Wednesday, December 28, 2011

A Couple of PRChina Questions

Two articles of interest.

From the Small Biz Times:

One aspect of Chinese business competition that Western companies often fail to grasp is the razor thin margins many companies in China live on. A Chinese boss will tend to look at the amount of money that can be made as opposed to what it represents in terms of margin.

... The company that assembles iPhones in China works on a 1.8-percent margin. With projected sales of $37 billion for the fourth quarter of this year alone, 1.8 percent means a fairly hefty $666 million for just one quarter - a tough number to sneeze at, but one which would disappear in an instant, if there was a major manufacturing flaw.

Thin margins, like thin branches, cannot take much weight, and if there is a storm, it’s not the place to have your baby’s basket hanging from. Even minor issues can become life and death struggles for these companies. Cutting costs and expenses, especially on quality and materials, becomes the only way for them to claw back.

It doesn't take a Ph.D. in Financial Analysis to recognize the implications:  if there is a serious manufacturing problem requiring a product-recall/warranty repair, the PRC supplier ain't gonna cough up the cash.  He doesn't have it.

Still think that low supplier-pricing is a good deal?

From Manufacturing News/McMillion:

...well-financed efforts continue to deny and minimize the immense damage being done to United States and world production, jobs, wages and tax revenues by obsolete "free" trade practices in the face of China's muscular, highly successful protectionist and industrial policies. One of the loudest and most prominent "serious" current claims derives from the fact that traditional trade statistics do not capture the country of origin for all "value added" because it omits inputs from the global supply chains of component parts and services in almost all advanced products. This new argument is being used to make misleading and clearly false claims which, repeated unquestioningly by virtually all major media (see links at the end of this article) has led to the point where these claims are now "known" by those who believe themselves truly informed, including by some who should have learned by now to be more skeptical...

IOW, there's a lotta lying-with-numbers goin' on out there by ignoring the actual supply-chain in favor of a (far more selective) set of cherry-picked numbers.

...Worsening rapidly, U.S. ATP [Advanced Technology Products] goods deficits now exceed the total net foreign earnings on all Intellectual Property royalties and fees (including franchise fees) by all "U.S." incorporated companies, from Apple and Intel to Starbucks and McDonald's. Using a broader measure, the global U.S. trade deficit for all types of machinery and components (HS 84-85) -- from nuclear reactors and machine tools to all computers, mobile communications devices, semiconductors and the component parts thereof -- has soared to -$1.4 trillion since 2000 including a new record -$173 billion in 2010 alone.

The US' net foreign borrowings reflect this, as trade-deficits must be financed by borrowing.

...China's enormous full global current account trade surplus surged to as much as 11 percent of its GDP, with even more immense global surpluses in manufactured goods totaling $2.7 trillion. China's exports and imports of all types of machinery and components first achieved a global surplus only in 2004, and yet, since 2000 have achieved a global surplus of just over $1 trillion including a record $212 billion surplus for 2010 alone. Perhaps I should emphasize that, as with China's massive surpluses in total global trade, its stunning surpluses in machinery trade fully take into account all of China's imported components

So what?

...except for research showing the systematic undercounts of U.S. unit imports through unit over-pricing by the BLS -- thereby underestimating the real size and effects of U.S. trade losses -- there is no serious question about the overall value-added that is being lost in the United States and gained in China from global trade. Failing to emphasize this key global reality of gross imbalances leaves critics' claims, at best, extremely misleading.

IOW, the "Free Trade" gang ignores the total-supply-chain to fuzz the numbers--and BLS assists them with systematic over-pricing errors.

...critics [i.e., the FreeTraders] insist that U.S. losses to China are exaggerated because much of the value of China's exports comes from global supply chain imports from third countries to China. Curiously, I have not seen any critic even note that China is flooding Canada, Mexico and much of the rest of the Western Hemisphere with its component exports, which also are assembled into products that are then exported to the United States but are similarly not counted in bilateral U.S./China trade statistics.

What does that mean?  It means this:  FreeTraders ignore PRChinese exports to Canada and Mexico when counting the "value" of goods assembled in those countries.  So--as an example--if all the brake-assemblies of your car come from PRChina, but the car is assembled in Canada, the brake-assembly costs are counted as "Canadian origin"--not PRChina origin.

McMillion goes on to demolish an IPhone "study" which purports to show that PRChina has only about $6.50/unit in value-added (compare to its $180.00 retail price.)  The study could have been written by 6th-grade students, except that the 6th-graders would have been awarded an "F" for drawing conclusions with absolutely zero evidence.

Have we entrusted virtually our entire ATP and autos to a country where margins are incapable of sustaining warranties?

1 comment:

neomom said...

The short answer to your last question Dad is "Yes". Corporations - especially multinationals - still believe in the unicorn foo-foo that China will magically open up their "World's Largest Market" up to them if they us PRC companies to build their stuff. Reality is that PRC robs them blind of their IP and puts up trade barriers to their sales... In my previous role, I was Global Supply Chain Manager for a P&L. I was questioning why we were even trying to deal with China instead of working to expand in Latin America. But the Big Kahuna, loves China so...