Category Archives: China

Is A U.S. Manufacturing Renaissance Coming?

A recent article over on bcg.perspectives on “the U.S. Manufacturing Renaissance” (registration required), summarized over on Supply Chain Brain (in an article that states “Manufacturing “Renaissance” to Begin Returning to U.S. Around 2015″), states that seven “tipping point” sectors are poised to return to the U.S. for manufacturing:

  • transportation goods
  • computers and electronics
  • fabricated metal products
  • machinery
  • plastics and rubber
  • appliances and electrical equipment
  • furniture

The expectation of Boston Consulting Group (BCG) is that these industry groups could boost annual output in the U.S. economy by 100 Billion while creating 2 to 3 Million jobs and lowering the U.S. non-oil merchandise trade deficit by up to 35% when combined with increased U.S. exports, starting in the next five years.

Note that these industry groups account for about 2 Trillion in U.S. consumption each year, and roughly 70% of the 300 Billion in goods imported from China. If the BCG is right, China will not only lose a huge cost advantage of the US, but a huge manufacturing advantage as well.

Why would this happen?

  • Labor costs in China are rising rapidly (at 15% to 20% a year) with required skill levels, quality and the rising yuan; the gap between US and China labor costs will be less than 40% by 2015
  • U.S. productivity is increasing
  • Factory automation is increasing, and a robot costs the same whether you operate it in China and the US
  • shipping and import costs (due to all of the security and
    paper trail requirements) are rising
  • management costs are rising with travel costs, as on site visits are becoming more expensive

It’s pretty clear that China is on its way out as a manufacturing location of choice for many industries and American companies, with the exception of those that have invested in World Class Facilities (like Apple, etc.) that could not be cost-effectively replicated elsewhere. But will the Renaissance take place in the US, or will we see a return to Mexico? That is not quite as clear.

The BRIC is Becoming Really Investment Critical

As per this recent article over on World Trade 100, it’s time to ask if “your company [is] ready to export to BRIC”, it’s time to start thinking about exporting to BRIC countries because:

  • 45% of global GDP is estimated to originate from seven emerging economies: Brazil, Russia, India, China, Mexico, Turkey, and Indonesia
  • it is estimated 55% to 60% of the nearly one billion households that will have incomes in excess of 20,000 will be from the developing world within a decade

However, one thing that needs to be noted is that many of these countries have sub-markets, and if the products aren’t localized to the sub-markets, it could be difficult to maximize your return. For example, China has 20 to 40 different sub-markets on its own. And some of these markets are only two hours apart. For example, Guangzhou and Shenzhen are both tier-one cities in China, located in the same province and just two hours apart but there is a marked cultural difference between the two. According to a study done by McKinsey, “Guangzhou’s people mainly speak Cantonese, are mostly locally born, and like to spend time at home with family and friends. In contrast, more than 80 percent of Shenzhen’s residents are young migrants, from all across the country, who mainly speak Mandarin and spend most of their time away from their homes”.

The article has some good thoughts to keep in mind when planning to expand into China, India, Brazil, and Russia. So ask yourself, “Is Your Company Ready to Export to BRIC?”.

Is It Time To Move Your (Supply Chain) Operations to an Emerging Economy?

After reading this recent piece in Chief Executive (CE) on how US companies are “garotted by red tape”, SI is wondering whether the time has come to follow the lead of IBM and other big multi-nationals and move your supply chain, followed by your headquarters, to China or another emerging economy. Even though I still think North America is going to retain the edge in High-Tech Innovation for a few more years (despite the fact that the numbers say that both India and China should be producing four times as many geniuses each year), the cost of doing business, or at least of keeping your supply chain and headquarters, in the US is becoming too high.

Consider these vary scary stats from the CE article:

  • In 2010, the Feds spent 55.4 Billion enforcing regulations
  • In 2009, economists Crain and Crain estimated the true cost of the Feds’ regulations was 1.75 Trillion – or 12% of GDP – compared to only 1.46 Trillion in pre-tax profits businesses earned
  • The Federal Register that compiles regulations is over 81,405 pages long
  • Since Obama took office, regulators have imposed 38 Billion in new costs
  • There are 2,785 proposed rules in the pipeline and 144 are economically significant and will add burdens of over $100 Million each for a collective burden of over $14 Billion on this 5%!

At the moment, federal regulations are a runaway train that no one can stop. And until the US gets a Denzel Washington or a Keanu Reeves that can deal with the situation, it’s only going to get worse before it gets better.

As a result, it might be time to consider moving your supply chain operations somewhere where the regulations are a little less severe … even if you have to pay a few government bribes or deal with a few pirates. After all, 238 Million (which is the amount paid to pirates in 2010 for ransom) is a lot less than 1.75 Trillion (at 0.01%), and a few hundred thousand goes quite a long way in developing economies where bribes are concerned. And while SI is not condoning bribery or pirate ransoms, there are much better uses from an innovation and jobs standpoint for 1.75 Trillion dollars than red tape.

Maybe if a few big companies start leaving and the feds realize that if they don’t stop the runaway train that the city will be empty by the time it arrives they’ll bring in a Denzel or Keanu to deal with it. SI doesn’t know, but thinks it’s a good question to ask.

Buy India, Sell China?

A recent article on Fortune on “Another Global Recession? Buy India, Sell China” caught my attention because, while I think China is over-hyped, I’m not sure India is ready for prime yet due to their infrastructure problems and the issues with getting freight from even a few hundred miles inland in many parts of the country. China still has problems, but they have been investing Billions to improve their infrastructure in recent years and making progress at a rapid rate whereas India, with twenty-eight states and seven union territories, and 22 languages of official status, has been slow to tackle their logistics challenges due to the very long timeframes it takes to get agreements on projects of a national scale. (It probably doesn’t help that the Republic of India is a federation with a parliamentary system that was based on that of Great Britain, where some projects take so long that they literally cross career life-spans!)

So why is the article recommending to Buy India, and Sell China? According to the authors, even though BRIC countries are growing at a rapid rate, countries like Brazil and China are doing so at the expense of other countries — primarily by supplying the global economy with raw materials and manufacturing. If major financial crises (continue to) materialize in the US and the EU, and global demand slumps significantly, these countries are going to get hit the hardest and the growth-rates of nearly 10% will be unsustainable. (And depending on which fear-monger you ask, growth could come to a screeching halt.) And this doesn’t even take into account the deep financial exposure China has to troubled regions through its massive foreign exchange reserves.

On the other hand, poorer, insulated economies like India are in much better shape to weather the storm and, in some economists’ views, even see a silver lining if major obstacles (such as nosebleed inflation rates) decline or disappear.

I have to agree, but only to a point. China is experiencing a rapid rise in its middle class at home and the local economy is booming as well. Plus it has a very aggressive five year plan, and a history of meeting those five year plans. While it will get hit hard, and probably drop down to a growth rate of 5% if a double-dip global recession hits us (just like its growth rate fell from 13% in 2007 to 6.8% in 2008), it will continue to grow and, more importantly, will likely be the first to recover when the double-dip recession ends (if it does hit us).

In other words, if you are one of the few investors left with the brains to take a long term view, don’t count China out yet. It may experience a few bumps, but it will figure out how to smooth them over as it builds its global highways. Moreover, if you’re looking to get rich quick, it will likely be another decade before India provides you with that opportunity. If you’re patient, I believe you can win with both economies.

What China’s Five Year Plan Ultimately Means for Your Business

If you are sourcing from China because it is part of your LCCS (Low-Cost Country Sourcing) Strategy, you will need to find a new low cost country to source from. Just like India is no longer a low cost country for call centers and outsourced support, it won’t be long before China is no longer a low cost country for manufacturing. As clearly pointed out in this recent McKinsey Quarterly article on “What China’s five-year plan means for business”, the plan targets:

  • a 13% increase in minimum wages each year,
  • an annual increase in household income of 7% each year,
  • new policies for pricing energy, raw materials, and water … that will increase costs further … and
  • tighter environmental regulations … that will increase costs even further.

In other words, your labor costs will be 84% higher within five years. And your raw material and environmental disposals cost will likely see a comparative price increase. Low Cost Country? Not anymore!