The coming rust-belt recovery

[Doctor Cynic]

So amidst all the doom and gloom, this article (from Canada, no less) reasons that the US recession might not be very hard as the cheap US$ makes manufactured products from midwestern industrial states competitive to the global economy. I wonder why it's so hard to find any silver lining...

http://www.theglobeandmail.com/servlet/story/RTGAM.20080125.wcoessay0126/BNStory/specialComment/home/

I liken the USA to a plane on autopilot: leave it alone, and it glides along. Even if you put a chimp in the cockpit, it will find its way back the minute after the passengers get fed up.

[Warren Stupidity]

1. Um, uh, what is the average hourly wage in China?

Which wage, by the way, is in Yuans, a currency that is basically pegged to the dollar. So it is pretty much bullshit to state that the declining dollar is going to return manufacturing to competitiveness against China, unless one also believes that wages here are going to reach parity with wages in China.

And the answer is:

"The average annual earnings for manufacturing workers in cities were $1,347 (11,152 yuan at the official exchange rate) for the year 2002. Manufacturing workers in the countryside averaged $837 (6,927 yuan) for the year. Urban manufacturing workers average 45.4 hours of work per week, "and it is...reasonable to assume that manufacturing workers average 50 hours of work per week in 2002," writes Banister."
http://www.manufacturingnews.com/news/06/0502/art1.html

Or something relatively close to that. It seems that China is not exactly a transparent society when it comes to labor statistics. The point is that when our $3,000/month lifestyle reaches parity one the way down to meet their $100/month lifestyle on the way up, manufacturing might return to our cities. But why? There are 10 Chinese workers to every one of ours. Their infrastucture is newer than ours. They have no unions. They have few restrictions on workplace safety or environmental impact.

[davekriss]

2. It's not that simple

There is the concept of "landed costs". It may take 1000 hours at $100/month to build a subassembly in a plant in Chenzen, but to that you have to add the shipping costs (with $90+ price for oil) and costs associated with a longer time to market (as the subassemblies loll across the Pacific Ocean at 20 knots cruising speed). You also have to add the Travel & living and opportunity costs of the management team shuttling back and forth from Chicago and St. Louis and Cleveland to their plants in Chenzen and elsewhere. The gap between the $100 in labor cost input compared to $3,000 input starts to narrow. Maybe a $2,000 wage in the U.S. compares favorably to a $100 wage in China after adding $2,500 in ancillary costs necessitated by the distance from the manufacturer to its market. Add to that and we might see a golden age in U.S. manufacturing again.

On the latter point, growth in the U.S. has slowed for some time; whereas developing markets in Asia-Pacific offer great opportunity. Just as it makes sense to manufacture in or near the U.S. if you're selling to the U.S., it also makes sense to manufacture in or near Asia-Pacific when that is your market.

[Warren Stupidity]

4. Maybe a $2,000 wage in the U.S. compares favorably to a $100 wage ?

Or maybe not. I think perhaps you did a PFA there. $2,500 in ancillary costs? Any evidence for that assertion at all?

My guess is that if the wage difference is more than a few hundred dollars manufacturing here is non-competitive. I don't think for one second that one has to have management teams constantly flying back and forth - why would that be required? You just hire people over there to do whatever management has to be done. This is essentially one time NRE. Shipping costs are not a major issue - obviously as we no longer have any manufacturing here. Even with fuel cost increases shipping costs are unlikely to become a major factor. Timeliness might be an issue for some items, which is why for example small high precision machine shops continue to be profitable here. But the OP is theorizing the revival of the rust belt - large scale heavy industry. It ain't going to happen.

[davekriss]

5. My team and I travel the globe all the time

It isn't a one time cost. Further, in my firms quest for best cost we move manufacturing facilities with some fluidity, so we might move from Chenzen or Shanghai further into the mainland where prices are cheaper, or move from China to Vietnam. The permuations are endless. Also, to truly be one global company, face-to-face leadership meetings are frequent. We're all executive platinum (top frequent fliers).

As for evidence of the ancillary costs, what do you think it costs to ship a 2,000 pound product from Chenzen, China, to a port like Los Angeles, and from there to it's final destination? Don't forget to factor the additional head-count needed to manage the complex logistics and support for the sophisticated information systems needed to make it all work. And there's more than that involved, too ($100 oil doesn't help). That $100 to $3000 difference in wages erodes fast -- the gap remains, but with a weakening dollar and falling wages it can close enough to make manufacturing here more profitable again.

Because of these costs, the firm I work for tends to manufacture close to market demand, so we manufacture within the U.S. much of the product to be sold in the U.S., and manufacture outside the U.S. product to be sold elsewhere. There is, however, lots of intercompany selling of specialty products that make up components of final assemblies, and that often means intercontinental shipping.

I'm hopping the run offshore has run its course (I mean I hope we've reached an equilibrium). However, we could do with a little regulation to tip the balance in favor of the American worker (in fact we can do with a lot of regulation!).

[A HERETIC I AM]

6. I'm very curious who you work for...

because it sounds very interesting.

Care to say so publicly? If not, I completely understand, what with the contempt many DU'rs have for all things "corporate".

You could PM me if you felt more comfortable to confidentially share that info. I find what you wrote fascinating.

I think one sector that will do very well this year is manufacturing for export. Caterpillar and John Deere tractors (just two examples in a massive sleeve) have gotten a LOT cheaper for overseas customers of late.

[davekriss]

7. Not comfortable saying (nt)

[amandabeech]

8. How much do environmental regulations enter into your economic calculation?

Or the availability of a reliable energy supply? I understand that China is having some problems with coal right now.

[bain_sidhe]

10. John Deere has another plus for it's balance sheet too

It's been investing, with farmers, in wind turbines. Now, I could wish that they'd branch into actually manufacturing the wind turbines (they're partnered with an Indian manufacturer right now), but the point is, they're getting some additional boost to their profit picture for what are essentially "micro loans" to farmers which finance the installation of wind turbines in, and between fields. It's all the talk of the Michigan farm belt (where my folks live), and certainly has some "brand loyalty" implications as well.

One local story: http://www.countrylines.com/rss/?rss_id=4

And some national coverage:http://money.cnn.com/2007/09/05/news/companies/deere_wind/index.htm

[ursi]

3. I guess one can hope that's true

[sendero]

9. In every boom...

... the seeds of a downturn are sown. In every downturn, the seeds for the next recovery.

Yes, there will be winners.

The real winner is going to be Americans/America deciding to try to live within their means.

[SlowDownFast]

11. Well said. n/t