Explaining what's behind the numbers that drive trade forecasts.

1. 8 AMERICAN SHIPPER: JUNE 2007
BehindBehind
the numbersthe numbers
Understanding the underlying drivers
of containerized air and sea trade.
BY MERGEGLOBAL FORECAST TEAM
Part one of a multi-issue series covering cargo forecasting

2. AMERICAN SHIPPER: JUNE 2007 9
Behind the Numbers
we use to think about trade growth with
an emphasis on:
• Why things are changing.
• A discussion of the shifts in indus-
trialgeographythatareshapingthefuture
structure of the global trade network for
years to come.
MergeGlobal uses a demand-pull
framework to forecast trade flows. This
E
veryyearMergeGlobal,investmentbankingresearch
groups,andconsultingfirmspublishforecastsoffuture
demand and supply for the global containerized air
and sea freight industries. The emphasis of these reports is on
showing how fast the market will grow, instead of explaining
theunderlyingdemanddriversthatcausestructuralchangesin
the supply networks of leading manufacturers and retailers.
We believe the real purpose of forecast-
ing is not to predict the future — which
is very difficult to do with any degree of
accuracy—buttothinkaboutitinastruc-
tured way and understand the linkages
between different pieces of the economy
and supply chain. This year we seek to
change this by bringing you behind the
numbers and sharing the framework that
Figure 1
Demand-pull framework
Source: MergeGlobal primary research.
Decision flow Description Why important?
• Consumer demand in destination market for consumer products
• Demand of manufacturers in destination market for industrial products
including components, which is driven by consumer demand eventually
• Share of different types of retailers and manufacturers using
different business models to meet end-user demand
• Two extreme business models are low-cost mass production
and responsive differentiation
• It determines total demand for specific product
in destination market
• It determines consignee segment share of total
product demand in destination market
• Share of import vs. domestic sourcing by retailers and manufacturers
• Sourcing decision depends on total landed costs, which include product
costs, trade-related costs, transport costs, and inventory costs
• It determines total imports demand for specific
product by consignee segment
• Share of different origin countries from which products are sourced
• It is driven by total landed costs of specific product made in specific
country and transported to final destination market
• It determines origin country share of consignee
import product demand
• Import shipment size, order frequency and transport mode choice
(air vs. sea FCL and sea LCL)
• It is driven by importers’ business model to meet evolving end-user
demand
• It determines expected shipment size mix
by mode and seasonality of the business
• Location mix of retailers’ DCs or manufacturers’ plants/warehouses
• It is driven by importers’ business model, geographic topology
and inland transportation infrastructures
• It determines transcontinental and inland
transportation routing
• Share of different regional routing and transportation modes
(e.g. intact MLB, transload MLB and all-water)
• It is a balance of transit time, reliability and total distribution costs
• It determines regional transportation mode
and routing
End user demand
in destination market
Business model
share of end-user
demand
Import share of total
product sourcing
Origin country share
of import sourcing
Regional
destination share
Routing share
to regions
Shipment size
and modal mix
1
2
3
4
6
7
5
approach is based on the assumption that
consumer or industrial demand “pulls”
imports into a country to fill the shortfall
in supply not met by domestic production.
The ratio of domestically produced to
imported supply varies across industries
and specific products. But overall import
share of supply has been rising in most
The MergeGlobal Forecast Team
comprises Brian Clancy, David
Hoppin, Luis Blancas, Richard Ho-
lohan and Clement Zhang. Clancy
and Hoppin are managing directors
of MergeGlobal, a specialist firm that
provides clients in the global travel,
transportandlogisticsindustrieswith
services ranging from financial advi-
sory to strategic consulting. This is
thefirstinaseriesoffourreportsfrom
MergeGlobal, with further coverage
appearinginAmericanShipper’sJuly,
August and November issues.

3. Behind the Numbers
10 AMERICAN SHIPPER: JUNE 2007
Figure 2
Personal consumption has expanded
faster than GDP for many years
Billions of constant 2000 dollars
Source: U.S. Bureau of Economic Analysis.
U.S. economy
Personal consumption
2.5%
4.1%
3.1%
4.4%
CAGR
12,000
10,000
8,000
6,000
4,000
2,000
0
1995 2000 2006 1995 2000 2006
Compound average growth rate
(CAGR) between the years
indicated on each graph.
Figure 3 (Tables 3.1-3.7)
Demand-pull based forecast
of U.S. footwear consumption
3.1: After a small slowdown, consumption is expected
to remain healthy over the next five years.
End user demand
in destination market
1
U.S. personal consumption expenditure
Annual growth, percent
3.0%
Forecast
3.1%3.1%3.0%3.0%
2.8%
3.2%
3.5%
3.9%
2.8%2.7%
2.5%
’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12
Source: U.S. Bureau of Economic Analysis and MGI Demand-Pull Model.
segments. The rising share of import sup-
ply as a percent of total end user demand is
what we call “network shift,” and it is the
key underlying driver of structural change
in trade network demand patterns.
Figure 1 shows the seven-step process
we use to translate end-user demand for a
specific product into an origin-destination
product trade flow by mode and network
routing.
Step 1 is total end-user demand for a
specific product in a destination country.
End-userdemandcomprisesconsumerand
industrial products and can be finished
goods ready for final consumption or com-
ponents that feed a product process.
In step 2, business modal share of end-
user product demand determines who
the consignee will be for imports. In the
retail sector, multiple distribution chan-
nels are competing for end-user demand
using multiple retail formats. Extremes
include big box retailers at one end of the
spectrum and high end specialty retailers
at the other end.
Step3istheimportshareoftotalproduct
demand, and measures the competition
between domestic and import suppliers.
Origin country share of imports in
step 4 captures the competition between
countries for import demand and reflects
therelativecompetitiveadvantageofeach
country in terms of its ability to supply
specific products cheaper than another
country on a total landed cost basis. Total
landed costs include product costs, ap-
plicable duties, transportation costs and
inventory carrying costs, and reflect the
balance between lower labor costs and
longer transportation length of haul and
supply chain variability. Changes in rela-
tivetotallandedcostsforspecificproducts
between countries determine a country’s
future share of origin demand for imports
to a destination country.
Step 5 is where shipment size and modal
mix are determined for a specific import
flow. Shipment sizes are a function of
numerous tradeoffs between ordering
costs and inventory levels, and must be
considered simultaneously with mode
choice. Ultimately, flows are segregated
into sea full-containerload (FCL), sea
less-than-containerload and air LCL, and
reflect the relative unit values, economic
perishability, physical characteristics and
theeconomicprocessimpairmentpotential
for each product.
Step 6 tracks the shifts in regional
destination demand for products at the
destination country, and reflects shifts
in distribution center and manufacturing
plant locations.
Step7isthelaststep,andiswhereorigin
and destination demand by mode is trans-
lated into specific flows over the network
byassigningdemandtosupplyandsolving
for equilibrium where “spilled” demand
is reassigned to the next-best routing until
all demand is satisfied. This requires an
evaluation of the relative capacity, transit
times and prices by route.
In the next section, we present this
analytical process at work focusing on the
U.S. footwear industry.
Application of demand-pull
framework
The best way to better understand the
demand-pull framework and how it’s ap-
plied is by example, and for this purpose
we’ve chosen the U.S. footwear market.
Again, the objective of the framework is to
understandtheprimarydriversoffootwear
consumption in a specific market over a
period of time, rather than determining
point estimates of consumption.
Footwear provides a good illustrative
example because it is easy to relate to, and
at the end of the exercise readers should
be able to judge the reasonableness of not
only the forecast (e.g., pairs per person

4. Behind the Numbers
12 AMERICAN SHIPPER: JUNE 2007
More than $10.55 per kilo Less than $10.55 per kilo
Business model
share of end-user
demand
2
FEU share vs. value share
of U.S. footwear imports
Via vessel and air
3.2: Big retailers will continue growing on an FEU ba-
sis, but specialty stores are likely to maintain
their share of imports by value.
100%
75%
50%
25%
0%
Forecast
High end
Low to
medium end
’07 ’08 ’09 ’10 ’11 ’12’01 ’04
Value share
100%
75%
50%
25%
0%
’07 ’08 ’09 ’10 ’11 ’12
Forecast
High end
Low to
medium end
’01 ’04
FEU share
3.3: Footwear sourcing is slowly reaching its steady state.Import share of total
product sourcing
3
U.S. footwear
import saturation
FEU, in percent
214
Domestic
Imports
’01 ’04 ’07 ’08 ’09 ’10 ’11 ’12
Forecast
225 226 230 236 246 255 267 280 294 312
330
U.S. footwear consumption
Thousands
of FEU
’95
Forecast
’00 ’07 ’12’04
6.4 6.7
8.6
11.1
7.5
U.S. footwear consumption
Pairs per person
Forecast
100%
99%
98%
97%
96%
87%
Imports
Domestic
’07 ’08 ’09 ’10 ’11 ’12’01 ’04
per year), but also the steps we took to
get there. We believe this approach is
ultimately more useful than a technically
sophisticated forecasting framework that
produces data that are difficult to assess
because of the “black box” nature of the
underlying methodology.
Demand-pull, on the other hand, helps
usdissectthecriticaltrendsthatultimately
determine consumption patterns. In so
doing, it provides us with metrics that fa-
cilitatetheassessmentoftheforecast.Most
importantly, as we build the framework,
we become intimately familiar with the
factors that are most likely to affect the
forecast going forward. As a result, we
can dynamically adjust the forecast as new
information becomes available.
The first step begins with personal
consumption. Personal consumption ex-
penditure (PCE) has been the main engine
of growth of the U.S. economy for many
years (Figure 2), growing rapidly through
the 1990s before pulling back in the wake
of the dot-com bubble bust in 2001. Since
then, PCE has recovered smartly, driven
in part by capital gains stemming from
booming stock and housing markets.
More recently a cooling housing market
and growing concerns over the U.S. trade
deficit have worried economists, but most
observers expect any economic slowdown
to be short-lived.
In fact, drilling down to a more granular
level,wecanseethatfootwearconsumption
in America has been very healthy, indeed.
Thenumberofpairsoffootwearconsumed
annually in the United States grew at an
averagerateof3.4percentperyearoverthe
11-year span of 1995-2006 (slightly faster
thantheeconomyasawhole).Overthepast
three years, however, footwear consump-
tion has really hit its stride: growth since
2003 has averaged 6.1 percent annually.
Understanding the secular trends behind
Source: U.S. Department of Commerce and MGI Demand-Pull Model.
Source: U.S. Department of Commerce and MGI Demand-Pull Model.
this rapid growth is a critical part of the
demand-pull paradigm.
Step2ofourframeworkbeginstosuggest
thatevenintheeventofaslowingeconomy,
the impact on footwear demand would
likelybelimited.ThisisbecauseAmerica’s
footwear consumption, like many other
consumer goods, is bifurcated.
Atoneendofthespectrumaremass-mar-
ketprivatelabelbrandsofferedatrazor-thin
marginsintheaislesofthelocalWal-Mart.
Similarly, branded footwear is offered at
substantial discounts by off-price retailers
like TJ Maxx and Ross Stores.
At the other end, original equipment
manufacturers(OEMs)operateresponsive
supply chains with the stated purpose of
deliveringbetterserviceanduniquequality
at a premium price.
As it turns out, Americans want both.
Consumers are happy to pay a premium
for certain products that are meaningful to
them, while “making up for it” by saving
money at the no-frills outlets of so-called
big-box retailers. In footwear, Payless
ShoeSource and DSW Shoes inhabit the
former end of the spectrum, while Nike,
Pradaandsimilarhigh-fashion,high-qual-
ity participants occupy the other.
While strategically very different, these
two contrasting areas of the bifurcated
footwear industry share one important
characteristic: they rely on offshore
manufacturing and require the capability
to operate extended supply chains.
At the low end, nationwide retailers

5. Behind the Numbers
14 AMERICAN SHIPPER: JUNE 2007
3.5: FCL will continue to dominate the sector,
but LCL and air freight will slowly gain share.
Source: U.S. Department of Commerce and MGI Demand-Pull Model.
Shipment size
and modal mix
5
Compound average growth rate (CAGR)
between the years indicated on each graph.CAGR
Other
Ocean FCL
Ocean LCL
Air
U.S. imports of footwear by mode
Thousands of FEU
+5%
+3%
’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12
205
218 221 227 233 243 253 264
278
293
310
329
Forecast
source from a handful of countries where
raw materials and labor are both abundant
and cheap. China is by far the preferred
origin, commanding close to 90 percent of
the American imports market by weight.
At the high-end, China is also the
origin of choice, not only because of its
cost-competitiveness but also because of
the footwear manufacturing expertise
China’s manufacturers have accumulated
over the past 25 years. In other words,
and contrary to popular belief, China’s
attractiveness as a sourcing center is not
onlyafunctionofcostadvantagebasedon
laborabundanceandgovernmentsupport,
but it also stems from how good they are
at making shoes.
Nevertheless, country-level share of
high-end footwear production is indeed
more diversified than that of the low-cost
market, with Italy offering an obvious ex-
ampleofaproductioncenterdifferentiated
by quality, know-how and brand names.
The conclusion: since Chinese costs are
unlikely to experience dramatic increases
over the coming years, and as experience
andknowledgeofcustomertastescontinue
to accumulate, the cost of footwear on a
per-pair basis is unlikely to rise and hence
American footwear demand is unlikely
to soften — even in a slowing-economy
scenario.
The next two steps of the framework,
Steps 3 and 4, are closely related. In the
caseoffootwear,thesestagesoftheanalysis
delve further into the issues of offshore
manufacturing in general and of China’s
growing dominance in worldwide shoe
production in particular.
Offshore footwear sourcing has been
goingonfordecadesintheUnitedStatesin
order to avoid the high landed costs associ-
ated with domestic production. Going first
to Japan, then to Taiwan and South Korea
and, since the 1980s, to other economies
such as Indonesia, Thailand and China,
Asia’sfootwearmanufacturingexemplifies
the region’s export-led growth “miracle.”
In the meantime, imports have steadily
taken share from domestically produced
footwear in the United States and, though
approaching the saturation level, show no
signs of reversing the trend.
Whatmaychange,however,isthecoun-
tryshareofU.S.shoeimports.Forexample,
whileChinahasrecentlyexperiencedlabor
shortages and other sources of cost pres-
sure, Vietnam has been firmly gaining
shareofU.S.footwearimports,goingfrom
effectively nothing (0.02 percent) in 1995
to almost 4 percent in 2006. Moreover, as
firms diversify their supply base for risk
management purposes, and supply chains
become more capable of dealing with
geographically dispersed nodes, China’s
share of U.S. footwear imports may likely
be reaching a plateau.
Shipment size and modal mix have
also been part of the transformation of
the footwear industry as it underwent an
unprecedentedbifurcationledbyconsumer
preferences.Forexample,theriseofthebig
retailers drove a decline in air freight use
for footwear shipments during the 1990s
in favor of FCL ocean freight. It would be
reasonable to expect, however, that as the
Country share
of U.S. footwear imports
Pairs, in percent
3.4: China will continue to dominate the market, while Vietnam will gain share
from other nations.
Origin country share
of import sourcing
4 U.S. non-Chinese imports of footwear
Pairs, in percent
Brazil
India
Indonesia
Italy
Mexico
Taiwan
Thailand
Vietnam
Rest of the world
100%
75%
50%
25%
0%
Forecast
Other countries
China
’07 ’08 ’09 ’10 ’11 ’12’01 ’04
100%
75%
50%
25%
0%
Forecast
’07 ’08 ’09 ’10 ’11 ’12’01 ’04
Source: U.S. Department of Commerce and MGI Demand-Pull Model.

6. Behind the Numbers
16 AMERICAN SHIPPER: JUNE 2007
3.6: The West has the highest share of imported
footwear traffic, primarily due to growing value-added
warehousing and transload operations in that region.
Source: MGI Importer Location Database.
West 35%
Southeast 32%
Midwest 17%
Northeast 16%
2007 estimated
U.S. distribution
center destinations
of imported
footwear
FEU, in percent
Regional
destination share
6
35%
16%
32%
17%
market becomes more bifurcated and as
aircraft become more fuel-efficient, air
freight will begin to regain share over the
comingyears,albeitslowly.LCLshipments
should also increase. Ocean carriers and
their inland transport partners are increas-
ingly interested in segmenting the ocean
freight market by offering faster service at
premium rates that are still much cheaper
than airfreight. Faster transit times are
possible not only because of newer and
faster vessels, but also because of infor-
mation technology systems that allow for
seamless special handling of “hot boxes”
at origin and destination. LCL should be
particularly attractive for footwear due to
the commodity’s relatively high unit val-
ues, and density characteristics that favor
ocean freight.
Finally, regional destination share and
specific routing decisions round out our
understandingoftheprimarydeterminants
ofU.S.footwearconsumption.Largelydue
to its proximity to Asia, U.S. West Coast
ports have seen unprecedented growth
over the last 15 years, particularly in the
Los Angeles Basin. This in turn has led to
a much greater use of rail intermodal (on
both ISO and, of more recent expansion,
domesticequipment)asasubstituteofhigh-
cost over-the-road transportation.
However, the growth of the West comes
at the cost of congestion in the U.S. trans-
portation network. Class I railroads, for
example, have asserted that redundant
capacity has been completely exhausted
along key routes. Railroads are aware of
much-needed investments, but lead times
on infrastructure projects are long, and the
basic need to recover the cost of capital
implies that funding sources might be
insufficient. These congestion problems
havebolsteredtheuseofall-waterroutesto
reach the consumption centers of the U.S.
East Coast, both via the Panama Canal (in
the case of footwear, mainly for Chinese
and Southeast Asian imports) and the Suez
Canal (in the case of footwear, mainly for
Indian imports).
To be sure, the trends in inland routing
operations highlighted above affect Asia-
originatedimportsacrosstheboardalmost
evenly. But a closer look at footwear and
its intrinsic characteristics might reveal
commodity-specific patterns that are of
interest to the demand-pull analyst. For
instance,footwearisa“staple”commodity
consumed in every household. In fact, an
average of 7.3 pairs per person were con-
sumed annually in the United States over
2000-2006, according to U.S. Commerce
Department figures. This implies that the
endU.S.destinationoffootwearshipments
is likely to closely match the geographi-
cal distribution of both population and
retail sales. Thus, the mini-landbridge vs.
all-water split of ocean shipments of foot-
wear should be expected to be close to the
national average across all commodities.
Moreover, the dominance of nationwide
retailers in the sector, the relatively high
value per pair, and the reliance by many
footwearshippersonvalue-addedservices
such as bar coding and labeling all point
to an expected high incidence of transload
operations at West Coast ports relative to
that of other commodities.
Figure3presentsourdemand-pullbased
forecast of U.S. footwear consumption for
2007 to 2012. Point estimates — rarely ac-
curateregardlessoftheforecastingmethod
used — are in this case the result of a logi-
cal chain of analysis that takes us from the
end customer back through the value chain
to the original producer. As a result, the
forecastanditsunderlyingdrivers,aswe’ve
outlined,areeasiertounderstandand,most
importantly, easier to assess.
In addition, the framework equips the
analyst with a short but meaningful list
of “sources of impact” that can be men-
tally traced as he reacts to news and data
from trade publications, competitors’
actions, primary research, public policy
announcements, and the general press. In
short, the demand-pull derived forecast is
actionable.
Demand-pull characteristics
for major commodity groups
Having applied the demand-pull con-
ceptstoaspecificindustry,wecannowgen-
eralize the framework to other industries,
bothintheconsumerandindustrialproduct
categories. We will do so by examining the
primarydemanddriversforthemajorcom-
moditygroupstradedbetweenAsiaandthe
United States. Our thought process at each
step is summarized in Figure 4.
Furniture. The broad furniture com-
modity can be broken into two categories,
office and residential, and as the names
suggest,thegoodstypicallyendupineither
an office or a home. Consequently, real
estate trends serve as a primary driver for
furniture demand, which in turn tends to
correlate with broader economic activity:
as the economy grows, new homes and
offices are built, and those structures need
to be furnished.
Lowinterestratesandavibranteconomy
have led to a boom in new home and office
spaceconstruction,drivinganextendedrun
of greater-than-GDP growth in furniture
consumption.Layeredontopofthiscyclical
growth are unique secular trends as well.
For residential furniture, the trend toward
increased ownership of ever-larger homes
has added to the already strong cyclical
trends. Office furniture demand has been
enhanced by the continued evolution of
the U.S. economy from manufacturing-
centric to increasingly white-collar and
service-centric.
Furniture retailing has also morphed.
Competitors such as Rooms To Go have
employed innovative business models that
source heavily from Asia and use regional
distribution centers to stage merchandise
for relatively rapid order fulfillment.
Other, vertically integrated retailers such
as Ashley Furniture have rapidly shifted
production to China and now actually own
facilities there. These retailers’ efforts to
re-engineer their supply chains have en-
abled them to take advantage of China’s
low production costs and Chinese imports
to satisfy a rapidly increasing share of
domestic U.S. furniture demand.
Furniture has seen one of the most
dramatic shifts of sourcing over the past

7. Behind the Numbers
18 AMERICAN SHIPPER: JUNE 2007
10 years, with imports now comprising
nearly 40 percent of all furniture con-
sumed in the United States, and China as
the main beneficiary. The labor-intensive
nature of furniture manufacturing made it
particularly well-suited for import substi-
tution. Further, China has ready access to
furniture’srawmaterials:hardwoodtimber,
steel, textiles and plastics. The exodus of
furniture manufacturing from the United
States occurred after China had “arrived”
in international trade (using its December
of 2001 admission to WTO as a rough esti-
mate of its “arrival”). As a result, furniture
manufacturing never made the intermedi-
ate stop in other Asian or Latin American
countries,andtheincreasedtradehasnearly
all accrued to China instead.
U.S. destinations for furniture follow
population distribution patterns, with
greater growth in regions that are grow-
ing their population share (such as the
Southwest) versus those that are losing
population share (such as the Northeast).
A unique characteristic of furniture trans-
port is a higher level of all-water service to
East Coast destinations versus intermodal
transit by way of West Coast ports, in
order to minimize handling that can lead
to damage.
Apparel. Domestic apparel shares simi-
lar demand characteristics with footwear,
driven by personal consumption and a
divide into two categories: lower cost,
mass-produced clothing and higher-value,
fashion apparel.
By weight, domestic per capita con-
sumption of apparel has grown at about
1 percent per year since 1995. However,
the per capita dollar value of apparel has
actually dropped by more than 1 percent
peryear,illustratingthedeflationaryeffect
cheaper imports are having.
Import penetration has largely reached
full saturation, with about 86 percent of
domestic apparel consumption originat-
ing overseas. However, country shares of
importsareshiftingsignificantlyfollowing
theexpirationoftheMultiFiberAgreement
in 2005. MFA was a trade agreement that
setU.S.apparelimportquotasforindividual
countries, and had the effect of artificially
fragmenting production among many na-
tions in order to avoid exceeding these
import quotas. When it expired in 2005,
production began to shift to China from
relatively higher cost countries in Latin
America and elsewhere in Asia.
Recently, apparel retailers have focused
on becoming more responsive to shifts in
styles and fashion, with meaningful impli-
cations for the modes of transport that are
used.Forexample,severalapparelretailers
make use of deconsolidation facilities lo-
catednearWestCoastports,allowingthem
todelayfinalshipmentallocationstostores
orregionsuntilafterthetwo-to-three-week
ocean transit, and therefore two to three
more weeks of visibility into customer
buying patterns and inventory levels.
Aswithfootwear,apparelretailingbusi-
ness models have largely bifurcated into
high-endmodelsfocusedonflexiblesupply
chains that can respond quickly to chang-
ing tastes and styles, and low-end models
focused on achieving the lowest possible
deliveredproductcostsbyleveragingscale.
This has led to a variety of supply chain
prescriptionsrangingfromFCLoceanship-
mentsmovedintacttoregionaldistribution
centers, to the use of high-cost air freight
to minimize response time to last-minute
shiftsinconsumertastesaroundtheChrist-
mas season. Hybrid solutions have also
proliferated incorporating ocean freight,
in order to minimize transpacific transit
costs, and deconsolidation facilities on the
West Coast in concert with expedited LTL
service, in order to maintain flexibility in
inventory balancing.
Computers And Components. De-
mand for computers has both a personal
consumption component and a business
investment component. A high-growth
commodity for years, the segment saw a
significant slowdown in 2001 and 2002 as
businesses postponed new purchases. But
demand rebounded quickly as increased
processor power and lower prices spurred
demand for data processing equipment.
Recently the rollout of Microsoft’s new
power-hungry operating system, Vista,
has started a new hardware upgrade cycle
that should bolster personal computer
shipment growth for the next one to two
years. Computer sales growth will remain
subjecttoeconomiccycles,particularlythe
corporate component. But secular growth
willoutpacebroadeconomicgrowthdriven
bycontinuedexpansionoftheservicesector
and software technological innovation.
For years, Dell has been considered the
best-in-class retailing model for personal
computers: direct sales are driven through
its Web site and desktop computers are
built to order at U.S. assembly plants from
imported components delivered through a
tightly knit supply chain.
More recently, laptops have taken share
from desktops, emphasizing a distinct
supply chain structure. Because laptops
typically involve less customization and
lend themselves to expedited air freight
Source: A: U.S. Department of Commerce and MGI Demand-Pull Model.
Source: B: MGI Network Flow Model.
A: U.S. ocean imports
of footwear, by coast
of access
FEU, in percent
Routing share
to regions
7
Forecast
100%
75%
50%
25%
0%
’95 ’00 ’07 ’12
West
East & Gulf
3.7: Over the coming years, all-water services
and West Coast transload routings are likely to take
share from intact mini-landbridge routings.
MLB 42%
WC local* 23%
All-water 23%
WC transload 12%
12%
23%*
23%
42%
*WC local includes local
intact moves, as well as
local transload operations.
B: 2007 estimated
routing share of U.S.
imported footwear
FEU, in percent

8. AMERICAN SHIPPER: JUNE 2007 19
Behind the Numbers
(because of their small size relative to their
value),finalassemblycanbeaccomplished
by manufacturers such as Quanta in China
and then shipped either to a distribution
center for repackaging or even directly to
the consumer.
Imports represent most of the comput-
ers consumed in the United States, having
largelyreachedsaturationlevelsintheearly
1990s. However, here again China is tak-
ing an ever-larger share of the import pie
from other Asian nations such as Korea
and Japan.
Thefinaldestinationsofcomputership-
ments are also changing, affected by the
shifting mix of laptops versus desktops,
and the sales channels that are used to
deliver them.
ConsumerElectronics. U.S.demand
forconsumerelectronics,epitomizedbythe
ubiquitous iPod, has also grown at levels
well above domestic GDP. New technolo-
gies such the mp3 music format and the
proliferation of wireless data products
continuallydrivedemandforthenext“gad-
get.” In many ways, consumer electronics
demandmirrorsthatfortheretailsideofthe
personal computer market (i.e. excluding
the more cyclical corporate component),
though typically at lower price points and
through a broader product variety.
Sales channels for consumer electronics
have shifted over the past 20 years, first
fromspecialtyshopstobroadlineretailers,
and from broad line retailers to “category
killers” such as Best Buy and Circuit City
as well as purely Web-based retailers like
Dell and Amazon.
Like computers, imports account for
nearly all of U.S. consumer electronics
consumption and import penetration
reached its saturation point more than a
decade ago. However, country shares are
shifting,havingalreadymovedfromJapan
to the Asian Tigers in the 1990s and now
increasingly moving to China.
Since the end of the go-go tech bubble of
the late 1990s, transpacific transport has
seen a significant shift from air to ocean
as large retailers, laser-focused on squeez-
ing costs from the system, have increas-
ingly downgraded the service level of their
freight. Routing has remained primarily
through West Coast ports though.
Auto Parts. Automotive parts can be
thought of in two categories, components
for new cars and replacement parts for ex-
isting cars, the former being significantly
more cyclical than the latter. During the
2001-2002 economic slowdown U.S. auto-
makers, desperate to prop up sales, offered
free financing and other sales incentives
across their product lines. While the ini-
tiatives worked temporarily, they did not
addressthefundamentalcostdisadvantages
of U.S. manufacturers.
Several years later, and in dire finan-
cial straits, the U.S. auto manufacturers
are putting enormous pressure on their
suppliers to reduce costs, and their sup-
pliers, in turn are looking to China. We
are only recently seeing the first signs of
what may be a major shift in auto parts
sourcing from domestic manufacturers to
overseas providers.
In order for auto manufacturers to tap
the low-cost labor pool in China, however,
specialized transport services will need to
be used to ensure time-definite delivery.
This must involve the use of ocean freight
service, to maintain the cost advantage
gained through sourcing from China.
And once the parts arrive at the domestic
port, an expedited ground service must be
employedtoavoidtheunpredictabledelays
that have plagued the western intermodal
rail networks in recent years.
In addition, all-water service to less

9. Behind the Numbers
20 AMERICAN SHIPPER: JUNE 2007
congested port complexes like Savannah,
Ga., will likely be very competitive for
parts bound for U.S. Southeast assembly
plants. While still in the early stages, the
auto parts segment is expected to be a
major source of import growth over the
next several years.
Industrial Machinery. Of the com-
modities discussed here, industrial ma-
chinery is unique in that it is the only one
driven primarily by corporate investment
rather than consumer demand. Clearly,
there is a derivative element of consumer
demand, but orders for new industrial
machinery are more directly associated
with lumpy increases in industrial capac-
ity — a new production line or a new plant
— than with the ebb and flow of consumer
demand. As such, industrial machinery
tends to show the most cyclicality of the
traded goods examined here.
While changes in industrial business
models are not as obvious to the casual
observer as, say, the rise of Wal-Mart and
Amazon, innovations such as lean or
just-in-time manufacturing can have a
meaningful impact on the level of import
penetration. JIT processes, for example,
depend on having components on hand
when they’re needed, and supply chains
that extend across the Pacific have been
thought of as incompatible. As a conse-
quence, imports represent a relatively
small percentage of domestic industrial
equipment consumption.
However,therearesignsthatthingsmay
be changing. Intense global competition
is forcing manufacturers and industrial
serviceproviders—thepurchasersofsuch
equipment — to examine and optimize
every element of their cost structures. And
Source: MergeGlobal primary research.
Figure 4
Demand-pull characteristics of major commodity groups
Import demand driver Apparel Consumer electronicsFurniture
• Unit price deflation is stimulating
demand in all product categories
• Customers upgrading to flat-panel TVs
and other appliances
• Near-term growth slowing due
to housing market slowdown
• Long-term growth strong
End user demand
in destination
market
1
Business model
share of end user
demand
2
Import share
of product
sourcing
3
Origin country
share of imports
4
U.S. region
destination mix
(DC locations)
6
Routing/service
level share
7
Shipment size
and modal mix
5
• Specialty big box retailers like Best Buy
continue to take share from traditional
channels
• Bifurcated market with high price branded
products and low cost private labels
controlled by large retailers
• High-end products
• Nontraditional manufacturers
like Ashley and Rooms to Go
taking share
• Import sourcing has been 70% of total
demand
• Key change will be retailers taking
control of inventory upstream
• Already high, and will continue to rise• Import sourcing increased
significantly in last few years
• China, Malaysia, Korea• Quota sunset is causing dramatic shift
in origin country shares where China
has captured majority of incremental
growth
• China is largest import source
and furniture is single-largest
commodity
• Southeast Asia also continues
to be key supplier market
• Combination of ocean FCL and LCL;
Air freight LCL used for both strategic
and operating purposes
• Combination of ocean FCL and LCL;
Air freight LCL used for both strategic
and operating purposes
• Primarily ocean FCL due
to unit value and density
characteristics
• DC locations driven by population
concentrations
• Apparel is large user of deconsolidation
on West and East coasts
• DC footprint varies
by competitor
• Traditional manufacturers still
clustered in the Carolinas
• Heavy flow through West coast ports
• Products with high value density, such
as iPods, will still move by expedited air,
but medium value density products, like
flat panel TVs are increasingly
moving by ocean
• Apparel will continue to flow to eastern DCs
via MLB off West coast deconsolidation
for large retailers
• All-water to Gulf Coast, South
Atlantic and North Atlantic port
range preferred to avoid
damage and high MLB prices
• Volume growth in line with population
growth
• Demand growth in terms of value will stabilize
and begin to rise slowly (vs. recent declines),
as import saturation is reached and the defla-
tionary effect of import substitution subsides.

10. AMERICAN SHIPPER: JUNE 2007 21
Behind the Numbers
as a result obstacles to overseas sourcing
are slowly being overcome primarily by
better supply chain collaboration.
Boeing is a case in point. Both compo-
nents and fully assembled sections of its
next-generation787Dreamlineraircraftare
shippedtoafacilityinEverett,Wash.,from
around the world. The key to coordinating
such a complex supply chain has undoubt-
edlybeenthetechnologicaltoolsthatallow
for seamless communication among sup-
ply chain partners. This strategy is likely
to encourage manufacturers of much less
sophisticated industrial machinery to look
for cutting costs by going global, just as
consumer product manufacturers have
done for decades.
‘It is better to be roughly right
than precisely wrong’
In spite of advances in highly techni-
cal econometric sciences, John Maynard
Keyneswordsarenolessapttodaythanthey
weremorethan60yearsago.Forecastsrarely
provideahighlyaccurateviewofthefuture,
but they can serve to help us understand the
reasons why certain things are more likely
to unfold one way rather than another.
Trade forecasts are no different, and we
have attempted to show, by example, the
logical mechanics behind our own efforts
in this area. When these assumptions and
their linkages to the output are better un-
derstood, the forecast becomes dynamic
and more useful as a tool for evaluating
unanticipated events.
Over the years, we have come to believe
thatwhilepointestimatesareoftenthefocus
ofattentioninforecasts,theirtruevaluelies
inthethoughtprocessesbehindtheassump-
tions. We hope the reader will agree. ■
Industrial machinery
• Upgrade cycle underway in consumer and business
markets stimulated by Microsoft Vista release
• Unit price deflation continues and laptop share
continues to climb
• Historical growth constrained by intellectual property
concerns and JIT manufacturing time-definite
delivery requirements
• Prospective growth accelerating as pricing pressures
force increased overseas outsourcing
Auto partsComputers & components
• Near-term demand to slow with rising
interest rates
• Long-term demand will continue
• Dell undergoing a radical rethink on product,
channel and logistics strategy
• Industrial manufacturers are experimenting
with longer supply chains in order to enable
more cost-competitive components
• U.S. industry restructuring is several years
from completion
• Product line and component sourcing
strategy expected to change
• Low value components have been sourced offshore
for years
• Intel is increasing building fabrication capacity
in China
• Historical import shares have been constrained
by intellectual property concerns and time-definite
delivery requirements of JIT manufacturing systems
• However, price pressures driven by overseas
competition are forcing manufacturers to increase
overseas sourcing
• Offshore sourcing of certain components
expected to increase significantly
• Large share shift of component manufacturing from
southeast Asia to Shanghai over last couple of years
• Laptop assembly is almost exclusively in China, with
the notable exception of Dell in Ireland and Malaysia
• Remaining assembly in U.S. may ultimately move
to China
• China is best positioned to capture significant share
in this vertical
• Concerns over intellectual property remain
an obstacle, but modularization and competitive
pressures will reduce the perceived relative risk
• China will experience large increase
in component demand from U.S.
manufacturers
• Brazil will also continue to increase share
of U.S. imports
• Combination of ocean FCL and LCL; Air freight LCL
used for both strategic and operating purposes
• Mostly ocean FCL in combination with time-definite
inland transport; Air freight used only to meet
operating challenges
• Mostly ocean FCL in combination with
time-definite inland transport; Air freight
used only to meet operating challenges
• Final product distribution patterns similar to those
of consumer electronics
• Component distribution driven by final assembly
plant locations (e.g. for Dell: Austin, Texas;
Lebanon, Tenn.; Winston-Salem, N.C.;
Oklahoma City, Okla.)
• Upper Midwest manufacturing and assembly facilities
• Southeastern U.S.are where most recent auto plants
have been sited
• Significant but less concentrated flows to areas
for natural resource extraction, such as the Gulf Coast
(energy) and the Pacific Northwest (paper and timber)
• Primary destinations are assembly plants
and footprint is relatively stable
• Recent auto assembly plants have been
sited mainly in the U.S. Southeast
• Progressive downgrading from air to ocean.
• Computer components through Dell’s supply chain
move intact intermodal to VMI hubs.
• Other computer makers assemble in Asia, and move
smaller lots of finished products to retailers’ or their
own warehouses
• Routing is likely to follow a pattern similar to new car
parts and components: heavy flows to Midwestern
and Southeastern manufacturing locations
• Time-definite delivery will be an important factor
in determining service level and modal choice
• Components for new cars will follow
relatively concentrated routes, generally
to assembly plants in the Midwest
and Southeast. Time-definite delivery
will be an important factor in modal
choice/service level.
• Spare parts follow more dispersed inland
distribution patterns, similar to retail goods