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To: AC Flyer who wrote (13524)	1/16/2002 10:00:09 AM
From: Don Lloyd	Respond to of 74559

AC - Thanks, reasonable sounding opinions. One more fact. My primary Chinese supplier has just purchased a very expensive state-of-the-art machine tool, manufactured in Italy, that will give them a production capability that is second to none. Given that they are already winning on price, this will presumably increase production capacity and possibly help on quality and costs as well? Thanks, Don

To: AC Flyer who wrote (13524)	1/18/2002 7:32:53 PM
From: TobagoJack	Read Replies (1) \| Respond to of 74559

Hello AC Flyer, I read the proceedings on the BBR every day without fail, but I am not able to respond until the weekend because of time allocation. I have just returned from Beijing and Changsha. I followed the discussion on your business anecdotes and related matters with great interest. Your fasteners are somewhat familiar to me because my English Chinese Jewish brother and his Shanghai Chinese Moslem wife, based in Beijing, has operated a business since 1978 that sources mechanical gadgets and other gizmos in China for international markets (car jacks, pulleys, trolleys, pallets, moulds, boilers, …, ball point pens, etc) from ISO certified and lesser manufacturers. They also source proprietary parts for manufacturers (ball bearings, cutting tools, industrial cutting blades, etc). These everyday industrial items are apparently what USD millionaires are made of. Message 16905289 <<my cost for the finished product, landed in Boston, is less than the cost of the raw materials in the US. Also, it is becoming increasingly possible to find specialty fasteners in China for which it is possible to obtain premium pricing in the US. My prognosis is that over the next ten years the majority of US commodity industrial fastener manufacturers will be blown out of the water by Chinese product. And Europe? The only thing that will prevent European manufacturing from being submerged by the Chinese tsunami will be trade tariffs, which the socialists in Europe will implement>> Yup, all sounds about right, and no, I do not believe the tariff barrier will help Europe, because China will move up the value chain and export whole finished systems, as well as establish factories/assembly plants in South Africa and Europe to incorporate China exported parts. Chinese making German and South African based investments started a few years ago, on a small scale so far. On Don’s questions … Message 16905672 <<do you have an opinion as to their relative importance? (labor costs, tax circumstances, government subsidies, etc.) In particular, is the manufacture and supply of the fasteners and their pricing the result of something that approximates a true economic free market, or is it the result of a central planning bureaucrat effectively saying produce this and charge that? Does the process provide profits that can be re-invested, while paying real competitive prices for its production factors?>> … and your response … <<Jay would pick up the ball … >> … and I, now, taking my turn, pick up what you told me to … I believe the manufacture and supply of the fasteners and their pricing is the result of something that more approximates a true economic free market than not. There now is no central planning content in most if not all Chinese manufactured goods; there are still some elements of central planning in staple grains, health services and such, and even these are being reduced at alarmingly large steps. However, the peculiarities of China’s industrialization landscape (copycat investments quickly making other profitable businesses and industries not so profitable due to crowding) and the lack of central planning discipline in nationally sponsored infrastructure development are making certain commodities very cheap. Electricity is one item. Massively concentrated and proportioned hydro power industry investment is collapsing electricity price, enabling industries requiring power to benefit without outright government subsidies. The surging urbanization of rural population provides seemingly limitless and inexpensive labour to make more of everything. The learning curves are being traversed rapidly, with much know-how brought in by the international manufacturers themselves, from USA, Europe and Japan, and other know-how locally developed in the course of copying or innovating due to competive heat. USA 1920 is the picture. China is in a over-capacity situation for the whole gamut of low tech items and the commodities that go into them, and rapidly, in high tech fabs and assembly works. Over capacity built using printed paper humored by Greenskaput’s global easing makes the cost of capital irrelevant in capital investment decisions. So, interim summary, the politicians are making possible, through policy, the availability of market priced but inexpensive labour, energy, raw material, and capital, without the old Communist central planning, but with full aid of the old Capitalist free enterprise. Uncle Greenskaput and Reagan would feel very comfortable in China. Limiting our discussion to the specific case of steel fasteners, China is an absolute importer of steel, of the high quality varieties (and the price is at times more expensive than world price due to shortage, and others times less due to duming), much from Japan, some from Korea and Taiwan, and is in surplus of steel, of the low quality domestic strains. China imports a lot of the latest of German and Japanese steel making equipment, makes more steel, and due to rapid industrialization, imports even more high quality steel. In the meantime, low quality but useable steel gets sold out of dilapidated smelters depreciating away in township and newly privatized (collective ownership by the employees) enterprises on the basis of marginal cost but market pricing. Low priced domestic steel, coupled with cheap and abundant energy, used by relatively energetic, enterprising but lowly paid labour, turning out items that AC Flyer can sell out of his Boston business, in exchange for powerboats and Nasdaq chips. Magic works, and may we all count our blessings. <<Labor in China is very cheap (fact), though I suspect that in the major industrial centers it is not quite as cheap as we might think (assumption). This reduces the cost of Chinese products at every step of the value chain, from iron ore to finished industrial fastener>> correct, even the assumption. <<Labor is indirectly subsidized by factors that are peculiar to the hybrid communist/capitalist system in China. For example, I suspect that many Chinese workers still live in housing that is paid for in full or in part by the government (assumption)>> Yes and no, because the housing stock is being privatized at giveaway prices (USD 3-6k per 800 sqf apartment from the old dilapidated stock). <<Companies do not carry the indirect cost burden that American companies carry - e.g. payroll taxes, health insurance, OSHA compliance, etc. (assumption)>> Yes and no. Private companies and progressive companies do, and state-owned enterprises might, and if not, then carry other types of social costs such as nurseries, subsidiary businesses for staff families, hospitals and such. This latter type of companies are disappearing fast. Currently state-owned to collective/private owned businesses are around 50/50, and in certain coastal provinces, 5/95%. <<… idea as to whether the government does anything to directly subsidize exporters>> exporters still enjoy certain value-added tax rebates as in many parts of the world, including Europe. <<My primary Chinese supplier has just purchased a very expensive state-of-the-art machine tool, manufactured in Italy, that will give them a production capability that is second to none>> Sounds very familiar now, and they will ramp production with improved quality, and use existing assets to get into new but related products, because much of the existing stock of Chinese capital equipment are general purpose in nature and can be flexibly used for manufacture of other items, to be sold through the same channels and existing customers, often operated by surplus workers or their family members. WTO will make the imported steel less expensive in China, and the end-product more competitive again. Chugs, Jay

To: AC Flyer who wrote (13524)	1/31/2002 10:51:54 PM
From: TobagoJack	Read Replies (2) \| Respond to of 74559

Hi Mike, just as follow up, some subscription only stuff, just this once ... economist.com Steel in China Lovingly touched by Mao Jan 31st 2002 \| HONG KONG From The Economist print edition A huge steel market that offers little for its own producers THE world's two biggest consumers of steel, China and America, appear to have much in common. In both countries, steel mills have been going bust, making losses or, at best, meagre profits. And in both, the industry is asking for protectionism to buy time and consolidate. In one key respect, however, the two markets could not be more different, and it is the larger, China, that represents the best remaining hope for an industry suffering globally from sluggish growth and a capacity glut. Why? Because not only is China's demand for steel growing furiously, but its domestic industry is in such a shambles that it will not be able to supply the country's needs for years to come. In the two decades since China embarked on market reforms, its steel consumption has quadrupled. In 2000, China passed America as the world's largest market. But that is only the beginning, says Jonathan Woetzel of McKinsey in Shanghai. China still consumes only 92 kilograms per head each year—far less than other developing countries like Malaysia, which uses 450 kilograms per head. Even if that gap is only partly closed, Chinese demand should double during this decade. A boon for Chinese steel makers, then? Unlikely. Steel has always been a favourite with central planners, but Mao Zedong had a particular fetish for it. In the 1950s, millions of abjectly poor Chinese were encouraged to contribute their tools and other metal possessions to the smelters, so that China might “catch up” with developed countries in production. In the 1960s, Mao decided that each region was to be self-sufficient, and hence should have its own steel mill. Steel was the last sector to emerge from central planning, four years ago. Even today the industry, which employs 3m workers, remains in the clutches of party politics. The result of all this is three big problems. The first is fragmentation. China is dotted with 1,042 steel mills, 95% of which make losses. The second is thus inefficiency. The average Chinese worker made 41 tonnes of steel in 1999, according to Pitzi Lau, an analyst at Salomon Smith Barney; his counterpart at South Korea's POSCO (now the biggest steel maker in the world) made 1,362 tonnes. The third problem is that China's mills are good at pumping out lots of steel of the type that nobody wants. The government's intended solution for the first two problems is consolidation. Since the mills are state-owned, merging them is not difficult. Reaping the benefits from mergers, though, is tricky, since laying off all excess workers at once is impossible. The national champion, Baoshan, a product of several mergers, is barely profitable and remains a dwarf compared to steel makers in other countries. Solving the wrong-product problem is proving just as difficult. The central planners have left China well equipped to make the long steel bars used in buildings and railways. These are easy to make, but there is little money in them. More attractive is the market for the sophisticated sheets used in cars and computers. These products, however, require technology and skills that the Chinese never bothered to acquire. So China has to import them. So far, this has been good news mostly for the big steel exporters in Japan, South Korea and Taiwan, which together account for two-thirds of China's imports. As America's economy went into recession last year, and as the Bush administration began considering new tariffs to protect American steel makers, Asian giants such as POSCO and Japan's Nippon Steel absorbed some of the shock by diverting even more exports to mainland China. China's recent entry into the World Trade Organisation helps too. Membership commits China to phase out tariffs on most steel products by 2004, with half of those cuts due this year. This is good for China, which will be able to industrialise more cheaply. But it makes life more difficult for China's steel industry. The government now hopes that foreigners will not only export to China, but also invest in it. Some western steel makers, such as ThyssenKrupp, already have joint ventures in China, usually near the Chinese plants of customers from home, like Volkswagen. In time, this infusion of capital and knowledge may even turn one or two of China's steel makers into world heavyweights.