Sunday, February 12, 2012

Capacity Focus, 34: The rising cost of "made in China" as an opportunity/challenge for industrial development and capacity building

On Feb 2nd, The Motley Fool investment analysts published an analysis of how rising labour costs in China are changing the balance of industrial competitiveness factors, based on a study by the legendary Boston Consultants Group:
In 2010, a Chinese worker could produce just 27% of what his/her American counterpart could for every hour worked. Not because Chinese workers are lazier, nor because American workers are a dialed-in group of high-efficiency automatons. No, American workers hold the advantage largely because of our head start on automation -- we've got better machines . . . . Rising wages in China further erode the advantages of setting up shop there . . . . 

[Now,] labor doesn't account for all of the costs of making a product. As the report's authors note, "Labor content ranges from only about 7 percent for products like video cameras to about 25 percent for a machined auto part." Therefore, since 2000, the tradeoffs for Chinese labor have been economically beneficial for global companies.

But while Chinese laborers are making steady gains in productivity, so too are their wages. BCG offers a succinct view: "Although we forecast that Chinese productivity growth will remain impressive ... output per worker will increase at only half the pace of the rise in wages." In other words, multinational corporations are going to be getting weaker and weaker returns on their investments in Chinese labor.
According to BCG the pattern over the past decade or so has been:

BCG (Fair Use): Chinese vs American workers -- Productivity vs Labour costs, 2000 - 2015 (estimate)
That looks and sounds rather familiar to us in the Caribbean: even with primitive techniques, once we are in a global era, sufficiently low labour costs can give a competitive edge. 

Chopping cane by machete was good enough to more or less keep our economies going for generations, but at the cost of having a large, impoverished, poorly educated peasantry. But, if we then have a rising expectation on wage rates social services and living conditions, we can price ourselves out of the market. 

That could of course open the door to someone who is even hungrier and willing to chop canes more cheaply. But, what happens if someone invents a sugar cane harvester that beats what a village full of cane choppers can do?

A Cane harvester in action -- notice how few people are needed (Source: Earth U [Costa Rica], fair use. Note the EU proposals to modify the harvester to make cane harvesting play a bigger role in a green energy future. Notice as well their note on how dangerous manual harvesting is, with Brazil suffering about 100 deaths per year 2002 -5.)
Especially, if our cane choppers and their children have an elementary school education only, or maybe the children have access to high schools and colleges that fit them to be clerks or teachers of academic subjects, but not to be an effective industrial workforce?

Of course, we can build hotels on our beaches and work as construction workers, room maids, cooks, gardeners, taxi drivers, waiters and porters.

But then, when oil prices shoot up, or a hurricane hits, or crime makes our destinations less attractive, we are right back in the problem.

Mottley Fool's argument is of course that US workers, especially in the relatively low cost semi-third world states, are again attractive. Attractive because they have sufficient education, sufficient productivity and the ability to work with high tech factories, that the market factors are re-balancing.

But, that points to Mexico and the Caribbean as well.

And, it highlights the desperate need to have sufficient education in the relevant technology fields that our people can work with factories and systems based on information, communication and controls technologies [Let's call that ICCT's], on a competitive basis.

So, we are right back to the need to find a way to teach computing for all, to teach interfacing, electronics and controls for all, and to exploit modular, low cost technological systems and approaches such as the Arduino or the Raspberry Pi that enhance our own firms and farms. We have to look at mechatronics and robotics. And more. 

Or, we lock ourselves out.

The message is clear: we need to rethink our education, our productivity systems, and our stance in the relevant markets. 

Sure, renewed and retargetted agriculture can be a part of the mix. 

Sure, we will continue to be competitive for now as a tourism destination. 

Sure, we are dipping our toes in the IT world. 

But, we dare not neglect the use of ICCTs in industry, commerce, institutions, and the farm. 

And our decision-makers and influencers have to open up their minds to this world, and decide that we must move ahead, or we will find ourselves locked out of the gateways to prosperity in the decades ahead.

Which also means we have to rethink and revamp our education and training systems.

For, much of what we need pivots on our building up the ability to be effective and productive with the world of technology. Where also, too much of what I am seeing shows a focus on tech as cool toys and entertainment gadgets. We are digital consumers, not digital producers.

In a digital age where Apple has rocketed to the top ranks of global firms by being the digital producer and purveyor to the digital consumer, that should get our attention, bigtime.

Let's lay out some numbers for Apple, as at Fri afternoon, Feb 10, 2012:
Share price: US$ 493.42 (and rising)
52 wk range: US$ 310.50 - 497.62
Price/Earnings: 14.04
Market Capitalisation: US$ 460.05 Billion
That's a lot of iPads, iPods, iPhones, iTunes, and iOS Apps!

Business Summary:
Apple Inc., together with subsidiaries, designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players; and sells related software, services, peripherals, networking solutions, and third-party digital content and applications worldwide. Its products and services include iPhone, iPad, Mac, iPod, Apple TV, the iOS and Mac OS X operating systems, iCloud, and various accessory and support offerings, as well as a range of consumer and professional software applications. The company sells its products and services to consumers, small and mid-sized business, education, enterprise, and government customers through its retail stores, online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers. In addition, it offers various third-party iPhone, iPad, Mac, and iPod compatible products, including application software, printers, storage devices, speakers, headphones, and other accessories and peripherals, through its online and retail stores; and digital content and applications through the iTunes Store, App Store, iBookstore, and Mac App Store. As of September 24, 2011, the company had 357 retail stores, including 245 stores in the United States and 112 stores internationally. Apple Inc. was founded in 1976 and is headquartered in Cupertino, California.
The message should be screaming from our headlines on our news-stands, and it should be saturating our news, talking heads shows and call-in programmes. Our educators and parents should be putting it at the head of every PTA meeting agenda.

That, by and large this just is not happening, or not sufficiently, is flipping a red flag warning on our being dangerously out of touch with crucial trends in our time.

Hence, again, of course, the significance of a digital age oriented technical side of the AACCS proposal for a regional cyber college and micro-campus centre based associate programme. 

But of course, the issues are much, much wider than that.

So, again: why not now, why not here, why not us? END