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Worldwide Effect of Sinking Dollar
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| DemonicAardvark |
Worldwide effects of sinking dollar
Its decline to a nine-year low is impacting everything from the price of goods at Wal-Mart to the vigor of Europe's economy.
By David R. Francis | Staff writer of The Christian Science Monitor
The sinking US dollar in recent weeks has raised what is suddenly a top concern from Washington to Berlin and Beijing: Is America's currency undergoing a benign adjustment or a precipitous plunge?
So far, the dollar's slide to nine-year lows doesn't reflect panic. But some analysts say a run on the dollar is possible. And even an orderly drop could affect everything from mortgages to prices at Wal-Mart.
The good news for Americans: It's getting easier for manufacturers to sell products overseas, and more likely that tourists from Germany will flock to US National Parks.
But the downside could be significant. America, the world's leading importer of goods, is now buying them at higher prices. And if the dollar's dive makes foreign investors wary, US interest rates may have to rise to attract buyers of federal debt. More broadly, it's a shock to the global economy. Sunday in Germany, officials from the Group of 20 industrial and major developing countries called for the United States to cut its federal deficit, which is seen as a key factor in the dollar's fall.
"There's a lot of speculation," says Michael Schubert, an economist at Commerzbank in Frankfurt. He sees some signs of a "herd instinct" developing.
The dollar is now down 50 percent against the euro since October 2000, and hit a its lowest level since 1995 against a basket of foreign currencies last week. While the shift isn't entirely new, it has accelerated since President Bush's reelection. Some observers say the timing reflects concern that Mr. Bush - with his emphasis on tax cuts - won't be able to rein in record budget deficits.
full article:
http://www.csmonitor.com/2004/1122/p01s01-usec.html |
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| Shakka |
| There's only so much that can be done to manipulate the natural balance of things in the world. I believe China has also been a major drag on the dollar and that it would alleviate some of the downward pressure if the Yuan were floated. Then again, a stronger dollar sustains the burn of the trade imbalance. |
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| ogvh5150 |
| It's a fiat money system worth manipulating. |
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| rupert |
What it really means is the United States in particular, and the West in general (deficit spending and trade imbalances are not particular to the US, although it presents the most egregious example) are going to have to get used to a reduced standard of living.
Current living standards and standards of consumption have been paid for by debt, and in the long run debt has to be paid.
This lesson has never ever been learned. It is a fundamental theme of history that political power in a grand strategic sense goes to the state with the most economic power and economic power gradually shifts from debtors to creditors. And that in turn is linked to production, those who manufacture and sell become creditors and those who buy become debtors. For example the UK was the worlds greatest creditor nation, but the cost of wars made it a debtor nation to the USA, which in turn became the worlds number 1 power.
For further reference on this point see Paul Kennedy's The Rise and Fall of the Great Powers.
In the short term, the financial system will shift back to Europe, now the Euro is an alternative currency to the dollar, but in the longer run, will shift to Asia.
Westerners who think that the service industries are going to pull their debt induced bacon out of the frying pan are seriously mistaken.
I read an interesting article from an analyst of the shipping industry. The shipping lines used to be run by Europeans and Americans, now they are run by Asians. The shipping transportation trade, he summarised is an extremely unbalanced one. The ships leave Asia full of goods to go to the West. And the very important point which sums up the global economy very nicely. THEY COME BACK EMPTY. The ship owners struggle to find things to fill up the containers for the return journey.
Now he also goes on to describe the service industry related to the maritime industry. While the ships are manufactured in South Korea or China and are run by Asia companies and deliver goods made in Asia, the service industry that goes along with the maritime industry is based in Europe and North America. The insurance, brokerage and legal services that control the maritime industry are all run by the West.
So the conventional wisdom goes, its OK the west has lost its manufacturing, but it has a comparative advantage in the service sector. Now the real issue from an economic term is this. The West does not enjoy a comparative advantage in the service industry either. Any western country is straight out uncompetitive in comparison to Asia.
I will put this in bold terms since it is a point that seems completely lost on most people.
THE WEST IS UNCOMPETITIVE IN ANY INDUSTRY. PERIOD. FROM FACTORY WORKERS TO CALL CENTRE WORKERS TO NUCLEAR TECHNICIANS, MOLECULAR BIOLOGISTS, CHEMICAL ENGINEEERS. MODERN TECHNOLOGY ALLOWS ANY FORM OF PRODUCTION TO BE MADE IN THE LOWEST COST ENVIRONMENT- ASIA.
The Maritime analyst goes on (correctly in my view) to show that it is only a matter of time before the maritime services will be relocated to Asia. Commonsense dictates it good business sense to locate the work with the highest cost of labour in the areas where labour costs the least. It also makes sense to have the service sectors located near the sectors they are meant to service, not on another continent.
Why is the dollar going to collapse. Because noboby wants to buy it. What does the USA or the West actually produce that cannot be done for a fraction of the cost in Asia. What does the USA have a comparative advantage in? Agriculture and intellectual property related industries (movies and books and music) Hardly the sort of industries that are going to fill up the containers of ships going back to Asia.
The era of USA dominance and the supremacy of the West is over. While the USA with its foolish notions of manifest destiny and american exceptionalism alienates potential allies in the Middle East in order to secure its energy supply, its real enemy China is busy building an economic platform to replace it as the dominant power. |
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| kaffeemeister |
| quote: | | THE WEST IS UNCOMPETITIVE IN ANY INDUSTRY. PERIOD. FROM FACTORY WORKERS TO CALL CENTRE WORKERS TO NUCLEAR TECHNICIANS, MOLECULAR BIOLOGISTS, CHEMICAL ENGINEEERS. MODERN TECHNOLOGY ALLOWS ANY FORM OF PRODUCTION TO BE MADE IN THE LOWEST COST ENVIRONMENT- ASIA. |
I think you'll missing somemthing, the Asian industries at this current standpoint do not have the ability to innovate, end of story. And are you saying that because of the cost of wages, you are leaning towards greater economic strength in that region? Cheap doesn't mean good :D |
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| occrider |
The worldwide effect of the sinking dollar doesn�t really impact America � at least not directly. It does have an impact on the global economy with respect to depressing it largely because America is the world's biggest consumer. Therefore appreciation of local currency with respect to the dollar hurts the trade surplus of nearly every country that trades with us. It's why the G20 is deeply concerned with the dropping dollar, it's why European Central Bank President Jean-Claude Trichet calls the dollars decline "brutal" on the Eurozone's fragile recovery, and it's why China and the rest of Asia are so willing to fund our deficits by purchasing US treasuries. If they every tried to float their currency and stop purchasing dollars, they would take deep hits to their exports. China and Asia needs the US because who else is going to buy their exports? Europe? They can't even drum up domestic consumer demand to prop up their own economies much less sustain an import economy. Asia? While China is indeed growing a middle class, much of their industrial success is derived from labor � in essence cheap labor. A huge component of their growth can be attributed to their export economies, a huge support is US demand, and furthermore, many of their economies, particularly China, has structural issues which makes many investors wary. So the value of the dollar isn't what's important ... sure it makes imports more costly, which should theoretically help to reduce the trade deficit. However, the fact that Asia pegs their currency to the dollar negates this to a certain extent.
What is important is the demand for the dollar. So long as Asian central banks are willing to purchase US securities interest rates will be unaffected, the US can continue its deficit spending, and Asian currencies will be pegged to the dollar and trade balances will remain the same. When asian central banks lose interest in the dollar, the prices of US treasuries will go down, which will result in a rise in yields which raises interest rates. In other words, in order to reach equilibrium on the supply and demand curve, you would need higher interest rates. At that point, higher interest rates would impact the US economy for obvious reasons. The US economy can weather rising interest rates based upon the relative health of our economy so long as the changes are gradual. The danger comes from whether the change in the demand for the dollar comes as a shock or whether it comes over a long period of time. The high twin deficits could lead to a massive sell off of treasuries if something big triggers it like a Chinese central bank sell off. And that�s what people should be worrying about, not so much the value of the dollar. I don�t think conditions are ripe for such an incident yet however, I spoke with several analysts yesterday who told me that what they were seeing in the markets was that demand for US treasuries are still fundamentally strong across the world in addition to China. |
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| rupert |
| quote: | | think you'll missing somemthing, the Asian industries at this current standpoint do not have the ability to innovate, end of story. And are you saying that because of the cost of wages, you are leaning towards greater economic strength in that region? Cheap doesn't mean good |
NO. You are wrong. China and India produce millions of highly skilled technicians and scientists. They also have economies of scale. The West is no longer competitive EVEN in new economy industries.
I strongly suggest anyone interested in this issue read the below article taken from Business Week Magazine. It addresses the issue of trade.
Also Stephen Roach (Chief Economist Morgan Stanley)in his weekly webcast talked about why the dollar is falling. His webcast can be found at the Morgans Stanley webpage and its free after registration. His message is exactly the same as what I have been saying for years but no one is prepared to listen.
http://www.businessweek.com/magazin...49/b3911401.htm
"The China Price"
They are the three scariest words in U.S. industry. Cut your price at least 30% or lose your customers. Nearly every manufacturer is vulnerable -- from furniture to networking gear. The result: A massive shift in economic power is under way
From the rich walnut paneling and carved arches to the molded Italian Renaissance patterns on the ceiling, the circa 1925 council chamber room of Akron's municipal hall evokes a time when the America's manufacturing heartland was at the peak of its power. But when the U.S.-China Economic & Security Review Commission, a congressionally appointed panel, convened there on Sept. 23, it was not to discuss power but decline. One after another, economists, union officials, and small manufacturers took the microphone to describe the devastation Chinese competitors are inflicting on U.S. industries, from kitchenware and car tires to electronic circuit boards.
These aren't stories of mundane sunset industries equipped with antiquated technology. David W. Johnson, CEO of 92-year-old Summitville Tiles Inc. in Summitville, Ohio, described how imports forced him to shut a state-of-the-art, $120 million tilemaking plant four football fields long, sending Summitville into Chapter 11 bankruptcy protection. Now, a tenfold surge in high-quality Chinese imports at "below our manufacturing costs" threatens to polish Summitville off. Makers of precision machine tools and plastic molds -- essential supports of America's industrial architecture -- told how their business has shrunk as home-appliance makers have shifted manufacturing from Ohio to China. Despite buying the best computer-controlled gear, Douglas S. Bartlett reported that at his Cary (Ill.)-based Bartlett Manufacturing Co., a maker of high-end circuit boards for aerospace and automotive customers, sales are half the late-1990s level and the workforce is one-third smaller. He waved a board Bartlett makes for a U.S. Navy submarine-detection device. His buyer says he can get the same board overseas for 40% less. "From experience I can only assume this is the Chinese price," Bartlett said. "We have faced competition in the past. What is dramatically different about China is that they are about half the price."
SLIDE SHOW: CHINA PRICESWhere the Jobs Went
"The China price." They are the three scariest words in U.S. industry. In general, it means 30% to 50% less than what you can possibly make something for in the U.S. In the worst cases, it means below your cost of materials. Makers of apparel, footware, electric appliances, and plastics products, which have been shutting U.S. factories for decades, know well the futility of trying to match the China price. It has been a big factor in the loss of 2.7 million manufacturing jobs since 2000. Meanwhile, America's deficit with China keeps soaring to new records. It is likely to pass $150 billion this year.
Now, manufacturers and workers who never thought they had to worry about the China price are confronting the new math of the mainland. These companies had once held their own against imports mostly because their businesses required advanced skills, heavy investment, and proximity to customers. Many of these companies are in the small-to-midsize sector, which makes up 37% of U.S. manufacturing. The China price is even being felt in high tech. Chinese exports of advanced networking gear, still at a low level, are already affecting prices. And there's talk by some that China could eventually become a major car exporter.
Multinationals have accelerated the mainland's industrialization by shifting production there, and midsize companies that can are following suit. The alternative is to stay at home and fight -- and probably lose. Ohio State University business professor Oded Shenkar, author of the new book The Chinese Century, hears many war stories from local companies. He gives it to them straight: "If you still make anything labor intensive, get out now rather than bleed to death. Shaving 5% here and there won't work." Chinese producers can make the same adjustments. "You need an entirely new business model to compete."
America has survived import waves before, from Japan, South Korea, and Mexico. And it has lived with China for two decades. But something very different is happening. The assumption has long been that the U.S. and other industrialized nations will keep leading in knowledge-intensive industries while developing nations focus on lower-skill sectors. That's now open to debate. "What is stunning about China is that for the first time we have a huge, poor country that can compete both with very low wages and in high tech," says Harvard University economist Richard B. Freeman. "Combine the two, and America has a problem."
How much of a problem? That's in fierce dispute. On one side, the benefits of the relationship with China are enormous. After years of struggling to crack the mainland market, U.S. multinationals from General Motors (GM ) to Procter & Gamble (PG ) and Motorola (MOT ) are finally reaping rich profits. They're making cell phones, shampoo, autos, and PCs in China and selling them to its middle class of some 100 million people, a group that should more than double in size by 2010. "Our commercial success in China is important to our competitiveness worldwide," says Motorola China Chairman Gene Delaney.
By outsourcing components and hardware from China, U.S. companies have sharply boosted their return on capital. China's trade barriers continue to come down, part of its agreement to enter the World Trade Organization in 2001. Big new opportunities will emerge for U.S. insurers, banks, and retailers. China's surging demand for raw materials and commodities has driven prices up worldwide, creating a windfall for U.S. steelmakers, miners, and lumber companies. The cheap cost of Chinese goods has kept inflation low in the U.S. and fueled a consumer boom that helped America weather a recession and kept global growth on track.
But there's a huge cost to the China relationship, too. Foremost is the question of America's huge trade deficit, of which China is the largest and fastest-growing part. While U.S. consumers binge on Chinese-made goods, the U.S. balance-of-payments deficit is nearing a record 6% of gross domestic product. The trade shortfall -- coupled with the U.S. budget deficit -- is driving the dollar ever downward, raising fears that cracks will appear in the global financial system. And by keeping its currency pegged to the greenback at a level analysts see as undervalued, China amplifies the problem.
America's Eroding Base
The deficit with China will keep widening under most projections. That raises the issue: Will America's industrial base erode to a dangerous level? So far the hardest-hit industries have been those that were destined to migrate to low-cost nations anyway. But China is ramping up rapidly in more advanced industries where America remains competitive, adding state-of-the-art capacity in cars, specialty steel, petrochemicals, and microchips. These plants are aimed at meeting insatiable demand in China. But the danger is that if China's growth stalls, the resulting glut will turn into another export wave and disrupt whole new strata of American industry. "As producers in China end up with significant unused capacity, they will try to be much more creative in how they deploy it," says Jim Hemerling, a senior vice-president at Boston Consulting Group's Shanghai office.
That's why China is an even thornier trade issue for the U.S. than Japan was in the 1980s. It's clear some Chinese exporters cheat, from intellectual-property theft and dumping to securing unfair subsidies. Washington can get much more aggressive in fighting violations of trade law. But broader protectionism is a nonstarter. On a practical level the U.S. is now so dependent on Chinese suppliers that resurrecting trade barriers would just raise costs and diminish the real benefits that China trade confers. Also, unlike Japan 20 years ago, China is a much more open economy. It continues to lower tariffs and even runs a slight trade deficit with the whole world -- which makes the U.S.'s deficit with China all the more glaring. Hiking the value of the yuan 30% might help. But that's unlikely. For one thing, Beijing fears what such a shift would do to jobs -- and the value of its $515 billion in foreign reserves. The real solution is for the U.S. to reduce its twin deficits on its own -- but that's more America's issue than China's.
Meanwhile, U.S. companies are no longer investing in much new capacity at home, and the ranks of U.S. engineers are thinning. In contrast, China is emerging as the most competitive manufacturing platform ever. Chief among its formidable assets is its cheap labor, from $120-a-month production workers to $2,000-a-month chip designers. Even in sophisticated electronics industries, where direct labor is less than 10% of costs, China's low wages are reflected in the entire supply chain -- components, office workers, cargo handling -- you name it.
China is also propelled by an enormous domestic market that brings economies of scale, feverish local rivalry that keeps prices low, an army of engineers that is growing by 350,000 annually, young workers and managers willing to put in 12-hour days and work weekends, an unparalleled component and material base in electronics and light industry, and an entrepreneurial zeal to do whatever it takes to please big retailers such as Wal-Mart Stores (WMT ), Target (TGT ), Best Buy (BBY ), and J.C. Penney (JCP ). "The reason practically all home furnishings are now made in China factories is that they simply are better suppliers," says Janet E. Fox, vice-president for international procurement at J.C. Penny Co. "American manufacturers aren't even in the same game."
Fox's point is important. China's competitive advantages are built on much more than unfair trade practices. Some 70% of exports now come from private companies and foreign ventures mainly owned by Taiwanese, Hong Kong, Japanese, and U.S. companies that have brought access to foreign markets, advanced technology, and managerial knowhow. Aside from cheap land and tax breaks in some areas, private Chinese manufacturers get minimal government help. "The Chinese government cannot afford to offer financial support to the export economy," says business professor Gu Kejian of People's University in Beijing. And as capital floods in and modern plants are built in China, efficiencies improve dramatically. The productivity of private industry in China has grown an astounding 17% annually for five years, according to the U.S. Conference Board.
China needs U.S. imports, though not as much as imagined when Beijing agreed to join the WTO. U.S. exports to China have risen 25% to 35% annually in the past two years. But China's exports still outstrip its imports from the U.S. by 5 to 1. The U.S. sells about $2.4 billion worth of aircraft a year, and its semiconductor exports tripled in three years. Otherwise the U.S. looks like a developing nation. It runs surpluses in commodities such as oil seeds, grains, iron, wood pulp, and raw animal hides.
Meanwhile, the Chinese keep expanding their export base. Chinese competition arrives so fast that it's nearly impossible to adjust through the usual strategies, such as automating or squeezing suppliers. The Japanese, South Koreans, and Europeans often took "four or five years to develop their place in the market," says Robert B. Cassidy, a former U.S. Trade Representative official who helped negotiate China's entry into the WTO and now works for Washington law firm Collier Shannon Scott, which wages dumping cases on behalf of U.S. clients. "China overwhelms a market so quickly you don't see it coming."
"Shock and Awe"
Georgetown Steel Co. is a case in point. The Georgetown (S.C.) maker of wire rods used in everything from bridge cables to ball bearings had battled Asian and Mexican imports for years. But last year it shut its 600-worker plant, citing a tenfold leap in Chinese imports, to 252,000 tons, from 2001 to 2003. International Steel Group Inc. (ISG ) has since bought the facility after U.S. anti-dumping duties on imports and a rise in global demand helped hike domestic prices. The Gardiner (Mass.) plant of Seaman Paper Co., a maker of crepe and decorative paper, is highly automated. Yet Chinese imports have grabbed a third of the market. It sells 81-foot streamers to big retailers for as little as 9 cents each. That's below Seaman's cost of materials. "We thought we could offset Chinese labor cost by automating, but we just couldn't," says Seaman President George Jones III.
In bedroom furniture, 59 U.S. plants employing 15,500 workers have closed since January, 2001, as Chinese imports have rocketed 221%, to $1.4 billion -- half of the U.S. market. Prices have plunged 30%. Dumping certainly seems to be one factor: At its Galax (Va.) factory, Vaughan-Bassett Furniture Co. displays a Chinese knockoff of one of its dressers that wholesales for $105 -- below the world market cost for the wood. But the main competition comes from Chinese megaplants that sell directly to U.S. retailers and can get a new design into mass production in two months. The new Chinese factories of suppliers such as Lacquer Craft Furniture, Markor, and Shing Mark, some of them Taiwanese-owned, employ thousands and are so big they seem meant to build Boeing 747s, making most U.S. factories look like cottage industries. "The first wave is shock and awe," says John D. Bassett III, CEO of Vaughan-Bassett, whose sales and workforce have shrunk even though it has boosted productivity fivefold at its 600-worker Galax plant since 1995 by investing in computer-controlled wood drying, cutting, and carving gear. "American industry has never encountered [such] competition."
As component industries and design work follow assembly lines to China, key elements of the U.S. industrial base are beginning to erode. American plastic-molding and machine-tool industries have shrunk dramatically in the past five years. Take Incoe Corp. in Troy, Mich., a maker of steel components for plastic-injection machines. "When the economy turned soft, we anticipated the business would come back," says Incoe CFO Robert Hoff. "But it didn't. We saw our customer base either close or migrate to China." The U.S. printed-circuit-board industry has seen sales go from $11 billion to under $5 billion since 2001. In that time, PCB exports from China have more than doubled, to a projected $3.4 billion this year, says market researcher Global Sources Ltd. (GSOL ) Most U.S. production of key electronics materials, such as copper-clad laminates, has fled, too. "The whole industry is hollowing out," says Joseph C. Fehsenfeld, CEO of Midwest Printed Circuit Services Inc. in Round Lake Beach, Ill.
The migration of electronics to China began when the Taiwanese shifted plants and suppliers across the Taiwan Strait in the late 1990s. As recently as four years ago, though, the U.S. exported $45 billion in computer hardware. Since the tech crash, that number has slid to $28 billion as the industry headed en masse for China, which is even more competitive than Taiwan. "All electronics hardware manufacturing is going to China," says Michael E. Marks, CEO of Flextronics Corp (FLEX )., a contract manufacturer that employs 41,000 in China. Flextronics and other companies are hiring Chinese engineers to design the products assembled there. "There is a myth that the U.S. would remain the knowledge economy and China the sweatshop," says BCG's Hemerling. "Increasingly, this is no longer the case."
A visit to Flextronics' campus in the Pearl River Delta town of Doumen vividly illustrates Marks's point. The site employs 18,000 workers making cell phones, X-box game consoles, PCs, and other hardware in 13 factories sprawled over 149 acres. The bamboo scaffolding is about to come down on an additional 720,000-square-foot factory nearing completion. Almost every chemical, component, plastic, machine tool, and packing material Flextronics needs is available from thousands of suppliers within a two-hour drive of the site. That alone makes most components 20% cheaper in China than in the U.S., says campus General Manager Tim Dinwiddie. Plus, China will soon eliminate remaining tariffs on imported chips. In the past five years, electronic manufacturing-services companies such as Flextronics have cut their U.S. production from $37 billion to $27 billion while doubling their China output, to $31 billion. That's likely to double again by 2007.
"Gravitational Pull"
China is even making its presence felt in the U.S. market for networking gear, a bastion of American comparative advantage. On Nov. 15, struggling 3Com Corp. (COMS ) in Marlborough, Mass., launched a data-communications switching system for corporate networks of 10,000 users or more. It claims twice the performance of Cisco Systems Inc.'s (CSCO ) comparable switch. At $183,000, 3Com's list price is 25% less. Its secret? 3Com is settling for lower margins and taking advantage of a 1,200-engineer joint venture with China telecom giant Huawei Technologies Co. This is the first high-end piece of networking gear sold by a U.S. company that is designed and manufactured in China. For the price of one U.S. engineer, the joint venture can throw four engineers into the task of making customized products for a client. Even if 3Com does not succeed, similar tie-ups are expected, which could drive down prices of high-end gear sold in the U.S. Says 3Com President Bruce Claflin: "We want to change the pricing structure of this industry." 3Com hopes this is the start of a whole line of networking gear designed and made in China for the global market. Without referring to China, Cisco CEO John T. Chambers says "we are starting to see a stream of good, very price-competitive competitors, particular from Asia."
The next step for China is critical mass in core industries. Outside Beijing, Semiconductor Manufacturing International Corp. (SMI ) has just opened a chip plant fabricating 12-inch silicon wafers that experts say is just two generations behind Intel Corp. (INTC ) A foundry that makes chips on a contract basis, this plant won't compete directly with U.S. chipmakers. But with four more 12-inch wafer plants due by 2006 and many more fabs in the pipeline, the U.S. Semiconductor Industry Assn. warns that a "gravitational pull" could suck capital, people, and leading-edge research-and-development and design functions from the U.S.
Digital technologies aren't the only areas where the Chinese have huge ambitions. In the past decade, U.S. petrochemical makers have invested in little new capacity. But at a three-mile-long site in Nanjing, 12,000 workers are erecting a $2.7 billion network of pipes and towers for China's Sinopec (SNP ) and Germany's BASF (BF ) that by next year will be among the world's biggest, most modern complexes for ethylene, the basic ingredient in plastics. An even bigger complex is going up in Shanghai. "The Chinese understand everything that scale means," says Fluor Corp. (FLR ) Group President Robert McNamara, who lives part-time in Shanghai and whose company has design contracts at both complexes. "When they target an industry to dominate, they don't mitigate."
Can China dominate everything? Of course not. America remains the world's biggest manufacturer, producing 75% of what it consumes, though that's down from 90% in the mid-'90s. Industries requiring huge R&D budgets and capital investment, such as aerospace, pharmaceuticals, and cars, still have strong bases in the U.S. "I don't see China becoming a major car exporter in the foreseeable future," says GM China (GM ) Chairman Philip F. Murtaugh. "There is no economic rationale." Murtaugh cites high production costs and quality issues at Chinese car plants, as well as just-in-time delivery needs in the West, as impediments.
Burning Rubber
Don't tell that to Miao Wei, president of Dongfeng Motor Corp. On Nov. 7, Dongfeng and Honda Motor Co. (HMC ) announced that their joint venture will invest $340 million to boost output of Honda CR-Vs and Civics fivefold, to 120,000, by early 2006. The plant aims to achieve world standards by employing Honda's flexible manufacturing system. "Honda will sell some of the Chinese-built cars in Europe," says Miao. Nissan Motor Co. (NSANY ) is also talking about exporting with Dongfeng.
China's carmakers are developing the suppliers that one day could sustain exports. Auto-parts maker Wanxiang Group in Hangzhou started as a tiny township-owned farm-machinery shop in 1969. Now it's a $2.4 billion conglomerate that supplies the Chinese assembly plants of GM, Ford Motor (F ), Volkswagen, and others and also exports 30% of its output. In two years, China will drop the rule that its auto plants buy at least 40% of parts locally. Wanxiang is getting ready: It is opening a $42 million plant loaded with U.S. and European testing gear. And since 1995, Wanxiang has bought 10 U.S. auto-parts makers. "Our goal is to acquire technology, management, and most important, to get access to overseas markets," says Chairman Lu Guanqiu.
Some U.S manufacturers hope China will run out of steam. This year, factories in Guangdong and Fujian faced serious labor shortages for the first time. Red-hot demand has meant skyrocketing costs for China's producers, most of which rely on imported goods such as steel, plastics, and components. Energy shortages have forced manufacturers to shut factories several times a week. In almost any industry one can think of, vicious price wars are biting into already razor-sharp margins. "There are so many small companies competing that they crowd out all profit," says Beijing University economist Zhang Weiying. Indeed, given the low emphasis on profits and the unsophisticated accounting of many Chinese companies, often their pricing isn't based on a full understanding of costs. Having gotten as far as they can on cheap production costs, Chinese manufacturers must develop their own technologies and innovative products to move ahead -- areas in which they've made slow progress so far.
The juggernaut will slow, but only slightly. While salaries for top Chinese designers are rising fast, they are still a fifth to a tenth of those in Silicon Valley. If China's wages rise 8% annually for the next five years, says a Boston Consulting Group study, the average factory hand will still earn just $1.30 an hour by then. If China allowed the yuan to appreciate by around 10% in the next year, productivity gains would more than offset the higher costs, figures China expert Nicholas R. Lardy of the Institute for International Economics. "I don't think revaluation will have a significant impact," he says.
And Chinese producers are hardly standing still. In a recent survey of Chinese and U.S. manufacturers by IndustryWeek and Cleveland-based Manufacturing Performance Institute, 54% of Chinese companies cited innovation as one of their top objectives, while only 26% of U.S. respondents did. Chinese companies spend more on worker training and enterprise-management software. And 91% of U.S. plants are more than a decade old, vs. 54% in China. Shanghai-based TV maker SVA Group, for example, has opened China's first plant to make flat panels, a venture with Japan's NEC (NIPNY ) Corp. That is enabling SVA to secure a U.S. beachhead by selling liquid-crystal display and plasma TV sets through channels such as the online sites of Costco Wholesale (COST ) and Target. Starting price: $1,600 -- 30% below similar models by Royal Philips Electronics (PHG ) and Panasonic (MC ).
More innovation. Better goods. Lower prices. Newer plants. America will surely continue to benefit from China's expansion. But unless it can deal with the industrial challenge, it will suffer a loss of economic power and influence. Can America afford the China price? It's the question U.S. workers, execs, and policymakers urgently need to ask. |
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| Dunya |
| LOL the dollar is sinking:D |
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| ierxium |
| quote: | Originally posted by Dunya
LOL the dollar is sinking:D |
I know! What is the dollar doing in the water if it can't swim?
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| occrider |
| quote: | Originally posted by Dunya
LOL the dollar is sinking:D |
Yup. Too bad it hurts the Euro economy and stock market .... |
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| DJ Lucas |
| my dollars seem to be doing alright ;) |
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