China has lost its edge.
There was lots of skepticism about a piece in my March letter called “The Great Comeback No One Will Believe” about the revival of U.S. manufacturing as China loses its cost advantage. But I continue to find evidence that the piece was spot on.
I had a good talk with Scott Huff, a principal at Innovate International, which does product development work and contract manufacturing for several industries. Scott’s story is worth passing on because the arc of his career in the last 10 years tells the story better than any set of statistics.
Scott is a design engineer. He started going to China in the mid-1990s to do work for clients. Huff was living in Chicago at the time. Every year, the travel got heavier as more and more clients manufactured in China. “So in 2004, after spending three months in the country in two-week blocks in the first half of the year, I figured maybe I ought to just move here,” Scott recalled. “My wife is pretty adventurous. So we moved lock, stock and barrel to Shenzhen and started rebuilding the business there.”
There were tons of opportunities, and the business grew. Things went well. Then, last year, it started to change.
“In the middle of last year,” Scott said:
I realized it when I was getting price quotes for some injection-molded plastics. Chicago used to be a center of excellence for this, and it’s since been decimated by overseas competition. But there were a handful of the old hands that survived. They kept up with the technology and got very lean and efficient, using electric presses and things like that that reduce cycle times and labor.
Suddenly, prices from them weren’t that different from what you could get in China when you factored in transportation costs. It looked better and better as we took another big labor increase in China in the third quarter of last year. Of the last four out of five jobs I quoted for injection molding in the U.S. versus molding in China, the U.S. won. Most people don’t believe me when I tell them I’m getting better prices in the U.S. The first instinct people have, the paradigm that they’ve learned to live with, has been to bid work in China.
Your editor sympathizes with this. I’ve had a lot of people shake their head in disbelief and call me crazy when I tell them it is (sometimes) cheaper to manufacture in the U.S. now. But here you have a real-world tale from a man on the ground seeing this new trend unfold in real time.
“Things are getting expensive in China, pure and simple,” Scott told me. “Labor costs have gone up substantially in China. That’s not a mystery to anybody. The amount of labor available at any price for some jobs is just not there. If you want to polish a piece of stainless steel for the kitchen industry or tie rawhide pet treats, you’re going to have a tough time finding people. People have options. They’d rather put together an iPad now.”
Even though labor costs have surged, one could argue they have not kept pace with the cost of living. “Food prices in China are ridiculous,” Scott says. “It’s a hell of a lot cheaper to live in the United States than it is in China if you equalize people’s incomes. As a percentage of someone’s income, the chunk for food is a huge line item there. Land prices have been skyrocketing everywhere. Apartment prices are through the roof. It is cheaper to live in the U.S.”
Remarkable, isn’t it?
So business is just starting to move away from China. Manufacturers are seeking out cheaper markets in Southeast Asia. Scott has a new plant there already, in Cambodia. “Cambodia is small but in a good location,” Scott says. “Right in the middle of everything, really.”
His company is also moving business to the States. When I caught up with Scott, he was in Knoxville, Tenn. He is still a resident of Shenzhen, China. That’s where he officially lives. But his kids are going to school in Tennessee, and he is looking to build a business back in the States. It’s a complete reversal of what happened eight years ago.
“I don’t think anybody has any idea that’s happening,” I said.
“It’s sneaking up on people, but they’re going to realize it. The handfuls of survivors in the molding industry in the U.S. are busy as hell right now. It’s not just the plastics industry. Anybody that was left here with manufacturing intact is getting extremely busy.”
“So it seems there would be an opportunity in U.S. manufacturing,” I said. Scott agreed, with a caveat.
“There is an issue that we’re battling. The U.S. lost an entire generation of toolmakers. They’re just not there. The old Polish toolmakers I used to work with in Chicago have all retired, or if not, they are more gray-headed than I am. And there aren’t the apprentices ready to step in. You can’t find a good toolmaker in Chicago right now. It’s hard to come up with. And the skill set — you can’t just turn it on and off like a faucet.”
This is something people — especially political types — overlook. It’s not just a matter of bringing back the jobs. The skill set has to be there, and that takes time to build.
“Technology changes, too,” Scott added, “so it is extra hard to find someone who’s kept up with it all. You can still cherry-pick and pull out a tool in Asia and bring it to the U.S. You just have to figure out a way to maintain it without a toolmaker.”
“Wow,” I said, “that’s a complete reversal of what went on before where people would take machines from the U.S., disassemble them and ship them to China.”
“I was one of them,” Scott said. “Now I’m designing products from China and carrying them to Chicago for production. Touch base with me in a couple of months and I’ll let you know how it went.”
I said I would. In the meantime, we’ll continue to watch this story. China losing its once-formidable cost edge would have a sweeping impact on manufacturers everywhere. Stay tuned…
Chris Mayerfor The Daily Reckoning
Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents.
I guess they’ll soon be devaluing their currency some more, then…
I am seeing this first-hand here in Detroit. Auto suppliers & OEMs are very busy scrambling to hire experienced engineers mechanics and designers to meet the demand.
does that mean fuel prices could conceivably come down in respect to declining transportation.
Little by little, wages in the US are coming down to the Chinese level.
Trend? What trend? As the article indicated injection-molding prices, INCLUDING TRANSPORTATION, are lower. This is always true for things that have a lot of air in them. The real test is “how many of these products is the USA exporting?” I’ll tell you how many – close to zero. And what kind of parts are we talking about? Things like tires where the USA slapped on a big import duty to keep USA manufacturers “COMPETITIVE”. Anyone who invests money in this “trend” is headed to the poor house fast.
sure, domestic manufacturers get competative the instant they eliminate the worker altogether.
so whats the difference between losing the job to overseas competition or losing the job to automation?
and how does that job elimination provide for consumption in a consumer driven economy?
addle media strikes again.
People read blogs like this to get an edge in their investing or decision making. But when you introduce a new paradigm then they fight it. Interesting concepts and ideas. Thanks for something new to think about.
John: The US is one of the top 3 exporting countries…. so The US is a major exporter. The whole meme of “the US doesn’t make anything” is bunk. And when you subtract Oil from our trade deficit the numbers are substantially more sustainable.
If you have good supply chain management (lots of companies don’t) you could have reduced your labor cost differential from China and other east asian offshoring sites to next to zero. (and the transportation costs will put it on the end).
If you produce in China you get a double tax benefit (you get a double tax deduction on your chinese corporation which is half owned by the government… but I am sure they will do nothing improper by owning half your company).
The major benefit beside cost of labor (which is losing out as a benefit) and tax/regulatory policy (which is still major) is the size of their new labor force.
Until recently china was increasing the size of their laborforce by 69 million people a year. Or more then the total labor force of almost every other OECD nation (except the US… but don’t worry Obamanomics is working to change that).
You now have labor status issues (who wants to work in a cheap toy factory when you could work for Foxconn) and you have issues with the pushing of labor from rural china into developed china (basically the chinese government ran a scam where rural china became hellish and laborers moved legally and illegally to developed china to work). and you have prices rising. All of these things impact the cost of labor. Many Chinese firms are outsourcing the lowest skilled labor jobs to places like Vietnam.
as for “devaluing” their currency. If you take a look at the ludicrously sketchy public debt situation in china their currency may actually be over valued. (at a minimum their debt to gdp is at 96% minimum)
Also: China is in a worse position in the greying of the work force then we are. We will feel the effects first (and we are now) but we will also get out of it sooner. So Companies that are deciding on long term capital investments are moving away from china. And you will start to see changes in investments as some factories come back to the US to get access to our youth (relative to other countries of note ) boom
The price of gas at the pump keeps going down.
gas prices are cheaper then prices ON A BOAT
So those 500,000 jobs at FoxConn will soon be moving to America?
Ok, but then we get stories like this.
why is USA importing Chinese workers to build our bridges and roads?
Brian: Over time yes.
Delmar: Yeah but thats not the norm
Delmar: They built railroads across North America in the 19th Century.
Larry: Weren’t you on Cheers?
Scott: Nope just some one who has been studying the China bubble for some time
the tricks they use to make their economy look good are hillariously amazing (that no one has caught them yet)
The National Government cuts off funds to local governments in rural areas (requiring them to depend on their non existant tax base). Require them to pay for any commissars who show up in their province and their commissar like lifestyle. And then the rural governments get loans from the state owned banks (controled by the central banks) to have public works projects to paper over china. This creates economic pressures which drive young men into the more developed areas (where the money is) and to have them repatriate money back to the rural areas.
In developed areas of china the state owned banks give money to keep the legacy era communist enterprises up and running (which have now somewhere between 66%-50% of the workforce in China outside the government) afloat. The managers and local party bosses for the luckier communist enterprises form joint ventures with foreign companies and use their cut of the profits from the venture to pay off their loans as they work to phase employees into the hybrid corporations. Those that cannot just rack up the debt and the chinese government uses book keeping tricks to keep the debt off budget and hide it
Then the national Chinese government sets up projects to artifically inflate GDP to attract FDi from gullible foreign investors.
these are the three principle ways China has built up their economy
Its all those other things sneaking up on us I worry about. But then, what me worry?
None of this matters because the United States is BANKRUPT and it could have EVERY COMPETITIVE EDGE POSSIBLE and it STILL couldn’t dig itself out of the HOLE OF BANKRUPTCY it’s in. Mathematics is a cruel mistress.
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