Monday, March 14, 2011

Chart of the Day

Based on Bureau of Labor Statistics' data, from Wired's Brendan Koerner:
China’s big manufacturing advantage has been cheap labor, but wages--while still low compared with those in the U.S.--have risen sharply in recent years.

Manufacturing wages more than doubled in China between 2002 and 2008, and the value of the nation’s currency has risen steadily. It’s now under tremendous international pressure to let the yuan appreciate even more, and the country must cope with worrisome inflation at home (food prices rose by nearly 12 percent last year). And though Chinese workers still earn a fraction of what their American counterparts do, the rising costs of labor there are prompting companies to reevaluate their production strategies. . .

Finally, sheer distance remains an intractable problem. Shipping costs nose-dived in the wake of the 2008 financial crisis but have since crept up as oil prices drift back toward $90 a barrel. And then there’s simply the time it takes to get goods from China. With credit hard to come by these days, companies are reluctant to tie up cash in inventory that takes three to six months to manufacture, ship, and clear customs.

When you include all the various drawbacks and costs that don’t appear in a factory’s price quote, manufacturing certain high tech goods in China can end up being surprisingly expensive. In 2008, three McKinsey consultants analyzed the production of midrange servers, taking into account everything from shipping to quality to exchange rates. They concluded that fabricating such devices in China made sense in 2003, when the required labor was 60 percent cheaper there than in the US. At that time, they estimated, the per-unit savings ran about $64. But this advantage, McKinsey concluded, had vanished by 2008: "After factoring in the higher labor and freight costs, we find that the former offshore savings have turned negative--a burden of an extra $16."
This is consistent with economic theory: as workers "acquire more skills and experience, their rising productivity leads to rising pay." And, in the case of off-shored manufacturing, this erodes cost advantages over time.

U.S. manufacturing employment won't return to its prior levels (though modest improvements are likely). But, that hasn't toppled America from remaining the world leader in manufacturing.

Free trade does disrupt. Yet, the jobs stimulated from "insourcing" normally more than offset those lost via outsourcing--we're transitioning to a "knowledge-based" economy, which represents competition and progress. Plus, U.S. consumers and producers benefit from lower prices of imported goods.

Yes, jobs have moved to China. But Chinese workers can't replace American smarts and services--and aren't to blame for current high unemployment.

(via Carpe Diem)


OBloodyHell said...

It's going to be interesting to see what happens in China -- Along with India, it's one of the two largest home markets in the world -- and as it bootstraps itself into the modern age, there's a tremendous opportunity to both make lots and lots of money (QUICK: What's 1/10 of one cent X 1 billion?) and to have lots and lots of .... "interesting" events happen.

1) Due to historical preferences for males and its "one child" policy, China has a gender-imbalanced population. Historically, such things lead to intense Jingoism. Can China avoid the military trap and direct all that excess male aggressive energy into economic development? Can it nudge its males into competing in the work force financially rather than by raw aggression? Will it seriously try to do so?

2) Can China control its home population's burgeoning desire for freedom? It's so far manage to do an interesting thing -- maintain its totalitarian governmental structure while creating a halfway decent "free trade" based economic structure -- in short, it's managed to decouple its formerly communist economy from its governmental functions. Can it continue to have success at this, or will either the internal pressures for freedom overwhelm the totalitarianism (leading to either a crackdown ala Tienanmen Square, or a Soviet-style collapse). There are certainly a lot of issues, but with a somewhat captive population used to "a lot less", it really does have a lot of slack to deal with. They can survive massive errors like this. And this. At least for now. But economics demands market corrections. At what point do these things get liquidated? And how? And what will the effect be on China's economy?

Whitehall said...

I've a friend in the home decor retail business. She's been telling me for months about the difficults she sees in getting goods for her shop from China.

Perhaps this explains some of the problem.