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Global Crisis/Innovation Blog

Now is The Time to Rethink Manufacturing in China: Bring Those Plants Home!

By Shlomo Maital

  This is a perfect time to rethink the losing strategy (losing, at least, for middle class factory workers in America and Europe) of producing everything in China.  According to Joe Manget and Pierre Mercier, writing in Bloomberg Business Week,  “The rising cost of manufacturing in China gives multinationals a rare chance to rethink global production plans”.

   The authors note that rising wages are eroding China’s massive competitive edge.   They point to Foxconn (huge Taiwan-owned contract manufacturer in China) and its doubling of wages, following strikes, suicides and worker unrest.

     “Much has been written about the more than doubling of wages at the Shenzhen factory of Foxconn,  the world’s largest electronics contract manufacturer, which produces Apple (AAPL) iPhones and iPads and employs 920,000 people in China alone. ‘One can talk about a world pre- and post-Foxconn,’ says Victor Fung, chairman of Li & Fung, the world’s biggest sourcing company and a supplier of Wal-Mart (WMT). ‘Foxconn is as important as that.’ ”

Wage inflation in China, coupled with soaring minimum wages (20 – 30 per cent increases in most regions) and stagnant productivity, suggest this is a great time to rethink the Made in China strategy.  If wages continue to rise 20 per cent a year, note the authors, added wage costs will total $623 / month in five years. (They cite a BCG Boston Consulting Group study).   Why not anticipate this trend, and bail out now, rather than wait for foreign multinationals’ Chinese plans to become uncompetitive? 

  I fear that again, CEOs of multinationals will again take the easy path and instead of working hard to build competitive plants in America and Europe, they will look for another source of cheap labor.  It’s easy to find – Vietnam.  According to Manget and Mercier,

   “Take one factory in Vietnam, where wages of 80¢ per hour are 31 percent lower than in China. On the face of it, this looks like a good deal—but factor in the differing productivity rates, and the Vietnamese factory’s cost edge drops to 14 percent. Furthermore, it won’t take long for young Vietnamese to demand the same treatment as their Chinese counterparts.”

  It is time for the U.S. to wake up and abolish all the major tax incentives granted under George Bush for companies that produce abroad, and transform those tax incentives by 180 degrees – give them to companies producing in America, rather than companies producing in Asia.   No country can ever maintain a strong prosperous middle class, healthy employment,  modern production technology, and rising productivity, when it produces services almost exclusively.  It is obvious.  Why, then, is it not obvious to political leaders in the West? 

     A golden opportunity presents itself to tackle the pernicious job crisis, with policies that are neither fiscal nor monetary.   Will our leaders again not miss an opportunity, to miss an opportunity?

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Global Crisis/Innovation Blog

QE2 Fails – So Let’s Go for QE3 !

By Shlomo Maital

   Ben Bernanke’s bond-buying rampage, known as QE2, or Quantitative Easing #2 (after the smash hit of QE1), has brought a deluge of criticism, global instability, and renewed fears of inflation, with no discernible impact on the US economy. 

     Writing in Bloomberg Business Week, Prof. Scott Shane [Case Western Reserve Univ.] shows that small business – the same small businesses who created nearly all the new jobs in America in the past decade, while big businesses were firing and laying off workers – will not benefit, while big business (yes, the ones firing and laying off) will.  Even if QE2 does lower interest rates,  it will not help small businesses, who have trouble getting loans at any rate, and who, moreover, refrain from borrowing because of weak demand for their products.    

     Prof. Shane notes what is completely obvious to everyone: The banks will continue to use the liquidity created by QE2 to shore up ravaged balance sheets (which continue to record losses, as banks ‘mark to market’ and write down their assets) by keeping every dollar the Fed pumps in, rather than lend it. 

“QE2 is unlikely to get banks to lend. Banks have weakened balance sheets as a result of the financial crisis and are more likely to use the money created by the Fed’s asset purchases to shore up their reserves than to lend more.”

  Faced with overwhelming evidence against QE2, and widespread protest from business economists (those who really know what is going on), Bernanke has thought carefully and deeply, and apparently – decided to try a third round of quantitative easing, QE3.  And, doubtless, a fourth and a fifth, until the dollar collapses and inflation recurs. 

     The Obama Administration is clearly desperate.  It cannot use fiscal policy, because capital markets now seem to demand a cut in budget deficits rather than an increase. So its message to the Fed is, don’t just stand there, do something!   With monetary policy also having shot its wad, the right message to the Fed should be:  Don’t just do something, anything, stand there!   Hasty ill-advised policy will prolong Americans’ travails, rather than cure them.  And that is precisely what is happening. 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
December 2010
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