I suspect we will see more of this sort of thing in the future. China has some major challenges in the future. Besides cheap labor they devalued the Yuan in order to grow their economy. But that has been going on for 20 years. Today they have a huge amount of over investment. They also have to revalue the Yuan higher in order to create their domestic market.
Which means that some of the manufacturing will return to the US.
Don't kid yourself.
Have you ever been to China ? Have you ever seen the size and flexibility of some of those factories ?
1st they have a labor market that is more flexible, quicker to evolve and more willing to input into their jobs than anything else I've ever seen. Don’t for a second think that I’m de-valuing North American labor force or ethics. All I’m saying is that until you walk into a 5000 person finished wood product shop, and see their employees work mechanically and focused – you cant imagine what I’m saying. Its almost surreal.
2nd , the equipment, while we mock it here, is so “replaceable” , that upgrades are almost on a yearly schedule as opposed to a decade turnover. I visited a Norinco plant in 2004, went back in 2006 and everything was new. Then in 2009 all the 2006 equipment was sitting in a parking lot because they had upgraded the milling equipment line again.
In 2011 I saw a re-con veneer factory basically scrap guillotines and glue spreaders because the factory grew and a new processing line needed to be installed. Yeah,, the old equipment was less than three years old.
3rd. While our shops and factories are limited to a local or regional market, they strive on global orders. They have expediters and lobbyists who’s only job is to make sure their clients orders are first in, first out, first on the fastest transport system.
So we can look at the Yuen, look at what media wants to tell us – but until you see a small 5-10,000 person factory in the “flesh” – you don’t have a clue of what you are up against,
The question is how did China grow at an unprecedented 10% per year?
Besides the fact that the Chinese cook the books, where the local apparatchik gets his bonus, no matter that he is building an empty city he still gets his bonus.
The 10% growth was achieved through mercantilism that our "leaders" allowed. This is primarily done through devaluing the Yuan and low interest rates. The problem for China is that now it is over invested and is on the precipice of a huge crash. The same spot the US was in in the early 30s, for the same reason.
Devaluing the Yuan is great for creating imports, the problem is that at the same time you lower the purchasing power of the Chinese people.
China's only option is to continue to raise the value of the Yuan and to raise interest rates. This will create a consumer culture or a middle class.
So far they have raised the value of the Yuan but the apparatchiks still don't want to raise the interest rates. Which mean the Chinese economy will not develop a consumer market to the degree it needs to (1.3 billion people)
Don't fool yourself the largest manufacturer in the world is the US. Since China cooks the books and since they don't specialize in capital goods.
The reality is that it is now as expensive to make something in China (with transport costs) as it is in the US. Will all the work come back to the US no. But some will.
skyscraper index ? - very debatable, but cool to read for sure.
reality - China has an enormous pool of resources from labor to technology, and they have a different labor mind-set that is more geared towards product production vs human rights and quality of living, supported by an ever increasing infrastructure of professional and amateur brokers - who are fueled by an appetite for low priced consumer goods on a global scale.
This is supported in the US, Canadian , and European retail sectors proof by the success of chains such as Wallmart, Dollar Store ( North America) , and Poundmart and Jumbo in Europe.
In term of manufacturing millwork goods, we already have Chinese re-con veneers, Chinese laminates, and hardware a plenty that is specked on projects without shame.
Do we need to gear up for a market share battle ? Absolutely.
Am I about to stroke my brother on the back and say "Don't worry, their turn is coming" ? Not a chance. Better I say - " I think a beating is about to happen, so get ready for a fight"
You think I'm wrong? Talk to any Hotel Owners Rep. Ask them about Chinese furniture and have an honest discussion with them. - you would be surprised how many Hotels are now taking advantage of that market.
Here's another interesting tidbit that hasn't been discussed. China is no longer limited to sending product in large quantity over here by sea container.
You can go on Alibaba or even Ebay, but small items direct from China, and they send them over here by the post office for free.
Funny, if I take something to the US Post office to ship overseas it costs an absolute fortune.....$40 for a small envelope. Yet the Chinese can figure out a way to mail something over here in 2-3 days for free.
Zdraft has this spot on. China encroaches on more markets every day. All the rambling about the Yuan, mercantalism (not even sure what the argument is there), and the Chinese middle class is just nonsense.
Life will get harder, not easier, for US manufacturing.
Better I be wrong and prepare, than wait for the downfall of China and emerging manufacturing markets by ignoring :
- their endless supply of ready , willing and able low cost labor availability
- their adaptation to technologies and manufacturing techniques
- their export networks, and delivery infrastructure
- natural resources that have still yet to exploited
- over 50 years experience in growing, failing, adjusting and evolving in a Western Economic dominated area to the point that "Made in China" does not have the negative connotations that it did 10-20 years ago
Since Tao of Poo has decided to be silent, I will say a little more about my contention.
China has been practicing mercantilism for the past few decades. What this means is that they have kept the value of their currency the Yuan artificially low. This makes their products much cheaper. Consequently they have experienced double digit growth in their economy more or less since 1978. This has never occurred in the history of the world, that I have heard of.
When you lower the value of your currency it means that the average Joe or Wong's income is kept artificially low because the buying power of the devalued currency is lower.
At the same time it means the governments income goes up because of the trade imbalance. This means the government and the cronies benefit from the current setup.
An equally important part of the growth has been cheap interest rates. The problem with cheap interest rates is that it leads to over investment. When you have an entire city, airport, train station, worlds tallest skyscraper remain empty this is a not so small hint that you have over investment.
In order to make people believe that all is normal the powers to be want to further the charade. By not admitting that bank loans are not going to be repaid or propping up things that should be allowed to fail.
At some point the over investment will have to reconciled at which point there will be a mega crash.
Mercantilism is not an organic process so creates bubbles and imbalances. In order to re balance the Chinese economy they have to raise interest rates to encourage savings and raise the value of the Yuan to create consumerism or a middle class.
The problem with doing this is that it will take power/money away from the government/cronies and give it to the common man. So it is not going to happen easily for this reason. As Michael Pettis says the fact that they are still claiming 7.5% growth tells you they are not adjusting.
The longer they keep up the charade the worst the crash will be.
So its because the Yuen is artificially kept low that they keep building cheaper products and enticing the world to buy from them ???
Ok, as I stated before, you obviously have never been to China or else you would know right off the bat that its erroneous statements like that - that keep us Westerners off our toes on stuff like this. When you are there it becomes CRYSTAL CLEAR.
So you don't think that having a workforce to perform manual labor for a (legally mandated) 1080 Yuen ($165) per month make a difference?
You don't think that negating or ignoring Western Standardized safety regulation in manufacturing practices - makes a difference?
You don't think that having factories capable of making veneer, mdf, and plywood outputs being ordered and manufactured at 100,000 sheets per day is not concerning ? Point me to a US, Canadian, or European factory that has that kind of capability and I will send you a list of 15 - 20 plants in china.
And its obviously not important to your theory - that there is a plethora of Chinese ex-pats now out there , who know the system, have the connections and the method to represent these factories in areas of the world that consumers had no clue previously of how to access these facilities.
Very good thread. Excellent information and very provocative theories. In many personal discussions I have expressed the belief that China will eventually have to suffer "an adjustment" as the market watchers call it, which could lead to a swing of business back to our shores. A rebuttal I often hear is sure, the Chinese could fall off, but the world market will then lurch to the next poorest producing country, such as Vietnam, India, Indonesia, etc., and so continue an endless cycle. Are my half empty friends on to something?
Pat and joiner,
Chinese labor rates have a long way to go in order to shift work back to the US.
Pat, your argument about internal Chinese economic imbalances has it backwards. If development crashes within China, it makes raw materials and labor cheaper, which makes their export sector MORE competitive with the US, not less.
The only way manufacturing comes back to the US is when the Chinese middle class grows substantially enough to raise their own labor rates to be on par with our labor rates. It's that simple. It's not about mercantilism, or interest rates, or communism, or egg rolls.
With a 1 billion strong labor force that is barely half tapped into, I'm not holding my breath that we'll see wage inflation in China that will put any sort of dent into their manufacturing advantage.
What happened to the US in the early 30s is comparible to what China is about to go through, according to Michael Pettis the author of the great rebalancing.
China has been pegging the Yuan to the dollar for a long time. This is part of their mercantilism, you are entitled to your own opinion but not your own facts.
What will happen when the market crashes in China will be deflation not inflation. This will make Chinese labor less competitve. Also countries will conduct less trade further depressing the economy as it did in the US in the 1930s.
1) I remember hearing the same arguments about why Japan would take over the world back in the 80s. Didn't happen.
2) Growth rates, either on a GDP basis, or more importantly, on a per capita basis, can be very high when the starting point is very low, without the actual size of the increase amounting to much. Which would you rather have, a $3000/year per capita income growing at 10% a year, or a $35,000 a year per capita income growing at 3% a year? It's unlikely that China will sustain the very high growth rates, expressed in percentages, as their economy grows larger. It's never happened to any country before, whereas there are numerous examples of countries, including the USA, that grew fast for a while and then leveled off.
Personally, I don't worry about China much. There's plenty of improvement to my own operation that I can make, and lots of business in this country. If you want to cry in your beer about our Chinese overlords, feel free.
Japan - Even though their economy grew very little last year, and they have to contend with the Chinese and Korean competition - they do have a strong foothold on Global Companies and Industries. Thank goodness not in millwork manufacturing !!
Their limitation is nationally limited resources, and limited labor market,
The truth of the matter is that I'm a one man shop so fighting for my business is done one client at a time through educating them as to choices of quality and materials.
There are many a potential client that I send to Ikea because it soon becomes apparent that that is in their budget.
There are also many potential clients I have won over by clearly demonstrating why my product is superior and is more cost effective than the imported furniture.
Not all my clients are "high end" and not all my projects fall into the tens of thousands but on a small scale I am waging my own war on the cheap fall apart garbage that many people end up buying.
I am intrigued by international economics but I choose to keep it simple by taking it one client at a time.
I think as a whole we as manufacturers have a responsibility to educate our clientele (potential or otherwise) as to why they should buy local and keep there money invested at home!
I started this thread because I think each one of us can help build awareness of the consequences of buying too many foreign products.
I think it's great that this business owner had the ability to help expose unlawful and unethical practices by competing foreign companies in China.
Don't get me wrong I'm not against foreign trade either, I'm against the price dumping that goes on by by the cheap imports.
It hurts our businesses by making it look as if the local guy is gouging the market for more than his product is worth.
Using local materials and labor are sometimes more expensive but at the same time the businesses add to the local economy which doesn't always happen with imports. Even though they may employ locals the money goes somewhere else in the end.
Now when you must compare make sure it's apples to apples unless of course the major concern is price in which case C'est la vie.
The term "comparative advantage" is simply used to make something banal sound sophisticated. Corporate managers replacing American labor with Chinese labor and pocketing the difference is what it is - greed. But those people making millions and billions on labor arbitrage also want to feel good about themselves. So they hide behind euphemisms like "comparative advantage" that attempt to mask the simple, greedy nature of their actions. And then they hire guys like John Stossel to promote their message, so that the masses who used to make a decent wage in middle class manufacturing jobs, but now make barely enough to get by with retail jobs, turn their discontent to the government rather than the true source of our economic malaise, which is the corporate elite.
Yup comparative advantage is very common and that is the point, if it weren't the world would not have advanced.
Sophisticated, not to anyone with an IQ over 100. But it is very important. Countries that don't use comparative advantage are North Korea or Burma. Somalia benefits more from this than the 2 aforementioned.
Arbitrage aside Americans benefited greatly through Walmart and the benefits of trade with China.
The real problem has been TARP and QE infinity, as it has not allowed the market to clear while creating some inflation at the super market and a lot in RE and the Stock Market which benefits the upper 1% and steals from the middle class.
But no doubt there has been downward pressure on wages because third world countries are willing to work cheaper.
But the real solution is to create growth opportunities in small business, that is being killed by Fed policies.
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