Why Layoffs in the US are a Bad Thing for China

Tuesday, January 27, 2009 5:14

With the recent news that CAT, Home Depot, and others are laying off people by the thousands in the US, it is clear that the Ox has decided to enter the new year ass first.

Big U.S. companies announce massive job cuts and Home Depot to lay off 7,000 jobs were the headlines that awaited many this morning. Simply an extension of the news that followed the poor Chirstmas sales season, my initial response was that that this was big.  a big sign of bigger things yet to come, and a sign that China’s  economic situation was about to become much more precarious.

Simply put, unlike some of the retailers who closed earlier in the month (Circuit City, Linens & Things, & Restoration Hardware), these firms were leaders.  They had strong cash positions.

So, the first message was that the credit crunch was sapping cash reserves of even the biggest firms.. a bad sign for many American SMEs as well

however, soon after that line of thought, my attention changed to what these layoffs meant for China.  After all, I am in China and write about China… and it was here I am concerned.

For the Home Depot announcement in particular, there are a number of areas that I see this having the greatest impact in China.  If you go back to a post I wrote a Avoid the Middleman! INVEST in Your QC!!!, I spoke about my work in the construction tool industry.  It is an industry that I personally knew little of 5 years go, but as I worked to manufacture several SKUs of tools here for one client, it was clear that in there were areas of China that were seeing a huge boost from their capacity in this area….Shantou in particular… and now with Home Depot clearly struggling to keep their finances in order, and lay people off, I am quite sure that many of the factories that I once visited are now having to downsize their operations significantly.

Taking another angle, with the downturn reducing the need for kitchen hardware or furniture, firms like Expo and Restoration Hardware were hit hard. In China, that has reverberated back to China in several geographic regions along the coast that were focusing on wood furniture. In a visit several months back to one cabinet maker, their volume was off roughly 70%…

It is a situation that is only set to grow more difficult as larger firms fail, as their suppliers are put into tight financial options with a reduced market, and as their layoffs grow larger and more concentrated.

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7 Responses to “Why Layoffs in the US are a Bad Thing for China”

  1. Lisa Reisman says:

    January 27th, 2009 at 9:46 am

    Hi Richard. Good post. McKinsey just published an interesting piece looking at historical decline and recovery across industry sectors. I think the noteworthy parts relate to the “industrial” and “materials” sectors. From a downturn perspective, industrials have “lagged” the recession in 3 of the last 5 recessions. Unfortunately, they have also lagged the recovery. Materials on the other hand lagged the decline in earlier recessions but lead the the recovery in all recessions. What does this mean for China? My feeling is that from an industrial perspective, it will feel like a long dragged out recession. It may feel a little shorter on the materials side (e.g. copper, steel etc). There are also plenty of supply constraints for most metals categories which means any slight uptick in demand could mean prices (and activity) will go up quickly. For Chinese firms producing consumer goods, life may be a little easier in the shorter term than for industrial firms.

  2. anon says:

    January 27th, 2009 at 10:25 am

    i beg to differ that CAT had a “strong cash position”…they have 36 billion USD in debt and their equity market cap is merely 19 billion USD. CAT was a leveraged play on global expansion. but i agree with your notion that china is screwed.

  3. Rich says:

    January 27th, 2009 at 11:35 am

    Lisa,

    My perspective on materials and industrials is that we are headed for very choppy waters.. double that for the consumer side (see my Nokia post).

    If there is a picture coming out of all this it is simply that we were overbuilt… and it is going to take some time to really see improvements.

    Where some oasis may lie is in the infrastructural & health care sectors, but this will not come quick. sure, the money has been earmarked, but how long will it take for permits to be issues, drawing drawn up, feasibly studies conducted, etc…

    consumer side.. yeah.. Chinese people are not going to spend.. and the sooner we all accept that the better.

    R

  4. Rich says:

    January 27th, 2009 at 11:37 am

    anon.

    fair point about the debt. I only looked at the fact that they has a quarter billion in cash.

    This does support my greater point as CAT, without access to revolving credit, was unable to sustain itself.

    R

  5. Chicago Resident says:

    January 28th, 2009 at 10:10 pm

    Rich,

    However bad China gets, the US will be worse (in terms of GDP decline). Yes, the Chinese economy was too heavily based on exports to the US and Eurozone. It will take awhile and some pain to re-arrange that production structure. There is no way Chinese buying power can fill the void left by American spending. China is still too poor.

    Now, if the Chinese government can just get those damn land contracts going. What the Chinese really need now is cheaper and more accessible food. That way they don’t spend all day and all their wages on food. That is real wealth.

  6. Victor says:

    February 2nd, 2009 at 3:44 am

    Hey Rich, nice post. Some of the big ibank people are saying that inventory in the US will draw down by second half, so things will pick up some time in the second half. I trust your opinion way more though. Vic

  7. joseph says:

    January 12th, 2010 at 10:25 pm

    well people here is what i have to say .you want to get cheap products from china which is of poor quality.have you noticed the neighbouring country such as india?do you know the quality of it and the price?
    may be you people will be thinking its expensive ,and same as in china.infact its just the opposite.the price will be 1 to 2 dollar higher than chinese .yes 1 to 2 dollar .but you will get a good quality and non toxic goods …

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