BTW, I think the biggest question facing the world now is whether China has a runaway capital spending boom or can it legitimately consume its own increase in output? (Since the US certainly isn't going to do it any time soon).

I'm skeptical that the kind of growth that's been occuring over there (China's Factory, Property Investment Climbs 25.6%) can be effectively managed.

And it's very easy to say that the output can simply be sold to Chinese consumers. Much more difficult to arrange the distribution of power and wealth within the country so that they actually can. Governments are overthrown and wars are fought over that kind of thing, you know.

China is the most overblown growth story in the history of growth stories. Sure they have a billion people. You know what? They are still a communist government that controls the flow of information. Good luck with that free market thing in a completely corrupt, overly bureaucratic system.

They have relied on cheap labor as a competitive advantage for the past 10 years. Sure they have the fastest growing middle class in the world, but they also have a huge amount of poverty.

Around 700 million people in China live in destitution. And I am not talking U.S. poverty where the poor still have electricity, tv, and running water. I am talking about third world poverty where people subsist on a very meager amount of calories and often have a shortage of drinking water. Anyone who has ever been to rural China can tell you the story is not as sanguine as the media would have you believe.

Where are you going to put the factories?

In the emtpy buildings from the CRE crash?

Jeez, the triumph of modern capitalism is colonialism. Find a desperate, poor country with a strong authoritarian government that suppresses dissent, open factories, pay as little as possible, socialize your expenses -- no taxes, no health care costs, no pollution or health/safety controls.

Make as much money as possible and, when the locals start to get restless, move on to the next desperate country. Vietnam, Cambodia, then maybe Burma (skip Bangla Desh, too democratic) and who knows, on to Africa where it all started.

We discussed this at length - he said his company is pulling out of Chine EXCEPT for product they expect to sell in China. They expect to sell a lot in China.

That's almost a tautology.

I'm interested in the manufacturer who's investing more in China because they expect to sell less.

BTW does anyone have a link to that warning coming out of Shanghai a while back that China was headed for a downward spiral of falling prices and employment?

If commodity prices are set at the margin, in the short-term they could become almost worthless if China's economy goes into recession.

I'm interested in the manufacturer who's investing more in China because they expect to sell less.

They are exiting China EXCEPT for the products they expect to sell in China. Even if China goes into recession they expect to sell more there than they do now - the question is how much more.

The product they expect to sell in NAFTA Zone will continue to be made here - initially they had hoped to make in China & export back here - not going to happen. So they are reinvesting in higher quality & more flex automation so they can sell high priced high value product here at higher prices & make margin... they know for a fact that means fewer units sold but at a profit per unit instead of importing cheap crap selling for way less at a loss per unit.

They have a similar strategy for Euro Zone - higher end, less volume.

Last year they had their best year ever - they are 20% above last year profit wise right now on fewer units sold.

They are expanding in the US as we speak - mostly in the Midwest. I'm not naming names because I don't know who reads this blog - it would compromise his position. Doesn't matter - you can't invest or short them - they are private.

Point is he knows from their own research that they aren't alone. Companies that have focused on high volume mass marketing of low cost products that aren't really low cost anymore are increasingly losing their ass - there is no way to make them low cost anymore given materials & world labor... so either go out of business or change the model. These guys were clever enough to get out in front - others will follow.

Means good stuff is going to cost more for all of us... just the way it is in a scarcity constrained world.

Dave,

sure:

汉字

Why is there a big uproar about ceramic dinnerware anyway? Just wait until everyone just uses paperware and China will be doomed. Doomed, I tell you.

It will be interesting to watch the Chinese inflation/deflation battle from here in the US.

On the inflationary side:
- Currency adjustments
- Rising costs of food, resources and therefore labor

On the deflationary side:
- overcapacity excacerbated by a pullback by US/European consumers.
- competition from other developing nations

I predict short-term inflation, but medium-to-long term deflation.

The other big hurdle will be simply that manufacturers will have to give their employees a huge part of the profits in order for them to purchase the goods they're producing.

That is happening - believe me that is happening. That is why you can't afford to ship the product back to the US, sell super cheap at Wally World and make the big margins they used to make say 3-5 years ago when 'labor arbitrage' was the next big thing. Labor arbitrage coupled to currency readjustment is like a mine or an oil well - only so much there before the well runs dry. We've exploited a lot of that resource.

I think it is a little early to declare 'peak labor' but super cheap, semi-skilled labor in politically safe regions sure is limited right now.

Another irony? That buddy I referred to above? He told me the Chinese don't even want the crap we make in their factory's. Seriously. That is one of the hurdles he said they have to cross if they expect to grow their business in China - the Chinese consumer has less throw away money than we do so is far more discerning than our typical WalMart shopper. We buy, use once & throw away - the Chinese can't afford to do that. He said they have to provide higher quality so the stuff lasts yet still offer at competitive prices if they expect to really penetrate the China market. He said they are still researching Chinese consumer 'break points'.

That one came as a surprise to them... they figured since they were poorer that price would be #1 - its turning out that assumption isn't 100% true.

"But ... [there are a] long list of concerns about China ... inflation, shortages of workers and energy, a strengthening currency, changing government policies, even the possibility of civil unrest someday."

And pollution. The place is a vertible toxic-waste dump. My son travels there frequently, and he says a person in the US can't even imagine how polluted it is. Such is progress, I guess.

dryfly, your post doesn't make a lot of sense. Everything is relative. If someone goes down, someone else goes up. Not EVERYONE CAN GO DOWN!
rj | 06.17.08 - 10:05 pm | #

Ummm yes they can. Just like it is possible to have a win-win it is also possible to have a lose-lose.

Not all transactions are zero sum TRADES & relative though traders seem to see the whole world that way. Sometimes things need to get produced first. It is quite possible & in this case likely that LESS will get produced as resources tighten - including labor resources.

The strategy of my buddies company going forward is to try and bundle more value in less resource (including cheap labor) and sell fewer units for more margin & profit.

I think a lot of producers better look at that model - the big box full-o-cheap-crap model is going to struggle in a world dominated by expensive materials & increasing labor costs everywhere. Just sayin'.

:::::

High-tech gadget manager 7,000 miles away from hell is still a sweatshop manager. Bon apetite.

My buddy would agree - he hates being married to a Blackberry. He hates flying over to the sweat shops even more - the Blackberry is the lessor of the two evils for him but it is still evil. The worst of the evils is being unemployed so he slogs on.

Believe me, no one knows better than him that the current model is broken.

and who knows, on to Africa where it all started.

Bob Dobbs | Homepage | 06.17.08 - 7:06 pm

God knows Africa has a huge number of problems to figure out. But I do think that in decades to come, it will start to get it together and become something real.

Now they import 90% of their food. Fuel prices are going to raise the cost of food to the point that it will once again be grown closer to the market. The only problem is that these are not high pay jobs. We will have to let the immigrants in to do the work. Interesting times. Always be careful about what you wish for.
Hanging by a thread | Homepage | 06.17.08 - 10:21 pm | #

What else would we do that was so productive & valuable that we could trade for 'cheaper immigrant labor'? You have to provide a tradable good or service, you can't just give the world script & promises like we have been doing.

Unless we get back to producing OTHER valuable things to trade then growing food might be as good a job as domestic locals can get.

On top of that if we don't improve our trade position the immigrants we are counting on coming in to do our bidding might have better options elsewhere.

The first colony was Ireland.

dryfly, your argument is very interesting, but I'm not sure I follow it. I get the bit about Chinese consumers. But here at home, it sounds like you're saying we're going to see wage deflation and a move to higher-priced quality consumer goods at the same time.

I can't understand how that can happen, given the attitudes of the American consumer and the iron law of planned obsolescence. The only toaster I own that always works reliably was one of my parents' wedding presents in 1938. But the generations since theirs would never buy it. It doesn't even have a microchip to malfunction.

And it's very easy to say that the output can simply be sold to Chinese consumers. Much more difficult to arrange the distribution of power and wealth within the country so that they actually can. Governments are overthrown and wars are fought over that kind of thing, you know.

ac | 06.17.08 - 6:49 pm | #

This is one reason why I think that the Chinese will be very slow to abandon their fuel price subsidies, they are a way of increasing the disposable income of the masses (or at least the upper half of the distribution there which is apx 700 million people). They have the $ to buy the oil, and it seems a better investment in social stability than pissing it away on a bunch of 2 year T-notes at a negative real rate. The Chinese authorities will start to uses their trade surplus and the accociated reserves built up with them for the benifit of the Chinese, not for the beneifit of the Americans as they have been so far. Now since the Chinese are the second largest users of energy on the planet, as well as far and away the biggest source of incremental demand for energy, this is anot a hopeful forecast wehn it comes to bringing overall world energy prices down anytime soon. I would note however, that india does not have the same sort of Surplus/Reserves as China does, thus they were forced to cut back on their subsidies a bit. The result was lots of protests, and it will hurt the Congress party at the ballot box. However, India only uses 1/3 of the oil that China does (and 13% of what the US uses despite a population 4x as big).