China will take time.

Substitutes Not Readily Available

China is the catch-all for all manufacturing of goods, from clothing and footwear to cars and computers. Hence, finding countries with similar strengths will be much harder. Instead, each country will have a specific strength in production. For example, Vietnam supplies replacement exports for frozen shrimp, leather goods, bags, and furniture.

A study concluded that countries that produce similar goods to China will see the most investment inflows. Taiwan is a prime candidate to replace Chinese exports due to its proximity. And it is one of the largest investors and contract manufacturers in China itself. Other likely recipients may include Thailand, Malaysia, Vietnam, and the Philippines.

Developing Nations Likely to Benefit

A positive outcome of alternative manufacturing hubs is that developing Asian nations stand to benefit. For some countries, it is challenging to find a stable supply of electricity and clean water, two critical things for basic operations. An influx of investment, the development of industrial parks and a ready pool of labor will attract more manufacturers to move operations.

Also, some could argue that it is a natural progression of China to move further up the value chain. Just like the global brands that keep the design and marketing teams in Japan and the States. Chinese firms can leverage on their past clout as contract manufacturers and OEMs to shift production abroad. And grow their research & development and design teams in China.


3. Drop Shipping Will Face a Decline

For EMERGE App customers who engage in drop shipping, they gave us a grim prognosis of the year ahead. E-commerce retail is competitive, fast moving and margins are slim. Hikes in tariffs and shipping rates will erase whatever profit margin they had in mind. They’re likely to leave drop shipping and expand other sales channels. Or find alternative businesses.

Drop shipping has enjoyed a hot decade. It was fuelled by cheap products at gargantuan trade shows, historically low shipping costs and the growth of marketplaces such as Fulfilled by Amazon. It spun off an industry that produced home businesses and software to support drop shipping. However, the good times are over.

The perfect storm of tariffs, higher shipping costs and the need to find alternative suppliers will dampen the drop shipping party. Historically, China could be depended upon in a drop shipping workflow. It could supply goods at an acceptable quality on time. China and the United States even created a new shipping class to facilitate orders.

Today, there is no end in sight to the trade wars. Tariffs are arbitrarily announced and applied within thousands of classes of products. There’s no second guessing which will be next and which will be exempted. A double digit percentage jump in tariffs will erase whatever profit margin you have.

Shipping Costs Are Rising

Shipping rates are set to jump in the short term after languishing at low rates. US businesses are likely to import whatever raw materials and goods they need while they are exempted from tariffs. Retailers will want to stock up in anticipation of further hikes. This air of uncertainty means that businesses would rather act now rather than later to avoid a ban or tariff hike on their goods.

Also, shipping costs from export replacement countries may not enjoy the same efficiencies and competitive costs as Chinese ports. They may not be able to handle the jump in shipments. It takes years to build new ports or berths. Meanwhile, shipping costs from other countries are likely to trend higher as longer routes are taken.

Finally, it may not be easy to find similar or substitute goods from another country. And when you do, does the supplier support drop shipping? Their logistics and postal system may not be reliable or sophisticated enough to handle a drop ship to the United States. How long will it take? Is tracking available? Anything less will impact customer satisfaction.


4. Some Countries Will Face Short-Term Pain

Other customers expressed concern about being caught out in the Chinese value chain. As orders from China wind-down or are scaled back, they need to find replacement customers quickly. They suggested they may diversify into other products or open offices in other Asian nations they may benefit from increased manufacturing activity.

If Chinese exports to the States see a fall in demand, then it is likely to have a knock-down effect on China’s imports of intermediates and raw materials in the value chain as well. And these suppliers are typically East Asian companies because of their proximity to China and their historical expertise in producing micro-electric parts.

A study suggested that drop in Chinese exports will affect Taiwan and Malaysia the most. They are major suppliers of parts for electronic and optical equipment, and electrical machinery. Less affected are Singapore, South Korea, and Thailand. Cambodia, Indonesia, and Vietnam may see a negligible effect because of their low participation in the Chinese production chain.

All in, wholesalers, distributors, and exporters in these countries are likely to see a slowdown in orders. Chinese manufacturers will scale back on their exports. But arguably any short-term drop in business is likely to be offset by a pick-up in orders as Chinese manufacturers relocate to these very same countries.


5. Trade With East Asian Countries Will Accelerate

As production diversifies itself away from China, it is likely that Asian nations, in particular, will pick up the manufacturing slack. This shift won’t happen overnight. But it’s already happening as wholesalers, distributors, and importers source alternatives from other countries and place tentative orders.

It has been suggested that the replacement potential of Chinese exports by emerging economies is significant. Vietnam, for example, may stand to gain the most from products that it already supplies to the States. The same study concluded that every $10 million of Chinese exports that it takes over is estimated to be 4.4% of Vietnam’s GDP alone.

The study also mentioned that other countries may benefit from a potential replacement of Chinese exports. These include the Philippines, Cambodia, Taiwan, Singapore, Malaysia, and Thailand. They produce similar goods that China exports to the United States. Only South Korea, Indonesia, and Myanmar may see a muted effect in switching away from Chinese exports.

Benefits May Not Be Shared Equally

However, the benefits may not be shared in the way that is projected. There will be competition between countries as they jostle to fill the void left by Chinese imports. Some countries may step up to the plate by investing in their strong sectors. For example, leather goods, woodcrafts and furniture from Myanmar and Indonesia.

Also, supply capacity may limit the Chinese export replacement potential. It takes time to grow timber forests, for example, to supply plywood, planks, and furniture. Domestic production may be unable to meet a sudden uptick in orders because of steady domestic demand and little headspace for exports.

Another drawback to this new sourcing trend is that each country has a comparative advantage for a product. You may end up having to source goods from a variety of countries. Before, you simply sourced everything from China. Now, you need to understand the language, culture, laws and bureaucracy of each country.


6. Technology Will Continue To March On

Despite the churning geopolitical backdrop, one thing is for certain from us. Technology will continue to advance and march on. Small and medium-sized businesses may not have the budget and need for automated picking by robots. But they can count on their everyday software being faster and smarter with every release.

Inventory management software, in particular, is critical for all players in the supply chain: importers, exporters, wholesalers, and distributors. New features and building out of existing ones are likely to depend on the needs of these businesses. So 2019 is likely to see e-commerce and drop shipping features stay the same while trade-related features gain more prominence.

EMERGE App, for example, was built from the ground up to support international trade. It supports multiple currencies demanded by importers and exporters. Multiple warehouse locations, to ship orders from locations closest to your customer, are built in. And it expedites your export workflow, such as automatic calculation of CBM from packing dimensions.


Conclusion

2019 will be the year that geopolitical news will continue to take center stage. Unfortunately, the effect of a tit-for-tat trade war highlights the dependency of the United States on China. Also, a drop in Chinese exports has a knock-on effect on economies and businesses around the East Asia region. Generally, a diversification of manufacturing away from China bodes well for these countries. Businesses should invest in an inventory management solution that is flexible enough to meet these challenges.