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Overheard and Observed in China: Part 1: The Economy

I just returned from a way-too-short and rapid trip to China. There are so many angles and facets to explore but for a Part 1, I thought I’d focus on some interesting economic dynamics in China that are highly interrelated with some equally interesting dynamics in the U.S. economy.

As context, note that the overarching paradox of trading with China from a U.S. standpoint is (a) we like China’s cheap costs but (b) we don’t like the trade gap. The burgeoning trade gap is particularly bothersome as the U.S. dollar continues to free fall in the international currency markets, which should make buying U.S. products more attractive than ever. But the trade deficet is going to be a side light and what U.S. businesses and consumers are really going to notice in the near and foreseeable future is that costs in China are on the raise and may increase at a more rapid pace. Here’s why:

1. We’re not the only ones that dislike a huge trade gap; for China’s economy to mature, more of its output needs to be consumed internally, not just by the export market. Toward that end, in the last ninety days Beijing has rescinded a substantial tax rebate (think subsidy) for factories and business that export their goods. That will no longer be part of the formula for quoting costs to U.S. companies that outsource to China.

2. The RMB (China’s currency) is up 20% against the U.S. dollar in the last 18 months. The renmimbi (“people’s currency”) is stronger across against many currencies on the international board, but with the ongoing storyline of a still declining U.S. dollar and its spending power, the bottom line result is higher costs.

3. New labor laws in China include new increases to the minimum wage and a sweeping worker reform act–no company can fire a worker once they sign a third employment contract–equals raising labor costs. On the second element, the reform act, one wonders if most Chinese laborers will now end up working for a new company every four years as many labor contracts are two year deals. Not even an almost limitless labor pool can hold back the simple reality that conditions for workers–from wages to safe working conditions to better factory-owned dormitories or private housing options–have improved and must continue to improve. Some have argued that with the reported 750 million unemployed workers this need not be the case. But what has changed is that people living a subsistance lifestyle in the great rural expanses of China are no longer willing to trade an open air work day for a factory work day that is still based on mere subsistance worker benefits.

4. Rising materials costs are happening across most industry categories, led by rocketing oil prices, but in my world, publishing, it comes as no surprise that the cost of paper keeps marching upward at a particularly steep grade. U.S. standards of “green” are much less stringent than those defined in Europe, but as that gap closes, costs will only continue to climb. Related but off topic: Bill Gates said that we tend to overestimate the impact of new technology over the next two years but underestimate its impact over the next five years (see Business at the Speed of Thought). I wonder: will there be a stampede to ebook readers in the next half decade?

5. When you add up nos. 1-4, not surprising but largely unnoticed in the business community, hundreds of Chinese factories are closing every month. Profit margins and Return on Investment (ROI) are so slim that the Chinese entrepreneurial class is looking for new and greener opportunities. Marching alongside the issue of ROI , the first true generation of entrepreneurs in China is hitting retirement age and the heirs don’t want to run factories–or in some cases can’t afford to run existing operations–so they’re selling off equipment and boarding up buildings. Some argue that this is simple Economic Darwinism and is a positive case of natural selection with inefficient operations falling by the wayside. Perhaps; but it should not come as a shock that as once or emerging third world economies develop, they no longer take on environmentally toxic projects with no questions asked.

Two questions that I predict will become more acute for U.S. (and world) companies that do manufacturing in China in the days ahead will be: are we anticipating and ready for continued rising costs? and are the vendors we are currently relying on going to be in business for the foreseeable future?
Stay tuned for Part 2 of things I observed and overheard in China …

What to Do When You Don’t Know What to Do

how do I make the best decision when I'm not sure what to do?

What do YOU do when you don’t know what to do?

What do you do when you don’t know what to do?

The great philosopher and baseball player, Yogi Berra, described this state of indecision and gave sage advice when he said, “when you come to a fork in the road, take it.”

Not knowing what to do can take various forms, including:

  • two or more great options – yes, theoretically we love having choices, but in real life, more menu items to select from is not necessarily easier.
  • two or more terrible options – this is the scenario that begat the phrase, “jumping from the frying pan into the fire.” If you’ve burned yourself on a frying pan, you know why the guy jumped.
  • confused by the facts – ETFs, ETNs, IRAs, Roth IRAs, 401Ks – have you figured out the best retirement investment options for your golden years?
  • the future is unknown – duh! – of course we know that, but this variation of confused by facts still catches us by surprise and stymie our decision-making. This factor has also created the sport of second-guessing the stupidity of others based on our 20/20 hindsight. And as a publisher I can attest there are plenty of books that have been written by people who have caught lightning in a bottle and looked back and described in detail how they engineered their success – even if they had no clue what they were doing at the time.
  • conflicting feedback – I’m not sure if it’s scarier when the people I trust unanimously agree with what I want to do – or when it is a hung jury.
  • fear of failure – *spoiler alert* – aren’t you just a little suspicious of anyone that promises you a path or program that insures success – like a sure-fire way to pick the right stock every time? (If that was possible, why would someone that rich waste time selling a program to me?) If you are a perfectionist, decisions just got more than a little bit tougher.
  • decision fatigue – there are business dynamos that have no problem making million dollar decisions all day but have a blank stare and no ideas when asked where to go for dinner. Decisions take energy. If you’ve been working 12 hour days to finish up a project, it might not be the best time to rush out and buy a new car you can’t afford.

[Read more…]

Sales Continue to Drop for Print Books

Publisher’s Weekly just reported:

The total unit sales of print books sold through the outlets whose sales are captured by Nielsen BookScan dropped 10.2% in the six month period ended July 3, falling to 307.1 million. Among categories, the biggest decline came in adult fiction with units off 25.7%, while mass market paperback had the steepest decline among formats with units down 26.6% in the period. BookScan totals cover about 75% of the outlets where print books are sold.

Is this yet another signal that the book is dead or should at least be placed on the endangered species list?

As someone who makes a living in the book publishing industry I continue to maintain an optimistic position on the future of the book, in part, because I don’t define the book as a physical object.

I see no reason for hand wringing. Publishers need to keep their focus on what they can control and what matters most: great content. The distribution medium matters but is not paramount. The music industry fought Napster (rightfully) and electronic distribution (wrongly) for most of a decade – and lost control of its own packaging and pricing. I think the book publishing industry has maintained a much healthier point of view toward electronic formats from day one.

I like physical books – actually, love is the better word for it – but I’m not going to lose sleep if we sell more books as electronic editions and kill fewer trees in the process. One of the biggest benefits of selling e-books for publishers is fewer dollars tied up in paper and ink with all the inventory management issues surrounding that. The amount of time it takes to recoup a dollar of the investment that goes into publishing a book is long enough without making the irreversible commitment to a print quantity that may not dovetail with real demand.

Of course many publishers have long built financial models around a certain percentage of their unit sales coming from higher priced hard cover releases. As e-books continue to eat into the number of hardcovers sold, particularly with adult fiction, it changes the proforma dramatically, so I’m not saying this change makes things easier in all ways. Change is hard.

I’m strictly describing what I think is – not proscribing what should be. And no matter how strong Amazon is as a bookseller, I still hope the market will support a robust brick and mortar retail environment. (Borders might not agree that is possible – but we should know if their reorganization is Chapter 11 or Chapter 7 within days – or even hours.)

My personal prediction – more gut than numbers at this point – is that five years from now 35-40% of all books sold will be e-books (digitally distributed), which would mean the majority of books consumed would still be on the ink and paper medium. I also think that projection would leave space for a strong brick and mortar presence for at least Barnes and Noble and some exceptional independents that incorporate an e-book strategy into their overall sales mix.

“The reports of my death are greatly exaggerated,” said Mark Twain after hearing his obituary had been printed in the New York Journal.

The same can be said by and of the book.

Overheard and Observed in China: Part 3: Odds and Ends

Time to move on to topics I’m less ignorant on, but after one more quick glance at my pictures and journal from China, I thought I’d throw a few odds and ends for your consideration.

1. Just a few miles from Hong Kong, part of the same country but a full border crossing away, stands Shenzhen. A fishing port of 300 thousand, it was singled out by Deng Xiaoping in 1979 as China’s first Special Economic Zone. Since then, 30 billion (U.S.) has flowed into the city and the population has grown to more than 10 million residents–with commuters and “invisible” people” causing estimates to fluctuate up to as many as 15 million)–and still growing. It is the most densely populated area of China. And you thought overcrowding was a problem in your city?

2. The level of “deferentialism” extended to American and other foreign business visitors to China is almost overwhelming. It’s hard to carry your own briefcase from the car to the meeting area without a young lady who probably doesn’t weigh 90 pounds wanting to lug it for you. We all like to be treated with courtesy and respect–and much more so when we are in a new environment–but the amount of attention given to helping one with their every move can create feelings of guilt. I’m over the guilt, however, so I’m not complaining–just observing!

3. In Shanghai, I’m pretty sure there is a ratio of one billboard for every resident–and visitor. And maybe for each panda, too!

4. Speaking of billboards, I was surprised that most of the signage in Hong Kong depicted Western models. The rule of thumb in advertising is that you strive for cultural relevance. I do have one idea on why the city’s signage looked a lot like New York City’s. Since Brand America is still the icon of wealth and prosperity, ad agencies in Hong Kong have played the “aspirational” card to the hilt. Of course, if the U.S. dollar drops any further, there may be job openings for billboard hangers in the near future!

5. China has long been viewed as a homogeneous people, which has probably always been a myth. If you look a the under-20 fashion statements even on the Mainland, China is rapidly becoming a diverse country.

6. I had dinner at the Peninsula Hotel in Hong Kong. A fleet of about 15 Rolls Royce Silver Shadows are arrayed in front to whisk guests to shopping and tourist destinations. I still haven’t figured out why my company’s travel manager didn’t book me there.

7. I talked to several business people there and in route who have a very strong non-financial motivation to doing business in China. It goes like this. China is not open to Christian missionary work. China is very open to Christian business men and women (and teachers). Once in China, there is plenty of freedom for religious expression (more so for foreigners but increasingly for the entire population as long as the topic isn’t Thailand or Tibet) combined with a keen interest in people from other countries, with America at or near the top of the list. Who knows how many “tent makers” are doing a good work in sharing their faith in China.