Monday, September 08, 2008

China's Economic Prospects Dimming

Higher shipping costs from China to the developed world is making the "outsourcing model" developed a decade ago obsolete. Manufacturers are discovering that those high long-distance shipping costs are stripping away their profits.
With fuel prices at record highs, the cost of sending a standard 40-foot container of goods has gone from $3,000 in 2000 to about $8,000 today, squeezing profit.

So this summer Kazazian, chief executive of Exxel Outdoors, a Los Angeles-based maker of recreational equipment, did something radical: He moved the manufacturing back to Haleyville, Ala.

Soaring energy costs, the falling dollar and inflation are cutting into what U.S. manufacturers call the "China price"-- the 40 to 50 percent cost advantage once offered by Chinese producers.

The export model that has powered China and other Asian countries for three decades will be compromised if fuel prices continue to rise, said Stephen Jen, a managing director for Morgan Stanley.

"Globalization has gone a little bit too far. It has overshot," Jen said. "We're not saying Asia is going to crumble, but we are saying Asia enjoyed extraordinary conditions in the past. Now the conditions are changing very quickly because of the energy shock, and Asia is coming under pressure."

The ripple effects have been far-reaching. The trade imbalance between the United States and China -- a source of political tension for years -- is beginning to right itself as Chinese exports fall and U.S. exports rise. Global trade routes are being transformed, suggesting a possible return to a less integrated world economy.

The model of outsourcing to China emerged at a time when oil was going for $20 a barrel. In the past few months, oil has been trading at about $110, and many experts say it will eventually hit $200.

This has led some companies to move production from China to northern Mexico, next door to the U.S. market. But others have chosen to relocate inside the United States.

Midwestern steelmakers are doing booming business as steel exports from China to the United States slowed down by 38 percent in the first seven months of the year while U.S. steel production rose 10 percent. Manufacturers of furniture, electronic appliances and textiles are also among those shifting production back.

The most prominent company in the group might be Thomasville Furniture, which was criticized a few years ago for sending several thousand American jobs overseas. It announced in June that it was returning production of an entire line of upholstered and wood furniture to the United States. The company says it will add 100 jobs in North Carolina.

A lot of factors in the economic equation are bound to change between now and 2020. Looking back, we will understand why China's stratospheric dreams collapsed.



Blogger Snake Oil Baron said...

Could China focus on regional manufacturing instead of American markets and retain its cheap labour advantage by shutting down more of its state run industries, which I understand are still numerous despite previous privatization waves?

It will be interesting to see how factors like oil prices alter the focus of their development priorities.

4:47 PM  
Blogger al fin said...

China has not raised itself up, it has been raised up by outsiders from Europe, North America, Singapore, Taiwan, Hong Kong, Malaysia, Indonesia, Philippines, etc. China is nothing without outside markets, outside capital investments, outside technology transfer, and outside resources such as oil, coal, and uranium.

If China shuts down its corrupt state run industries too quickly, its stock market will tank, there will be devastating runs on banks and all financial institutions, and foreign capital might come with more strings attached.

7:24 PM  

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