Stocks and investing thread

[southsider2k5]

I know, its macroeconomic theory, and it runs counter to what most people have been brainwashed to believe.

 

Its not difficult at all to reduce growth and still strengthen the dollar... Find a way to cut production costs of American goods across the board. Cut things like wages, benefits, material costs...

 

Another similiar story that goes right into my theory. The micro-economic effects of the macro-economic adjustments playing through the rest of the worlds economies is interesting, well at least to me. Notice the talk throughout about profit pressures, wages pressures, and currency differences squeezing profits. Alan Greenspan was already talking about China as a whole facing these pressures in the middle term future. It looks like that day is coming quickly.

 

http://www.chicagotribune.com/services/new...0,3188492.story

 

China factories feel the squeeze

Vendors fight for work, cut costsCaught between rising costs at home and low-cost pressure abroad, some firms decide to cut corners

 

SHENZHEN, China - Sitting in a windowless conference room surrounded by the remote-control toy Ferraris and Mercedes he sells the world over, factory owner Kuma Gu summed up what it's like to manufacture products for American consumers these days.

 

"A lot of Chinese companies have a saying," he said between drags on a cigarette. "Do you want to kill yourself? Then do business with Wal-Mart."

 

Gu wasn't looking for sympathy. He has thrived for years amid the economic miracle that has transformed this one-time steamy fishing village into one of the world's largest manufacturing bases.

 

Keeping kids safe

But as he discussed the lead-paint fiasco that has damaged his industry's vital relationship with U.S. shoppers, Gu put the issue in far broader context.

 

China's export machine, he said, has become a victim of its own success.

 

For decades, the economic relationship between the United States and China has been based on a crystal-clear calculus: American consumers wanted low-cost goods, China delivered them.

 

But exponential growth along the sprawling Pearl River Delta just north of Hong Kong has triggered sharply rising costs for everything from labor to plastic. And as the Wal-Marts of the world continue to press for lower prices, Chinese manufacturers are getting squeezed.

 

Many factory owners, government officials and U.S. importers interviewed in China linked the toy-safety problem to this market pressure, part of the profound changes under way in an economy on the rise.

 

Just as Japan and Taiwan did before it, Southern China is struggling to mature from a Wild West economy that thrives on cheap labor and lax regulation to one valued for its technical ability and high quality. That future may come. But for now, China is like a gangly economic adolescent, fast-reaching adulthood but still prone to explosive, childlike outbursts.

 

The shift is upending many of the low-cost assumptions that have fueled China's staggering growth. For years, migrant workers have flooded to Chinese factories on the coast providing a seemingly limitless supply of dirt-cheap labor. Now, the government is trying to rebalance the economy by encouraging industrial development inland, allowing more workers to stay home and forcing companies to come to them.

 

In coastal cities like Shenzhen and Dongguan, this has translated into a labor shortage. Amid China's ravenous appetite for raw materials -- oil in particular -- other costs are rising too. Meanwhile, the flip side of the government's friendly policies inland are hostile ones for coastal industries that use lots of labor and environmental resources. Add in a rising yuan against the dollar and the region's low-cost advantage is beginning to slip away.

 

The result is that many small to mid-size outfits like Gu's find themselves locked in a new and volatile struggle for survival. All developing countries have suffered the ills of headlong industrial growth -- periods of lawlessness, environmental degradation and quality issues -- offering many reasons for China's product meltdowns. But with costs rising precipitously in China, many experts say the pressure to shave pennies through bad behavior has increased, especially as foreign buyers continue to exploit the market's chronic overcapacity by shopping door-to-door for vendors who will do whatever it takes to win business.

 

"It reaches a point where things aren't economically viable and corners get cut by subcontractors and sub-subcontractors," said Steve Vickers, head of a security company called International Risk and former commander of criminal intelligence for the Royal Hong Kong Police. "That's called capitalism, I guess. But it's reckless."

 

Made in China

 

China's problems couldn't seem more distant from the bland forest of glass office buildings lining Interstate Highway 88 in suburban Oak Brook. But in the third-floor office suite that houses RC2 Corp., toy designer Jeff Bricker is only a high-speed Internet connection away from RC2 offices in Dongguan, just north of Shenzhen.

 

Bent over a drawing table covered with plans for a new Thomas and Friends talking train set, Bricker explained how product teams in Oak Brook dream up Thomas toys, beam them to design engineers in Dongguan and wait for the products to flood back from 35 contract manufacturers so they can be sold all over the world.

 

He also lamented the damage done to the Thomas brand from RC2's recall this year of about 1.7 million lead-tainted toys.

 

"Hopefully, [parents] will realize these things can happen," Bricker said. "Hopefully, the trust will come back."

 

Curt Stoelting, RC2's chief executive, knows that hope rings hollow with parents when it comes to toy safety. He hardly thinks doing business in China is reckless, but the recalls have made him painfully aware of what can go wrong when a global supply chain snaps a link under pressure.

 

He still isn't sure exactly why lead paint ended up on many of his wildly popular train toys. He doesn't even know whether to blame the manufacturer or the company that supplied it paint.

 

"What I can tell you," Stoelting said recently after returning from China to inspect the situation, "is that corners were cut. Our very specific requirements were not followed."

 

RC2 had given its contractors price relief to cover rising costs. It had been confident that its testing procedures -- which met or exceeded industry standards -- were adequate. "But it turns out they weren't," Stoelting said. Having been lulled by his contractor's good behavior over a period of years, he added, "We took things for granted."

 

Mattel Inc., which has recalled nearly 2 million of its own lead-tainted toys this year, has told a similar story -- only its long-term contractor killed himself after being duped by a supplier. Like RC2, Mattel and many other companies subject to recalls have acknowledged that their testing procedures were woefully inadequate.

 

Keeping kids safe

Quality control experts used to working in China say the mistake companies like Mattel and RC2 have made is assuming that China -- still a developing country -- offers U.S. companies a mature and stable manufacturing platform. China is certainly capable of manufacturing high-quality products. But Kurt Schneiders, co-founder of PRO QC Systems in Hong Kong, said a combination of overcapacity, lax regulation, rising costs and pressure from buyers has encouraged the desperate, uneducated or unscrupulous to do whatever it takes to win business.

 

"Nobody wants to pay for quality," Schneiders said. "Not buyers, not manufacturers."

 

Made to order

 

For Lawrence Chan, chairman of the Hong Kong Toys Council and founder of a large Mattel supplier called Wynnewood Corp., this isn't a surprise. It's simply the risk of doing business on the mainland. On a Saturday morning in his sparse but bustling office in Hong Kong's Kwun Tong District, Chan explained that the further you get down the food chain in China, the more trouble you encounter.

 

Big companies, he said, tend to have sophisticated managers who are well aware of U.S. regulations. They also recognize that skimping on paint doesn't save enough money to offset the very real risk of a recall.

 

But in China's ever-expanding market, there is always another company that will bid lower if a buyer looks hard enough. Some will even open up a new factory to get the business. Big companies under price and time pressure often subcontract to smaller ones with less sophistication and fewer resources.

 

"At large companies, management is at least informed that [using lead paint] is a no-no," Chan said. "But for subcontractors, are they totally aware? And has management informed employees?"

 

Chan insists that few Chinese companies -- even unsophisticated small ones -- would knowingly use toxic substances. But he gave the example of a small subcontractor rushing to produce 10,000 pieces on deadline.

 

"Sometimes they run out of paint for a small portion of the order," Chan explained. "Then due to ignorance they say, 'Oh, here's some paint that is similar.' Then they have a problem."

 

Chan knows that U.S. buyers face pressure to "squeeze every fraction of a penny. It's their job." But if they want quality, he said, they have to lift their heads from the price sheet and consider where they are.

 

"This has been a great lesson for everybody," he said. "Sometimes you have to pay for what you want."

 

Made to listen

 

For RC2's Stoelting, this lesson means two things. First, he knows he has to spend more money on testing in Dongguan, where RC2 has an office to engineer products, perform quality assurance and manage its large stable contract manufacturers.

 

The company has beefed up its quality control procedures to include more in-process audits and the testing of every batch of paint that comes through the door. RC2 also makes Bob the Builder, Johnny Lightning and John Deere toys, as well as children's products under The First Years and Lamaze brands.

 

The second implication of Chan's lesson, however, is more reflective of what's really going on in China.

 

Recognizing that cities like Dongguan are becoming too expensive to give him what he needs in terms of cost and efficiency, Stoelting is planning to move 200 miles inland to a 400-acre site in Wengyuan. Labor, land and taxes are cheaper there and utilities are more abundant. He studied moving as far as Vietnam, which many in the outsourcing world call "the next China."

 

The recall experience hasn't blunted Stoelting's faith in globalization. A 47-year-old former Arthur Andersen consultant, he believes companies like his are in a perpetual search for cheaper places to manufacture.

 

 

Made for change

 

A decade ago, when RC2 first teamed with several manufacturers to build an office-production complex in Dongguan's Chang'an district, the area was surrounded by rice paddies. Companies built multistory factories like those found in Hong Kong. Labor was so cheap that Chinese firms ignored automation and lean manufacturing techniques. Those things made sense in Japan. Here they were unnecessary.

 

Chang'an remains a rough-hewn industrial district in many respects. The smog is thick and rolling electrical blackouts are the norm. Although Jetson International Ltd., one of RC2's dedicated factories, uses rudimentary automation to produce wooden Thomas trains and track, workers still toil in the 90-degree heat with nothing but paper surgeon's masks protecting them from sawdust and other hazards. Wages have been rising, but they are still puny by Western standards. Production workers in Dongguan earn less than $150 a month.

 

Keeping kids safe

Nevertheless, signs of change are everywhere. A five-star hotel has arrived, restaurants have blossomed and office towers are on the rise. The real growth is coming from computer-parts factories that are as modern as any in the world.

 

Wynnewood's Chan remembers paying workers $6 a month in the years after Deng Xiaoping opened the south for development in 1978. Even in 1989, he had to argue with his Chinese partners about putting in a fire escape in a multistory worker's dormitory with only one exit.

 

"I wasn't even asking them to pay for it," Chan said. "The value of life was very different at that time."

 

Robin Munro, research director for the China Labour Bulletin in Hong Kong said labor conditions remain primitive by U.S. standards. Dormitories are still crowded, long hours of overtime are still expected and worker safety remains a distant concept. But Monro also said the pendulum is swinging. The Pearl River Delta has developed such a dismal reputation that as industry develops inland, workers increasingly head home or never leave. That has created a labor shortage of 12 percent to 15 percent in the region.

 

Made at a price

 

At the Chitone labor market near Dongguan's gleaming new civic center recently, the shift was obvious in the interplay between potential employers and job seekers packed into the market's top two floors.

 

At one booth sat 28-year-old Li Jun, whose company makes plastic bags for supermarkets around the world. On this day, he was looking for office staff. But two months earlier he had been forced to hire an agency to travel inland to recruit factory workers to fill out the company's staff of 280.

 

Li said the worker shortage had driven wages up around 30 percent over the last three years. Production workers used to get around $100 a month. Now they are paid closer to $140. Retaining workers also means improving living conditions, albeit from rock bottom standards.

 

Li explained that in March his company added hot water to the dormitory bathrooms and put in air conditioning. The owners hired a cook to replace the meal service because workers were complaining about the food quality. The company bought a snooker table, a big movie projector for the dining

 

room and started regular exercise periods.

 

Another manufacturer, Minoya Sharehold Co., was also pushing lifestyle amenities. "We have a beautiful environment," said a colorful sign, noting the company's Ping-Pong and snooker room, as well as its basketball, volleyball and badminton courts.

 

But Yang Jianjun, a 25-year-old quality control manager, wasn't buying. Minoya was offering almost $190 a month plus overtime for quality control positions. Yang's price was closer to $270.

 

"I think the salary is too low," he said. " I don't think it would motivate me to work there."

 

Labor costs at Gu's HK (Shenzhen) Industries Ltd. have jumped by half over the last several years. But that's just the beginning. ABS plastic, a basic raw material in model cars, has more than doubled. Nickel, the key ingredient in batteries, has rocketed from around $16,000 a ton to almost $47,000. Meanwhile, everything has been made more expensive for exporters by the government's policy of letting the value of the yuan float higher in response to U.S. complaints about its trade deficit with China.

 

Safety, too, comes at a cost. Even before the toy-quality scandals, Gu said, he constantly worried about getting slipped lead paint by a supplier looking to shave pennies. So he demands certification from suppliers and insists they sign contracts taking full responsibility for a recall. He also makes sure he buys from large, established companies. All of this helps him sleep at night. But it also means he pays top dollar for paint.

 

A few years ago, he said, Mattel came to him and expressed strong interest in hiring HK to build a branded line of radio-controlled toys. The two sides had several meetings and talked about designs. But, in the end, they didn't come to terms because Gu couldn't afford it.

 

"The quality was very high and the requirements very strict," Gu explained, "but the price was no good, so we wouldn't do it."

 

A Mattel spokeswoman said the company has no record of working with HK.

 

Back in Oak Brook, RC2's Stoelting said the reason he's moving inland is that there's no way to avoid the kind of problem Gu complains of.

 

In Wengyuan, he said, higher transportation costs will be an issue for a while. But because the government is building a new road to the area connecting it to the port in Shenzhen, a 15 percent to 20 percent drop in labor rates pulls like a magnet. Moreover, by building a new compound of factories, RC2 and its partners can leap frog their current facilities. They are designing efficient, single-floor production plants equipped with more automation machinery and laid out to take advantage of lean production systems.

 

Keeping kids safe

"If labor costs weren't increasing, I don't think there would be motivation to use more efficient equipment and different manufacturing techniques," Stoelting said. "But they are increasing and they're going to continue to increase."

 

U.S. companies go out of their way to preserve the kind of competition that drives down prices, said K.K. Choy, assistant general manager of Wealthwise Industrial Ltd., a large Mattel contractor. Choy explained that while Mattel gives Wealthwise a steady diet of work producing all manner of Elmo, Dora and other toys, it is also careful to channel some business to smaller firms to keep them in the game.

 

"For smaller companies, it will be a tough time to keep alive," said Choy. "But Mattel will protect them. They don't want us to get too big."

 

A Mattel spokeswoman responded that her company uses many manufacturers around the world, big and small.

 

Made to move

 

Making life increasingly complicated for the small and the weakened, however, is steadily becoming official government policy in the Pearl River Delta. Cities like Dongguan and Shenzhen are actively favoring big exporters and high-technology companies that can eventually develop their own brands and focus on the domestic market.

 

One example is a switch in the value-added tax rules that require smaller companies to put up half the tax in cash until its products are exported. Only companies with strong balance sheets can afford to do that month after month.

 

"It's a way to make life more difficult for smaller manufacturers," said Clement Chen, chairman of the Federation of Hong Kong Industries. "As the economy becomes more mature, they want more mature factories -- more value added, more brands."

 

If out-of-favor companies agree to move to inland regions, however, those rules will be revoked, Chen said.

 

Jiang Ling, Dongguan's vice mayor for economic development, said trimming overcapacity, enforcing regulation and increasing quality are not simply government objectives. With the Made in China brand under siege, it is a matter of survival.

 

"If the quality and credibility of our products is bad, that will ruin our city," Jiang said. "In the past, we paid much more attention to quantity. Now we have to pay more attention to quality."

 

Even Jiang acknowledges, however, that the transition will be difficult.

 

For 20 years, economic expansion has been the tonic that cured all ills in China. Growth in gross domestic product has been the currency of political power. Local mandarins have been judged by Beijing on their economic prowess and given resources and clout accordingly. Many officials have built a lifestyle taking bribes for looking the other way when it comes to regulation and even those that haven't see their professional advancement tied to growth in GDP, creation of jobs and general social order.

 

Jiang admits that "it will take time for different levels [of government and the business world] to accept this concept." He also said it will be a challenge to "better manage officials in government" to make sure graft and corruption don't cripple reform.

 

Some experts say that the current crisis may give reform-minded officials cover to make some tough decisions. And, already, the government is clamping down by sending out armies of quality inspectors, while recertifying exporters.

 

Nevertheless, explained Chen, the pain of transition isn't likely to end soon.

 

"It's a mega-project for the central government," he said, "and unfortunately, it can't be rushed."

 

 

 

 

[southsider2k5]

I know, its macroeconomic theory, and it runs counter to what most people have been brainwashed to believe.

 

Its not difficult at all to reduce growth and still strengthen the dollar... Find a way to cut production costs of American goods across the board. Cut things like wages, benefits, material costs...

 

Another similiar story that goes right into my theory. The micro-economic effects of the macro-economic adjustments playing through the rest of the worlds economies is interesting, well at least to me. Notice the talk throughout about profit pressures, wages pressures, and currency differences squeezing profits. Alan Greenspan was already talking about China as a whole facing these pressures in the middle term future. It looks like that day is coming quickly.

 

http://www.chicagotribune.com/services/new...0,3188492.story

 

China factories feel the squeeze

Vendors fight for work, cut costsCaught between rising costs at home and low-cost pressure abroad, some firms decide to cut corners

 

SHENZHEN, China - Sitting in a windowless conference room surrounded by the remote-control toy Ferraris and Mercedes he sells the world over, factory owner Kuma Gu summed up what it's like to manufacture products for American consumers these days.

 

"A lot of Chinese companies have a saying," he said between drags on a cigarette. "Do you want to kill yourself? Then do business with Wal-Mart."

 

Gu wasn't looking for sympathy. He has thrived for years amid the economic miracle that has transformed this one-time steamy fishing village into one of the world's largest manufacturing bases.

 

Keeping kids safe

But as he discussed the lead-paint fiasco that has damaged his industry's vital relationship with U.S. shoppers, Gu put the issue in far broader context.

 

China's export machine, he said, has become a victim of its own success.

 

For decades, the economic relationship between the United States and China has been based on a crystal-clear calculus: American consumers wanted low-cost goods, China delivered them.

 

But exponential growth along the sprawling Pearl River Delta just north of Hong Kong has triggered sharply rising costs for everything from labor to plastic. And as the Wal-Marts of the world continue to press for lower prices, Chinese manufacturers are getting squeezed.

 

Many factory owners, government officials and U.S. importers interviewed in China linked the toy-safety problem to this market pressure, part of the profound changes under way in an economy on the rise.

 

Just as Japan and Taiwan did before it, Southern China is struggling to mature from a Wild West economy that thrives on cheap labor and lax regulation to one valued for its technical ability and high quality. That future may come. But for now, China is like a gangly economic adolescent, fast-reaching adulthood but still prone to explosive, childlike outbursts.

 

The shift is upending many of the low-cost assumptions that have fueled China's staggering growth. For years, migrant workers have flooded to Chinese factories on the coast providing a seemingly limitless supply of dirt-cheap labor. Now, the government is trying to rebalance the economy by encouraging industrial development inland, allowing more workers to stay home and forcing companies to come to them.

 

In coastal cities like Shenzhen and Dongguan, this has translated into a labor shortage. Amid China's ravenous appetite for raw materials -- oil in particular -- other costs are rising too. Meanwhile, the flip side of the government's friendly policies inland are hostile ones for coastal industries that use lots of labor and environmental resources. Add in a rising yuan against the dollar and the region's low-cost advantage is beginning to slip away.

 

The result is that many small to mid-size outfits like Gu's find themselves locked in a new and volatile struggle for survival. All developing countries have suffered the ills of headlong industrial growth -- periods of lawlessness, environmental degradation and quality issues -- offering many reasons for China's product meltdowns. But with costs rising precipitously in China, many experts say the pressure to shave pennies through bad behavior has increased, especially as foreign buyers continue to exploit the market's chronic overcapacity by shopping door-to-door for vendors who will do whatever it takes to win business.

 

"It reaches a point where things aren't economically viable and corners get cut by subcontractors and sub-subcontractors," said Steve Vickers, head of a security company called International Risk and former commander of criminal intelligence for the Royal Hong Kong Police. "That's called capitalism, I guess. But it's reckless."

 

Made in China

 

China's problems couldn't seem more distant from the bland forest of glass office buildings lining Interstate Highway 88 in suburban Oak Brook. But in the third-floor office suite that houses RC2 Corp., toy designer Jeff Bricker is only a high-speed Internet connection away from RC2 offices in Dongguan, just north of Shenzhen.

 

Bent over a drawing table covered with plans for a new Thomas and Friends talking train set, Bricker explained how product teams in Oak Brook dream up Thomas toys, beam them to design engineers in Dongguan and wait for the products to flood back from 35 contract manufacturers so they can be sold all over the world.

 

He also lamented the damage done to the Thomas brand from RC2's recall this year of about 1.7 million lead-tainted toys.

 

"Hopefully, [parents] will realize these things can happen," Bricker said. "Hopefully, the trust will come back."

 

Curt Stoelting, RC2's chief executive, knows that hope rings hollow with parents when it comes to toy safety. He hardly thinks doing business in China is reckless, but the recalls have made him painfully aware of what can go wrong when a global supply chain snaps a link under pressure.

 

He still isn't sure exactly why lead paint ended up on many of his wildly popular train toys. He doesn't even know whether to blame the manufacturer or the company that supplied it paint.

 

"What I can tell you," Stoelting said recently after returning from China to inspect the situation, "is that corners were cut. Our very specific requirements were not followed."

 

RC2 had given its contractors price relief to cover rising costs. It had been confident that its testing procedures -- which met or exceeded industry standards -- were adequate. "But it turns out they weren't," Stoelting said. Having been lulled by his contractor's good behavior over a period of years, he added, "We took things for granted."

 

Mattel Inc., which has recalled nearly 2 million of its own lead-tainted toys this year, has told a similar story -- only its long-term contractor killed himself after being duped by a supplier. Like RC2, Mattel and many other companies subject to recalls have acknowledged that their testing procedures were woefully inadequate.

 

Keeping kids safe

Quality control experts used to working in China say the mistake companies like Mattel and RC2 have made is assuming that China -- still a developing country -- offers U.S. companies a mature and stable manufacturing platform. China is certainly capable of manufacturing high-quality products. But Kurt Schneiders, co-founder of PRO QC Systems in Hong Kong, said a combination of overcapacity, lax regulation, rising costs and pressure from buyers has encouraged the desperate, uneducated or unscrupulous to do whatever it takes to win business.

 

"Nobody wants to pay for quality," Schneiders said. "Not buyers, not manufacturers."

 

Made to order

 

For Lawrence Chan, chairman of the Hong Kong Toys Council and founder of a large Mattel supplier called Wynnewood Corp., this isn't a surprise. It's simply the risk of doing business on the mainland. On a Saturday morning in his sparse but bustling office in Hong Kong's Kwun Tong District, Chan explained that the further you get down the food chain in China, the more trouble you encounter.

 

Big companies, he said, tend to have sophisticated managers who are well aware of U.S. regulations. They also recognize that skimping on paint doesn't save enough money to offset the very real risk of a recall.

 

But in China's ever-expanding market, there is always another company that will bid lower if a buyer looks hard enough. Some will even open up a new factory to get the business. Big companies under price and time pressure often subcontract to smaller ones with less sophistication and fewer resources.

 

"At large companies, management is at least informed that [using lead paint] is a no-no," Chan said. "But for subcontractors, are they totally aware? And has management informed employees?"

 

Chan insists that few Chinese companies -- even unsophisticated small ones -- would knowingly use toxic substances. But he gave the example of a small subcontractor rushing to produce 10,000 pieces on deadline.

 

"Sometimes they run out of paint for a small portion of the order," Chan explained. "Then due to ignorance they say, 'Oh, here's some paint that is similar.' Then they have a problem."

 

Chan knows that U.S. buyers face pressure to "squeeze every fraction of a penny. It's their job." But if they want quality, he said, they have to lift their heads from the price sheet and consider where they are.

 

"This has been a great lesson for everybody," he said. "Sometimes you have to pay for what you want."

 

Made to listen

 

For RC2's Stoelting, this lesson means two things. First, he knows he has to spend more money on testing in Dongguan, where RC2 has an office to engineer products, perform quality assurance and manage its large stable contract manufacturers.

 

The company has beefed up its quality control procedures to include more in-process audits and the testing of every batch of paint that comes through the door. RC2 also makes Bob the Builder, Johnny Lightning and John Deere toys, as well as children's products under The First Years and Lamaze brands.

 

The second implication of Chan's lesson, however, is more reflective of what's really going on in China.

 

Recognizing that cities like Dongguan are becoming too expensive to give him what he needs in terms of cost and efficiency, Stoelting is planning to move 200 miles inland to a 400-acre site in Wengyuan. Labor, land and taxes are cheaper there and utilities are more abundant. He studied moving as far as Vietnam, which many in the outsourcing world call "the next China."

 

The recall experience hasn't blunted Stoelting's faith in globalization. A 47-year-old former Arthur Andersen consultant, he believes companies like his are in a perpetual search for cheaper places to manufacture.

 

 

Made for change

 

A decade ago, when RC2 first teamed with several manufacturers to build an office-production complex in Dongguan's Chang'an district, the area was surrounded by rice paddies. Companies built multistory factories like those found in Hong Kong. Labor was so cheap that Chinese firms ignored automation and lean manufacturing techniques. Those things made sense in Japan. Here they were unnecessary.

 

Chang'an remains a rough-hewn industrial district in many respects. The smog is thick and rolling electrical blackouts are the norm. Although Jetson International Ltd., one of RC2's dedicated factories, uses rudimentary automation to produce wooden Thomas trains and track, workers still toil in the 90-degree heat with nothing but paper surgeon's masks protecting them from sawdust and other hazards. Wages have been rising, but they are still puny by Western standards. Production workers in Dongguan earn less than $150 a month.

 

Keeping kids safe

Nevertheless, signs of change are everywhere. A five-star hotel has arrived, restaurants have blossomed and office towers are on the rise. The real growth is coming from computer-parts factories that are as modern as any in the world.

 

Wynnewood's Chan remembers paying workers $6 a month in the years after Deng Xiaoping opened the south for development in 1978. Even in 1989, he had to argue with his Chinese partners about putting in a fire escape in a multistory worker's dormitory with only one exit.

 

"I wasn't even asking them to pay for it," Chan said. "The value of life was very different at that time."

 

Robin Munro, research director for the China Labour Bulletin in Hong Kong said labor conditions remain primitive by U.S. standards. Dormitories are still crowded, long hours of overtime are still expected and worker safety remains a distant concept. But Monro also said the pendulum is swinging. The Pearl River Delta has developed such a dismal reputation that as industry develops inland, workers increasingly head home or never leave. That has created a labor shortage of 12 percent to 15 percent in the region.

 

Made at a price

 

At the Chitone labor market near Dongguan's gleaming new civic center recently, the shift was obvious in the interplay between potential employers and job seekers packed into the market's top two floors.

 

At one booth sat 28-year-old Li Jun, whose company makes plastic bags for supermarkets around the world. On this day, he was looking for office staff. But two months earlier he had been forced to hire an agency to travel inland to recruit factory workers to fill out the company's staff of 280.

 

Li said the worker shortage had driven wages up around 30 percent over the last three years. Production workers used to get around $100 a month. Now they are paid closer to $140. Retaining workers also means improving living conditions, albeit from rock bottom standards.

 

Li explained that in March his company added hot water to the dormitory bathrooms and put in air conditioning. The owners hired a cook to replace the meal service because workers were complaining about the food quality. The company bought a snooker table, a big movie projector for the dining

 

room and started regular exercise periods.

 

Another manufacturer, Minoya Sharehold Co., was also pushing lifestyle amenities. "We have a beautiful environment," said a colorful sign, noting the company's Ping-Pong and snooker room, as well as its basketball, volleyball and badminton courts.

 

But Yang Jianjun, a 25-year-old quality control manager, wasn't buying. Minoya was offering almost $190 a month plus overtime for quality control positions. Yang's price was closer to $270.

 

"I think the salary is too low," he said. " I don't think it would motivate me to work there."

 

Labor costs at Gu's HK (Shenzhen) Industries Ltd. have jumped by half over the last several years. But that's just the beginning. ABS plastic, a basic raw material in model cars, has more than doubled. Nickel, the key ingredient in batteries, has rocketed from around $16,000 a ton to almost $47,000. Meanwhile, everything has been made more expensive for exporters by the government's policy of letting the value of the yuan float higher in response to U.S. complaints about its trade deficit with China.

 

Safety, too, comes at a cost. Even before the toy-quality scandals, Gu said, he constantly worried about getting slipped lead paint by a supplier looking to shave pennies. So he demands certification from suppliers and insists they sign contracts taking full responsibility for a recall. He also makes sure he buys from large, established companies. All of this helps him sleep at night. But it also means he pays top dollar for paint.

 

A few years ago, he said, Mattel came to him and expressed strong interest in hiring HK to build a branded line of radio-controlled toys. The two sides had several meetings and talked about designs. But, in the end, they didn't come to terms because Gu couldn't afford it.

 

"The quality was very high and the requirements very strict," Gu explained, "but the price was no good, so we wouldn't do it."

 

A Mattel spokeswoman said the company has no record of working with HK.

 

Back in Oak Brook, RC2's Stoelting said the reason he's moving inland is that there's no way to avoid the kind of problem Gu complains of.

 

In Wengyuan, he said, higher transportation costs will be an issue for a while. But because the government is building a new road to the area connecting it to the port in Shenzhen, a 15 percent to 20 percent drop in labor rates pulls like a magnet. Moreover, by building a new compound of factories, RC2 and its partners can leap frog their current facilities. They are designing efficient, single-floor production plants equipped with more automation machinery and laid out to take advantage of lean production systems.

 

Keeping kids safe

"If labor costs weren't increasing, I don't think there would be motivation to use more efficient equipment and different manufacturing techniques," Stoelting said. "But they are increasing and they're going to continue to increase."

 

U.S. companies go out of their way to preserve the kind of competition that drives down prices, said K.K. Choy, assistant general manager of Wealthwise Industrial Ltd., a large Mattel contractor. Choy explained that while Mattel gives Wealthwise a steady diet of work producing all manner of Elmo, Dora and other toys, it is also careful to channel some business to smaller firms to keep them in the game.

 

"For smaller companies, it will be a tough time to keep alive," said Choy. "But Mattel will protect them. They don't want us to get too big."

 

A Mattel spokeswoman responded that her company uses many manufacturers around the world, big and small.

 

Made to move

 

Making life increasingly complicated for the small and the weakened, however, is steadily becoming official government policy in the Pearl River Delta. Cities like Dongguan and Shenzhen are actively favoring big exporters and high-technology companies that can eventually develop their own brands and focus on the domestic market.

 

One example is a switch in the value-added tax rules that require smaller companies to put up half the tax in cash until its products are exported. Only companies with strong balance sheets can afford to do that month after month.

 

"It's a way to make life more difficult for smaller manufacturers," said Clement Chen, chairman of the Federation of Hong Kong Industries. "As the economy becomes more mature, they want more mature factories -- more value added, more brands."

 

If out-of-favor companies agree to move to inland regions, however, those rules will be revoked, Chen said.

 

Jiang Ling, Dongguan's vice mayor for economic development, said trimming overcapacity, enforcing regulation and increasing quality are not simply government objectives. With the Made in China brand under siege, it is a matter of survival.

 

"If the quality and credibility of our products is bad, that will ruin our city," Jiang said. "In the past, we paid much more attention to quantity. Now we have to pay more attention to quality."

 

Even Jiang acknowledges, however, that the transition will be difficult.

 

For 20 years, economic expansion has been the tonic that cured all ills in China. Growth in gross domestic product has been the currency of political power. Local mandarins have been judged by Beijing on their economic prowess and given resources and clout accordingly. Many officials have built a lifestyle taking bribes for looking the other way when it comes to regulation and even those that haven't see their professional advancement tied to growth in GDP, creation of jobs and general social order.

 

Jiang admits that "it will take time for different levels [of government and the business world] to accept this concept." He also said it will be a challenge to "better manage officials in government" to make sure graft and corruption don't cripple reform.

 

Some experts say that the current crisis may give reform-minded officials cover to make some tough decisions. And, already, the government is clamping down by sending out armies of quality inspectors, while recertifying exporters.

 

Nevertheless, explained Chen, the pain of transition isn't likely to end soon.

 

"It's a mega-project for the central government," he said, "and unfortunately, it can't be rushed."

 

 

 

 

[kapkomet]

In our business, which reports in Euros and does most of its business in the US, we are getting KILLED on currency. It sucks.

 

[southsider2k5]

In our business, which reports in Euros and does most of its business in the US, we are getting KILLED on currency. It sucks.

 

Serious question, have they thought about currency options in reporting months as a hedge?

[StrangeSox]

More bloodletting today, it looks like. Is major inflation on the way?

[Balta1701]

More bloodletting today, it looks like. Is major inflation on the way?

One of the guys on the fed who I'm told is usually one of the biggest inflation hawks seemed to suggest that inflation right now just wasn't their big concern when he spoke yesterday.

The U.S. interest rate policy outlook is "asymmetric," with the likelihood of further rate cuts bigger than the potential for increases, St. Louis Federal Reserve Bank President William Poole said on Wednesday.

 

"It is easy to imagine a scenario where another rate cut is called for," but would take "a very big surprise" for policy-makers to consider a rate hike at the Dec. 11 Federal Open Market Committee meeting, Poole told reporters after a speech at Marquette University.

 

The ongoing decline in the housing market would likely have a "modest" impact on U.S. economic growth, but the risk of a bigger impact could not be discounted, said Poole, an FOMC voter in 2007.

[southsider2k5]

One of the guys on the fed who I'm told is usually one of the biggest inflation hawks seemed to suggest that inflation right now just wasn't their big concern when he spoke yesterday.

 

Fed Fund futures are pricing a 94% chance of a rate cut to 4.25% at the next meeting.

 

And yes, inflation is coming.

[kapkomet]

Fed Fund futures are pricing a 94% chance of a rate cut to 4.25% at the next meeting.

 

And yes, inflation is coming.

I would say MAJOR inflation is coming. The worst thing to happen since the late 70's is when the fed just cut those rates in a period where prices are dramatically rising across the board for all goods, commodities, services, etc.

 

Now, the counter argument is that all these cheap goods is what is offseting this - but it can't last forever. The time machine is about to stop.

 

I'm not a typical doomer and gloomer when it comes to our economy, but the actions of the last 3-6 months have been a really, really bad sign.

[NorthSideSox72]

I would say MAJOR inflation is coming. The worst thing to happen since the late 70's is when the fed just cut those rates in a period where prices are dramatically rising across the board for all goods, commodities, services, etc.

 

Now, the counter argument is that all these cheap goods is what is offseting this - but it can't last forever. The time machine is about to stop.

 

I'm not a typical doomer and gloomer when it comes to our economy, but the actions of the last 3-6 months have been a really, really bad sign.

Wait... you aren't saying that prices are rising dramatically now, are you? Because it looks to me like, other than energy-related and corn products (and their derivatives), prices are staying very stable. I do think we'll see some inflation due to corn's ripple effect, and the price of oil. But I don't see it as being out of control. Those drops in rates are not suddenly going to flood the market with cash. People are too tenative about credit right now, and people includes business. I just don't see it being that bad in the near term.

 

ETA: And I forgot, major factor here - demand will slow because of the credit crisis, and that will keep some prices down.

 

[Balta1701]

Wait... you aren't saying that prices are rising dramatically now, are you? Because it looks to me like, other than energy-related and corn products (and their derivatives), prices are staying very stable. I do think we'll see some inflation due to corn's ripple effect, and the price of oil. But I don't see it as being out of control. Those drops in rates are not suddenly going to flood the market with cash. People are too tenative about credit right now, and people includes business. I just don't see it being that bad in the near term.

 

ETA: And I forgot, major factor here - demand will slow because of the credit crisis, and that will keep some prices down.

I'm a very good shopper so I've been able to overcome it, but I must say at least for me, I've seen a lot of prices at the grocery store going way, way up in the last year. I'd say that in the last year and a half, the amount I pay for Milk has gone up 75%, OJ has gone up 25%, soft drinks about 20-25%, eggs 20%, and on and on. (OJ by the way is a unique one, as it went up when much of the CA crop was lost in a freeze). I mean, if nothing else, I certainly feel like I'm paying a lot more for many of the items I buy than I did a year ago.

[NorthSideSox72]

I'm a very good shopper so I've been able to overcome it, but I must say at least for me, I've seen a lot of prices at the grocery store going way, way up in the last year. I'd say that in the last year and a half, the amount I pay for Milk has gone up 75%, OJ has gone up 25%, soft drinks about 20-25%, eggs 20%, and on and on. (OJ by the way is a unique one, as it went up when much of the CA crop was lost in a freeze). I mean, if nothing else, I certainly feel like I'm paying a lot more for many of the items I buy than I did a year ago.

Thus, as I pointed out, corn derivatives. Milk is up mostly because of the rise in price of feed corn. That rise in price is at least partially due to the ethanol trend. We are again back to the fact that ethanol might be a nice bridge, but its not a viable long term solution. Soft drinks and eggs, same thing. Corn-driven.

 

[kapkomet]

Thus, as I pointed out, corn derivatives. Milk is up mostly because of the rise in price of feed corn. That rise in price is at least partially due to the ethanol trend. We are again back to the fact that ethanol might be a nice bridge, but its not a viable long term solution. Soft drinks and eggs, same thing. Corn-driven.

Maybe it's just where I am, but it seems like everything is going up in price, save electronics.

[Balta1701]

Thus, as I pointed out, corn derivatives. Milk is up mostly because of the rise in price of feed corn. That rise in price is at least partially due to the ethanol trend. We are again back to the fact that ethanol might be a nice bridge, but its not a viable long term solution. Soft drinks and eggs, same thing. Corn-driven.

But here's the one thing that bothers me about the people who only look at the "Core CPI", the part of it excluding energy and food...that's like 50-60% of my non-rent expenditures each month (and rent's been going up slowly also). The price of corn is going up in no small part because the price of oil is going up and the price of oil is going up in no small part because the dollar is in collapse mode. It's sometimes a useful exercise to look for inflation in the part outside the CPI, but right now, the part of the market that is going to be the hardest hit by inflation is the core part...energy and food, and there is not a soul in this country who won't be hit by that (it won't matter for some but it'll still hit them).

[NorthSideSox72]

But here's the one thing that bothers me about the people who only look at the "Core CPI", the part of it excluding energy and food...that's like 50-60% of my non-rent expenditures each month (and rent's been going up slowly also). The price of corn is going up in no small part because the price of oil is going up and the price of oil is going up in no small part because the dollar is in collapse mode. It's sometimes a useful exercise to look for inflation in the part outside the CPI, but right now, the part of the market that is going to be the hardest hit by inflation is the core part...energy and food, and there is not a soul in this country who won't be hit by that (it won't matter for some but it'll still hit them).

Oh I agree we will get some inflation, more so than the 1 to 2% we've seen since the early 90's. But I am thinking more like 3 or 4%, or even 5%. Not 10 or 12% craziness like the late 70's and early 80's.

 

[Balta1701]

Oh I agree we will get some inflation, more so than the 1 to 2% we've seen since the early 90's. But I am thinking more like 3 or 4%, or even 5%. Not 10 or 12% craziness like the late 70's and early 80's.

Oil has gone up what, 25% in the last couple months, from the $70's to $100? That's the kind of thing that eventually has to trickle through, and it's going to hit the products people buy. The question is going to be the scale of it, and I don't think anyone has a clue where the ceiling will be in that market right now.

[southsider2k5]

Thus, as I pointed out, corn derivatives. Milk is up mostly because of the rise in price of feed corn. That rise in price is at least partially due to the ethanol trend. We are again back to the fact that ethanol might be a nice bridge, but its not a viable long term solution. Soft drinks and eggs, same thing. Corn-driven.

 

Actually if you really want to look at it, we are in a general capital commodity based inflation right now. It isn't just energy stuff. Metals are at all time highs, energies are at all time highs, food stuffs are at multi-decade highs, lumber is at very high levels... These things touch everyday lives, so it is not like we are talking about a small portion of people or economy.

[Balta1701]

On a different subject, Bloomberg seems to have noted the connection between foreclosures and the bankruptcy bill.

Washington Mutual Inc. got what it wanted in 2005: A revised bankruptcy code that no longer lets people walk away from credit card bills.

 

The largest U.S. savings and loan didn't count on a housing recession. The new bankruptcy laws are helping drive foreclosures to a record as homeowners default on mortgages and struggle to pay credit card debts that might have been wiped out under the old code, said Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank.

 

``Be careful what you wish for,'' Westbrook said. ``They wanted to make sure that people kept paying their credit cards, and what they're getting is more foreclosures.''

 

Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. spent $25 million in 2004 and 2005 lobbying for a legislative agenda that included changes in bankruptcy laws to protect credit card profits, according to the Center for Responsive Politics, a non-partisan Washington group that tracks political donations.

 

The banks are still paying for that decision. The surge in foreclosures has cut the value of securities backed by mortgages and led to more than $40 billion of writedowns for U.S. financial institutions. It also reached to the top echelons of the financial services industry.

 

[NorthSideSox72]

Oil has gone up what, 25% in the last couple months, from the $70's to $100? That's the kind of thing that eventually has to trickle through, and it's going to hit the products people buy. The question is going to be the scale of it, and I don't think anyone has a clue where the ceiling will be in that market right now.

 

Actually if you really want to look at it, we are in a general capital commodity based inflation right now. It isn't just energy stuff. Metals are at all time highs, energies are at all time highs, food stuffs are at multi-decade highs, lumber is at very high levels... These things touch everyday lives, so it is not like we are talking about a small portion of people or economy.

 

I don't disagree that these are high impact areas. But I think maybe I should have noted that I don't believe that all these commodity prices will stay that high. I think agriculture, like any industry, will adjust. Animals will start being given more non-corn feed. Biofuel companies will push hard in other areas. The high price of corn will force alternatives. It doesn't happen right away of course, it takes time, especially in agriculture. But it will happen in 2008, and further in 2009. So I don't think all these prices stay as high.

 

And you are not looking at the demand side of the equation. People will start being more price-conscious than they have been in shopping for food. People will also pull back spending on travel and other areas, further reducing upward price movement.

 

I just don't see the dynamics here encouraging out of control inflation. I see it being a little high, 3 or 4% maybe with perhaps an occasional spike worse, but even those trends will only last a few years at worst (barring some new dynamics coming into play that I can't anticipate yet).

 

[kapkomet]

For me, as we continue to rape (yes, I mean that) "cheap labor" - which then escalates into out of control inflation whereever that cheap labor came from (Vietnam, China, Central America, Mexico, Brazil, etc.) - we put ourselves to the point where prices across the board MUST come up. The Walmarts of the world continue to drive prices down, and it works, but only for so long. Eventually, the pool of cheap labor will run out, rampant global inflation will run its course, and in the US, it will hit particularly hard. One of the reasons is because as you put it earlier today, Americans are spoiled rotten.

 

There's some things fighting against that (service based economy vs. much more manufacturing of old, lower dollar to push down foreign good prices, etc) but at some point, something has to give way. I understand that there will be less money available because of "credit tightening", but IMO the Fed wants to put inflation back out there. I have my own "conspiracy" reasons for that, but I digress.

[southsider2k5]

For me, as we continue to rape (yes, I mean that) "cheap labor" - which then escalates into out of control inflation whereever that cheap labor came from (Vietnam, China, Central America, Mexico, Brazil, etc.) - we put ourselves to the point where prices across the board MUST come up. The Walmarts of the world continue to drive prices down, and it works, but only for so long. Eventually, the pool of cheap labor will run out, rampant global inflation will run its course, and in the US, it will hit particularly hard. One of the reasons is because as you put it earlier today, Americans are spoiled rotten.

 

There's some things fighting against that (service based economy vs. much more manufacturing of old, lower dollar to push down foreign good prices, etc) but at some point, something has to give way. I understand that there will be less money available because of "credit tightening", but IMO the Fed wants to put inflation back out there. I have my own "conspiracy" reasons for that, but I digress.

 

BTW, just so I can say you heard it here first... When places like S and SE Asia start getting to expensive for labor, you will start to see a push into Africa, probably with in the next two decades. Its the last bastion of underutilized, cheap labor on the planet.

[kapkomet]

We talked about that quite a bit in one of my strategic management classes. You're right, it will happen, but there's a lot more issues in going into Africa then Asia. Europe has tried, and to this point, it really hasn't worked. I'll share more of the issues we came up with later.

[NorthSideSox72]

BTW, just so I can say you heard it here first... When places like S and SE Asia start getting to expensive for labor, you will start to see a push into Africa, probably with in the next two decades. Its the last bastion of underutilized, cheap labor on the planet.

In my last job, as you know, I managed some staff in India. Programmers. I'm quite familiar with this topic.

 

What you are discussing is already underway. Labor costs in India in technology, medicine and other areas is skyrocketing. They are so well trained and educated, and realize that they are good at what they do, and the demand for their labor is so high... salaries are going up like you wouldn't believe. And as salary pressures on those fields continue to keep wage growth neutral stateside, the cost gap of outsourcing diminishes. Plus, as companies emerge from the herd mentality-induced fog of "outsource! outsource! outsource!" and realize the performance cost differential, they suddenly see that outsourcing doesn't work so well in all areas all the time. This forces one of two paths - bring the labor back home, or, outsource to the next sphere of influence. (and both things are happening, BTW)

 

Africa is one possibility. China, smartly, has been investing a ton into Africa already, so the US is already at a disadvantage. But there is another emerging market for cheap, educated labor - Russia. That is already being tapped by American interests. And outsourcing, unlike manufacturing, has much lower total risk profile. So here we go again.

 

Manufacturing is slightly different of course, but the same forces apply to some degree.

 

[kapkomet]

I personally like India contracting all of the CPA work and doing it over there. With some of the complexity of the stuff I'm dealing with here, good luck with that.

 

 

[southsider2k5]

In my last job, as you know, I managed some staff in India. Programmers. I'm quite familiar with this topic.

 

What you are discussing is already underway. Labor costs in India in technology, medicine and other areas is skyrocketing. They are so well trained and educated, and realize that they are good at what they do, and the demand for their labor is so high... salaries are going up like you wouldn't believe. And as salary pressures on those fields continue to keep wage growth neutral stateside, the cost gap of outsourcing diminishes. Plus, as companies emerge from the herd mentality-induced fog of "outsource! outsource! outsource!" and realize the performance cost differential, they suddenly see that outsourcing doesn't work so well in all areas all the time. This forces one of two paths - bring the labor back home, or, outsource to the next sphere of influence. (and both things are happening, BTW)

 

Africa is one possibility. China, smartly, has been investing a ton into Africa already, so the US is already at a disadvantage. But there is another emerging market for cheap, educated labor - Russia. That is already being tapped by American interests. And outsourcing, unlike manufacturing, has much lower total risk profile. So here we go again.

 

Manufacturing is slightly different of course, but the same forces apply to some degree.

 

Russia is an interesting place, I spent a lot of time in high school and college reading about it. The biggest reason they won't be a big player, besides the historical political hostilness and instability in general, is they don't have the population numbers needed to be that kind of a place. They don't have enough people to take care of themselves, let alone work for the rest of the world. Unless they throw open the doors to immigration, I don't see them happening.

[NorthSideSox72]

Russia is an interesting place, I spent a lot of time in high school and college reading about it. The biggest reason they won't be a big player, besides the historical political hostilness and instability in general, is they don't have the population numbers needed to be that kind of a place. They don't have enough people to take care of themselves, let alone work for the rest of the world. Unless they throw open the doors to immigration, I don't see them happening.

Actually, while they don't have nearly the numbers that, say, India and China have... Russia does have a quickly growing, educated middle class, specifically in the larger cities like Moscow and St. Petersburg. Some outsourcing in technology is already going there.

 

Speaking of India and China... Some companies in India who sell their outsource services are getting so much work, and are so hard-pressed for cheap labor, that they are double-outsourcing to China. And, interestingly enough, there have been some problems there because apparently Chinese workers sometimes refuse to work for an Indian firm. There is apparently some history there, probably over issues like Tibet and Burma.