Robin’s Blog

China Seeks Low-Cost Production copyIn the United States

Beware of what you wish for. For all of the “pollyannas” who have been rooting for manufacturing jobs returning to the good old USA from low-cost countries such as China, they may just be getting their wish; but not in the way they intended.  It will end badly.

In a perverse kind of irony, it appears that the United States may be evolving into a low-cost country, wooing China-based manufacturers to set up shop here — at least in the textile and yarn industries — which the US lost to Asia and the Far East in the 70s and 80s.

In fact, several Chinese yarn and textile manufacturing businesses have already moved to the United States, primarily in the southern states where the manufacturing skills still reside and where most of those textile jobs were lost to lower-cost countries. The region also has state and local governments eager to boost their economies and decrease unemployment, and willing to provide significant tax breaks, bonds to defray project costs, grants, and job-development credits.

One such yarn manufacturer, Shanghai-based Keer Group, recently invested $218 million to build a factory in North Carolina.  With energy costs lower than in China, and non-union labor costs low enough to be offset by the ability to ship yarn to manufacturers in Central America where finished garments can be sent back to the US duty free, the total cost for yarn production is now less in the US than in China. A kilogram of yarn spun in the US in 2003 cost $2.86 vs. $2.76 in China.  By 2010, the US cost was $3.45 per kilogram vs. $4.13 in China.

While this is just one small example in one industry, it’s a trend that is expected to continue.

And for those who would point to the fact that Chinese companies currently represent only a small percentage of total foreign direct investment in the US (and to provide context regarding how small the Keer Group event is), it merely added one more Chinese company in the greater Charlotte area, bringing the total number to roughly 23.  This is a fairly insignificant Chinese penetration compared to about 920 companies from around the rest of the world establishing a footprint in the same area.  German companies alone, account for 189 of the total.

My reason for “raising the flag,” so to speak, on China’s moves (pun intended), is that China represents the biggest and most obvious country that stole US jobs, particularly in the apparel/textile sectors, in the first place. And more significantly, it’s my opinion that as China’s economy and its culture continue such a rapid ascent up the “food chain,” and the country becomes more consumption-driven, it will accelerate its acquisition of resources and assets around the world, quickly outpacing all other countries, the US included.  And the “low hanging fruit” of the apparel/textile industry will likely be top priority for Chinese companies. So if you are looking for the light t the end of the tunnel to grow jobs in America, beware, because there’s a train picking up speed coming right at you, and it’s bearing a red flag with a bunch of stars.

Not a Good Thing

So getting manufacturing back to the US in this way is not a good thing.  It confirms that while some emerging countries, primarily China, are moving up the proverbial food chain at a very rapid pace, it also means the US may be pushed down the chain, as China either continues to acquire our assets or builds out their own on our soil.  Yes, the US will get manufacturing back, but those businesses will be owned by foreign companies. And while some of the profits will likely be invested in US expansion, higher wages, and more employment, a substantial amount will end up back in foreign economies.

Remember how we justified outsourcing low-wage manufacturing jobs, by declaring it would enable us to compete and grow at a higher value-adding level in the technology, science, and engineering sectors in an innovation culture? Sadly there are now indications from our global educational rankings that our youngsters are showing less competence and, indeed less interest, in those higher-level pursuits; plus there are signs that as China rapidly converts its manufacturing-driven economy to consumption-driven, it might just beat us to the top of the food chain.

As China literally pushes its economy to make this conversion, it is simultaneously ramping up the standard of living, and along with it, higher wages. Thus, its once lowest-cost manufacturing base is eroding and losing share to other lower-cost countries.  However, to offset these losses in certain industries, Chinese companies are either acquiring or building new manufacturing plants in the lower- cost countries, as well as acquiring existing companies around the world to fuel its rising consumer economy.

In the US alone, China invested about $14 billion in the food, energy and real estate sectors in 2013 (including about a $7 billion acquisition of the Smithfield food company), up from $1.3 billion in 2008.

Low-Hanging Fruit

Chinese textile, apparel, and footwear manufacturers currently supply upwards of 40% of those goods to the US. For Chinese companies getting squeezed by higher labor and energy costs, and losing business to other lower-cost countries, the US likely represents a fairly quick and easy opportunity for not only expanding their manufacturing businesses and maintaining growth, but it also provides them a foothold in the biggest marketplace in the world.

What this scenario suggests is that once the Chinese open their factories or acquire existing companies in the US, they can begin the process of integrating forward, ultimately owning and/or controlling every link in the value chain, including the most important link that connects with consumers: retailers and brands.  This will likely be a lengthy evolution, but it is a logical one.
It is also a win-win for Chinese manufacturers who succeed in vertically integrating and owning apparel and footwear brands and their US revenues.  They can export these brands to the rapidly growing Chinese consumer markets.  Eventually, depending on volume and growth, they may even open (or re-open), factories in China, where they may have to pay higher labor costs, but will achieve quicker and easier access to their burgeoning marketplace.

“Uncle Sam” Will Hasten the Selling of America

I predict US federal, state and local governments will hasten the sale of our economic assets. The first stage, in which Chinese factory development in the US increases employment and tax revenues, is a no-brainer and is already happening.  For example, the small investment made by Shanghai’s Keer Group was hailed by local and state political leaders as “just the beginning” (of putting people back to work, stuffing their tax coffers—and helping to get them re-elected). And of course, the perks given to this tiny company to locate in North Carolina will be viewed by some of the giant Chinese manufacturers with a magnifying glass, knowing those perks will be even greater to lure them to “come on down.”

As this first stage accelerates, happily bringing manufacturing jobs back to the US, and infusing capital into our economy, the foreign-owned manufacturers, with the same strategic intelligence and capitalistic instincts that got them here, will then move their vision downstream to the US consumer markets.  They say, “go for it.” And they do.

Globalization is a Two-Way Street

So is it really a bad ending if the process of increasing employment and boosting the economy also results in foreign ownership of many of our brands and retail assets? Not necessarily, if globalization means a level playing field for all competitors.

Many of our brands and retailers have been expanding internationally for years.  However, just as our government provides great incentives for foreign-owned companies to acquire or build businesses in the US, they should equally incentivize the global expansion of American companies. One glaring and ongoing issue is the corporate tax rate. At 39%, it is the second highest among the OECD countries (Japan at about 40%), which puts US companies at a competitive disadvantage. Additionally, it actually de-incentivizes companies for returning their foreign earnings back to the US for further investment. Think of the irony.  The same government that is paying foreign companies to buy our assets or build businesses in the US is penalizing American companies for aggressively competing globally.

Another issue has to do with the domestically regulated standards by which American companies must conduct business around the world.  For example, in Mexico it is an accepted practice to hire “consultants” to obtain required building permits. Yet, Walmart is currently under US investigation for possibly engaging in what Mexico views as an accepted way of doing business.

So the world is not the level playing field that globalization would suggest. It’s not as flat as perhaps author Thomas Friedman envisioned it.

But that’s not to say it shouldn’t be.  To that end, let’s start at home.  Let’s send our “teams” onto the global playing field with at least comparative advantages to our foreign competitors.

Otherwise we will end up being the hired hands, and not in the way we intended to bring jobs back to the US.

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