Don’t put all your eggs in one basket

China’s policy makers have recently set about trying to curb China’s rapid economic growth. They’re calling it the ‘new normal’. They are essentially not implementing short-term growth stimuli in response to fluctuations in the economy (for example, they are limiting tax breaks). Now, I’m not going to go into what this means for China but instead look at our friend Laurence Harris in the UK.

Laurence is a Welsh farmer who supplies milk to Pret-a-Manger chains in Hong Kong. He has not as yet begun to feel the impact of China’s slowdown, however, analysts predict it will soon hit exporters like him. This is on account of the 7.4% drop in China’s growth. The Chinese government is tightening its grip on spending and the ‘new normal’ will soon see falling demand affecting the Laurences of the world. Larger multinationals like Unilever and Ben & Jerry’s have already begun to feel the brunt of the ‘new normal’ after reporting a 20% fall in their sales in the last quarter of 2014.

The British marine industry, in particular, has been hit pretty hard; it’s sales having dropped from 71m in 2012 to 52m in 2013 to 34m in 2014. This is, in part, due to the volatility of the industry – you don’t exactly see people running out and buying a powerboat every other day; it’s usually only the Donald Trumps of the world that go out and buy one, maybe one in every harbour city in his case, but you get the idea: it’s a one-time buy sort of good. However, the drop in Chinese economic momentum has also played a significant part. Not only has the fall in demand seen a fall in sales, but it creates uncertainty – exporters are unable to predict and plan how much stock to move. This places increased pressure on factors like employment and storage/ holding costs.

Companies like Alucast, however, haven’t been hit as badly and here’s why. They spread their operations over a number of different countries. They have operations in the US, Hungary, Romania, China. It increases their security and reduces the chance of them being catastrophically hit on account of Xi Jinping’s decisions over in China. Globalisation has its perks but it also has its weaknesses, and dangerously high interdependence is one of them. So, the moral of the story? Don’t put all your eggs in one basket.

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One thought on “Don’t put all your eggs in one basket

  1. Fantastic. Lots to think about. Elasticities of supply and demand; risk spreading economies of scale; shifts in the AR/ MR curve; specialisation; demand side policy and so on and so forth!

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