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BOSTON-Various sources suggest the Republic of China’s influence on the US industrial sector may be waning. According to China Logistics, a report released in late November by UK-based Transport Intelligence, while the Chinese logistics industry is set to experience strong growth over the next five years, the rates of growth for some sectors will be slower than previously anticipated. The slower growth will in turn create less need for new warehouse and distribution centers, which some major US industrial REITs have been counting on to provide the engine of growth needed to counter reduced domestic demand for new product.

In particular, say TI researchers, the Chinese international express industry is now forecast to expand around 23% a year to 2012, far below the 35-40% growth rates reported for the past few years. In addition, the contract logistics sector is forecast to show a 21.7% average annual compound growth rate of 21.7%, modestly below recent levels, while the freight forwarding will likely see only a 13.5% annual average growth rate, less than half recent levels and far below previous predictions.

Nonetheless, as TI chief executive John Manners-Bell points out, growth will continue, even if at a slower rate than some might hope. “Given that much of the developed world is on the brink of recession, it would be easy to write off prospects for growth in China on the false assumption that the market is solely dependent on Western consumers,” he says. “Although China is certainly not completely decoupled from its export markets, the country’s economic growth – forecast this year to be ‘only’ 9.5% − has in recent years developed its own domestic dynamics. With the government planning to stimulate its economy further by investing in the coming year some of its huge reserves, China is a good bet to ride out the recession.”

Arthur Jones, an economist at Boston-based Torto Wheaton Research, agrees China’s economy is not so much contracting as expanding at a slower rate. “Historically, recessionary periods in China had been measured by a slower-growing economy rather than a contracting one,” he says. “Its status as an emerging economy and ability to attract capital inflows are partly responsible for this resilience.”

Still, he warns against assuming Chinese development opportunities will provide the antidote to slowed US and European markets. “That the broader economy has managed to weather recessionary headwinds in the past, however, is not an indication of the resilience of its commercial real estate market,” he states.

But if China is likely to provide less opportunity for development than expected, the biggest impact on the US industrial real estate market is likely to come from weakening Chinese exports. Though current decreases in US consumer demand have temporarily reduced demand for Chinese-made products, a growing number of analysts see North American, European and Japanese original equipment manufacturers altering sourcing patterns to make themselves less reliant on Chinese manufacturing.

The likely beneficiaries are Mexico, Brazil, Canada and even the US itself, where reduced shipping times make for a more reliable and efficient supply chain. Though the change will not necessarily reduce long-term US real estate needs, it probably will create geographic shifts as fewer exports arrive at West Coast ports and more arrive at East and Gulf coast ports and via inland rail routes.

A new study from Boston-based AMR Research based on a survey of 130 global companies names China as the region that contributes the most risk to global supply chains. The survey identified volatile fuel, energy, and commodity prices as the top risk factors, followed by intellectual property infringement, supplier and internal product quality failure and security breaches.

“This creates a dilemma for many global companies,” says AMR vice president of research Noha Tohamy. “On the one hand, they continue to enjoy the advantages of cheaper material costs and labor wages in China as well as the potential to reach vast consumer markets, but on the other they must continually reassess the pros and cons of operating in China,”.

According to the report, a growing risk of product quality failure and intellectual property violations is forcing companies to improve the management of product quality across their global supply chains. AMR says survey respondents believe Chinese management practices frequently undermine their own efforts to ensure product reliability. They also say China presents a serious challenge to maintenance of intellectual property rights as one of the world’s major copyright and patent violators.

As a result, says the report, more and more companies are taking a new look at near-shore sourcing and manufacturing as a means of keeping better control over production. According to AMR, the top three strategies being used to mitigate supply chain risk are performance-based contracts with suppliers or service providers, closer collaborative relations with trading partners, and dual/multi sourcing strategies or use of redundant suppliers. All of these objectives, survey respondents indicate, can be better achieved outside Asia.

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