Manufactured in the Middle Kingdom

Stocks were up some on Monday…after falling some more last Friday. All in, major indexes in the US are still sitting a few percentage points below where they began the year. That’s not too bad…until one considers that the modest move south comes after the largest, collective global stimulus program ever implemented.

Fellow reckoners are invited to make of that what they will.

Aside from the intra-day blips, month-to-month moves and year-to-date noise, there are larger, stronger undercurrents in these waters.

Right now, for example, the weary old world is witnessing the largest human migration in the species’ relatively short history. People are literally marching out of the provinces all around Asia in the hope of finding a better life for themselves in the continent’s swelling mega-cities.

According to People’s Daily, China’s official English language publication, the Middle Kingdom’s urbanization level is expected to exceed 50% during the next (12th) “5-year plan.”

“By 2009, China’s urban population has reached 622 million people,” the Daily reports, “and urbanization rate has been increased to over 46 percent by statistical counting.”

Statistics can read more or less whatever you want them to, of course, so they are to be taken with a grain of salt. Still, even “ballparking” the figures inspires some awe.

“For the next 10-15 years,” the paper continues, “China will still be in a rapid urbanization development stage, and the level of urbanization will increase average 0.8-1 percent every year.”

The effects of this massive urbanization, as with almost any trend of such magnitude, are mixed. On the one hand, the world’s most populous nation has managed to graduate some 350 million poverty-stricken people to the ranks of the middle class during the past decade. Not bad. On the other hand, she now hosts 15 of the 20-most polluted cities in the world. Not good.

Water flows downhill…birds fly south for the winter…and, whether by force of gravity of desire for a better environment, humans move to cities. For better and for worse, that seems to be the general trend of things. What is it all these people are seeking? Throngs of hard working peasants, fighting and scrapping their way out of abject poverty, are pushing hard for a better quality of life. In short, they want to be part of the “Made in China” success story.

Next year, the United States’ 110-year reign as the worlds leading manufacturer will come to an end. China’s manufacturing juggernaut, which exported around $1.7 trillion of factory-made gadgets and gee-gaws last year, will be the new number one.

Of course, all trends have surges and lulls, peaks and troughs. Already, the Middle Kingdom’s ubiquitous “made in” branding is beginning to be replaced by cheaper competition from her Asian neighbors.

Manufacturing wages across China rose an average of 14% over the past year. This relatively nascent trend has led some, including Alistair Thornton, an analyst with IHS Global Insight, to declare that China may have reached the “Lewis Turning Point.” Named after the British economist, Arthur Lewis, this is a kind of epochal moment in a developing nation’s pubescent stage, when it exhausts its supply of low-cost rural workers, which, in turn, puts upward pressure on wages.

The recent, high-profile case of Foxconn Technology Group – where strikes over working conditions after a spate of suicides led to a 70% increase in wages at the company’s South China plants – certainly supports the loose thesis that “Made in China” may already be under threat from the likes of Bangladesh, Sri Lanka, Viet Nam and other low cost producers. “Tools down” protests at Honda factories echo a similar sentiment, and already some high-end brands are actively seeking cheaper labor abroad. This, from today’s China Daily:

Two large US companies, Ann Taylor Stores, the women’s clothing retailer, and Coach, the luxury handbag maker, are poised to relocate production to countries where labor rates are cheaper.

Whether this is a turning point, as some suggest, remains to be seen. To be sure, China’s cheap labor pool is far from shallow. When Foxconn decided to relocate its controversial South China plants, the news sparked a bidding war among emerging “tier-2 and -3” cities around the country. Zhengzhou, in Henan province, Chengdu in Sichuan and Wuhan and Langfang in Hubei are all in contention to host the world’s largest contract for the electronic maker’s relocated factory. China Daily continues:

A company document acquired by China Daily shows that the Taiwan-headquartered firm, whose clients include Apple and Sony, will hire 100,000 workers from 18 cities by Sept 20. As of June, about 38,000 people had already joined.

As China’s manufacturing margins “thicken” due to the gradual increase in the cost of labor, jobs will indeed head overseas. But nobody in the countries buying those gadgets and gee-gaws is prepared to work for less than a Chinese factory worker. The Middle Kingdom may yet share some of its world-beating manufacturing windfall, in other words, but it won’t be with the west.

Joel Bowman
for The Daily Reckoning

The Daily Reckoning