The Politics Behind the RMB: Part 2

Wednesday, March 22, 2006 8:43
Posted in category The Big Picture
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Argument 1: Revaluing the RMB will stop American companies (and jobs) from moving abroad.. or at least to China  

Wrong!

The truth is that the RMB Aside there are dozens of reasons why manufacturers are looking to China (and other countries) to expand their operations and/ or relocate U.S. operations

Top 5:
1) Access to New Markets (For this exercise we will use China)
2) Movement of OEM/ ODM
3) Availability of low cost labor
4) Access to engineers
5) Wal-Mart

Access to new markets:
Gaining access to new markets is not a new phenomenon. Usually, the first two considerations of any expansion plan beyond ones home market are can I access new distribution channels and/ or will I have better access to raw materials.

In the case of China, there are 1.6 billion people who wear 3.2 billion shoes and buy more mobile phones than anywhere else in the world. So for companies looking to enter a new market and believe in the law of numbers, China is a no brainer.

Movement of OEM/ ODM:
The movement of OEM/ODM manufacturing bases has created a domino effect down the supply chain whereby tier 1,2 and 3 suppliers must either move to support new bases or try and compete by exporting from home markets to new markets.

With respect to the OEMs moving to China, supplying components is a short term strategy that will sustain business. However, for manufacturers who are producing simple components like stamped metals it is unsustainable. At some point, the manufacturers in the new market will gain access and replace the original supplier (first in China, and then worldwide). Examples of this can be seen in Xiamen near the Dell factory, in the auto industry, and most recently the medical equipment industry.

Availability of Low Cost Labor:
With an estimated 800 million people living in rural conditions, China has a labor pool more than 2x the population of the United States. Recently reported that labor costs are skyrocketing, and this is true. however, with over 100 cities with 1+ Million people in China, there is no shortage of low cost labor. In fact, due in large part to an improvement in logsitics and transportation, many manufacturers have already begun moving away from these cities to cities like Xi’an and Wuhan (please see 2nd Tier City Real Estate report for more….)

Access to Engineers:
The countries of China and India for year have been producing engineers in multiples of their Western counterparts. In the late 90’s this meant the immigration of engineers to support the Tech boom in Silicon Valley. However, since the bust in 2000 and the visa restrictions in the U.S., many of these engineers are choosing to stay in their home countries. This has in turn lead to companies expanding/ moving to new locations to ensure they have access to the talent they need to design and produce their products.

Wal-Mart:
Is Wal-Mart Good For America? was an excellent piece by PBS in which, for the first time, the effects of Wal-Mart (good and bad) were explored. With over 20% of the goods entering the United States from China headed to Wal-Mart stores, they are officially the 6th largest trading partner of China.

Note: The above is an oversimplification of the issues meant only to spark ideas and portray what we see here on the ground. Each of the topics above will surely be the focus of numerous studies.

 

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