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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 Toward that end, in the last ninety days Beijing has rescinded a substantial tax rebate (think subsidy) for factories and business that export their goods.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.

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