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Doing Business With China From the Western Perspective

Changes on the way

By Heide B. Malhotra
Epoch Times Staff
Created: September 17, 2012 Last Updated: September 20, 2012
Related articles: Business » Economy & Trade
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The media has a field day when any juicy tidbit discussing outsourcing of U.S. jobs comes to light. Presidential candidate Mitt Romney was dragged through the wringer about investing in Bain Capital LLC, a firm that allegedly profited highly from investing in companies that outsource to countries such as China.

On the other hand, the media remains slightly hands off when it comes to reporting jobs returning from China and other countries or companies realizing that the promised profit from outsourcing didn’t materialize. 

“This whole move to China was driven by [large corporations]. They can set up plants in China, have full control of their workforce, and take full advantage of labor and material cost,” said Matthew Davidson, head of Wisconsin-based Xten Industries, in an article on the Inc. website, a site devoted to business issues. 

Outsourced Manufacturing Returning to U.S.

“With the weak dollar, the U.S. is actually a more attractive place to do business,” said Bill Strauss, chief economist at the Federal Reserve Bank of Chicago, as reported by Inc. 

Economic realities are slowly eroding China’s cost advantages, such as labor and transportation costs, making it more profitable to return manufacturing to the United States. 

Also, America’s spendthrift society is disappearing because of unemployment and reduction in earnings. Saving for a rainy day has become popular again, reducing the need to furnish the U.S. market with cheap goods from China.

“US households are now reeling under the chaotic pressures of post bubble financial wreckage, diverting their income towards paying down debt and replenishing their savings. … This unprecedented cutback of spending by American consumers has turned the tables on the dynamics of the U.S. economy inside out,” a Sept. 7 article on the Seeking Alpha website suggests. 

Companies returning production to the United States from China include Whirlpool Corp., which is now producing its KitchenAid hand mixers in Ohio. Starbucks negotiated and completed a deal with another Ohio company to make its coffee mugs. The Coleman Co. Inc. decided to produce its 16-quart wheeled plastic cooler in Wichita, Kan. Sleek Audio Inc. is now producing its high-end headphones in Florida.

Other firms that are bringing production back to the United States from China, for reasons such as the need for cost reduction and a reliable supply chain, include Peerless Industries Inc., Outdoor Greatroom Co., and Watts Water Technologies Inc.

Labor costs are rising by up to 20 percent in China with the net labor cost in the manufacturing sector being around the same amount in the United States as in China, so any cost benefit is eroding.

“Within the next five years, the United States is expected to experience a manufacturing renaissance as the wage gap with China shrinks and certain U.S. states become some of the cheapest locations for manufacturing in the developed world,” said Harold L. Sirkin, senior partner with the Boston Consulting Group Inc., in an August 2011 article on the Inbound Logistics website. 

Although China has become a less desirable location for producing products for the U.S. market, sourcing back to the United States is still in its infancy. There are still many locations other than China that appear to be better for manufacturing than in the United States.

“Products that require less human labor and are turned out in modest volumes, such as household appliances and construction equipment, are most likely to shift to U.S. production. Goods that are labor-intensive and produced in high volumes, such as textiles, apparel, and TVs, will likely continue to be made overseas,” according to the Inbound Logistics article. 

Outsourcing/Insourcing Cost Perspective

“In the first part of the rush to China, engineering and manufacturing leaders made outsourcing decisions based only on production and labor costs. Logistics wasn’t invited to the party. Companies thought they would save 50 percent, but ended up saving only 10 percent once they factored in all the supply chain variables,” said David Morgan, CEO of D.W. Morgan Co., as reported by Inbound Logistics. 

Companies forgot to include a slew of factors in the cost-benefit breakdown of moving offshore, including regulations, currency rates, stealing of trade secrets, inventory levels, quality, energy costs, time for turnaround, and currency rates.

Additionally, the dollar has depreciated against other currencies, making it cheaper to source from America. The hourly compensation rates have decreased by .01 cent in August over July, representing a monthly annualized growth rate of -0.51 percent, according to the Ycharts website. 

“Rapidly rising wages are making China and other labor markets less competitive with U.S. manufacturers,” according to a June article on the T. Rowe Price Investor website. 

Chinese Regime’s Stimulus Spending Misses the Mark

“The Results Are In: Chinese Stimulus Fails,” according to an Aug. 10 article on The Heritage Foundation website. 

Taking numbers from the Chinese regime’s National Bureau of Statistics, in 2008 the Chinese state’s stimulus plan provided 4 trillion yuan ($585 billion) over a two-year period and in 2009 another 9 million yuan ($1.3 trillion) to prop up its banking sector lending spree.

The Chinese regime’s stimulus package didn’t benefit the populace, but for infrastructure projects, including building the longest sea bridge, airports, and the high-speed railway, mostly state-approved projects. Besides, the funds only benefited state-owned enterprises, companies that were bureaucratic, corrupt, and not profit-oriented.

“But as the stimulus efforts show, the government [Chinese regime] primarily resorted to making state-owned enterprises bigger—and ended up making the lives of most people harder,” the Heritage Foundation article suggested. 

According to an Aug. 14 Seeking Alpha article, the Chinese regime’s stimulus has failed because the Chinese state controls spending behind the scenes, instead of market forces, and thus ignores productivity theory.

“Just look at the bubbles in China. The stimulus spending created their own version of the housing bubble which has really begun to burst in the last year, and now untold millions of people connected to the industry are finding their incomes grinding to a halt,” according to the article on the Seeking Alpha website. 

Another Perspective of the U.S.-China Trade Deficit

An Aug. 11 Seeking Alpha article states, “Even though the US, like any other trade-deficit country, could require balanced trade under WTO [World Trade Organization] rules, the Obama administration has let the Chinese government keep out American products through a wide variety of tariff and non-tariff barriers.” 

According to reports from market experts, due to trade barriers imposed by the Chinese state, U.S. producers are forced to produce products in China and more often than not must turn over propriety information. One case in point is that General Motors Co. had to turn over its latest electric battery and Cadillac technology to its partner, Chinese automaker SAIC Motor Corp. Ltd., for the right to sell electric and luxury cars in China.

 

“There have been frequent press reports about slower growth in Chinese exports, related to the global slowdown, but little notice of the much sharper decline in Chinese manufactured imports,” the Manufacturers Alliance for Productivity and Innovation pointed out in a recent article on its website. 

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