Hello Russ, my two cents worth on China and bust, so as to minimize investor miscalculation on China and its effect on portfolio health.
I have considerable knowledge about Chinese companies (state-owned, collectives, domestic public/private, foreign private, sino-foreign joint ventures) gained from my work to bring companies to China, work out problems, divest of bad investments, and trade sourcing.
Together with some industry associations representatives in the US, we had gone through the gamut of China-based companies in the small/medium range in different geographies engaged in different specialties, the ones that constitute the bulk of China-based production and supply larger outfits that focus on assembly.
We had gone through the exercise of comparing US and China-based companies (of different ownership types in China) for raw material quality, source, cost, to labour skill, productivity, compensation, to machine tool sophistication, source, cost, to facility costs.
I feel, unless I am totally blind and stupid, that the majority of the factories in China do not sell their products at an aggregate accounting loss. The private and collective companies make a profit. The state companies either make a profit or are cleansed out of the system at a rapid rate, with the assets ending up in collectives (worker owned), less the social baggage, and then making a profit.
The driving reality is simply that the costs are lower in China by a huge margin.
For example, raw material, even when imported from the exact same source as where the US-based companies get them from, i.e. Swedish specialty tool steel, is costing less in Shenzhen than Chicago, simply because of the cost involved in the layers of handling between port and factory raw material inventory warehouse, and because the typical Chinese tool making shop is of a bigger scale than the typical US shop, with larger purchase orders.
The land and buildings cost less in China.
The engineers operating the latest CAD-CAM systems cost less than the US variety (USD 8-10k vs USD 100k, all in cost).
The mould-makers (USD 10k vs USD 150k) cost less, the gentle ladies that do the fine finishing of the moulds cost far less and is far more effective than that guy in Illinois with big hands and the impatient temper.
The machine tools are newer (imported from Germany/Japan) in the private shops than their US equivalents, and the machine tools are less expensive in the state-owned factories (they use domestically manufactured machine tools, and China is making more and more of improving quality).
The rapidly disappearing state-owned factories are freeing up more equipment everyday for the private entrepreneurs and collective of ex-employees to start out in private business.
Most Chinese domestic-market oriented domestic private manufacturing businesses cannot easily secure bank loans, they, unlike their US equivalent, must make do on equity, and on contract flow, and this approach forces them to be lean and very mean, but it also gives them great flexibility when the revenue rolls in, for new equipment and better service, to secure more customers.
The export oriented sino-foreign joint venture companies and domestic private contractors, accounting for perhaps another 25% of total China-based production are just like any company in any other country, except they have no financing troubles, legacy burden, lower costs, higher productivity, better quality, and less international marketing/sales/distribution headaches (just tapping into the existing parent organization’s network).
Et cetera, so on and so forth, ad infinitum, ad nauseam …
I think most media/academic comparisons of China vs Japan/Korea/Taiwan are false comparisons.
I direct you to my earlier read on China
Message 16172978 <<August 6th, 2001>>
Message 16178484 <<August 7th, 2001>>
… and while I think China will go through manias and bubbles, booms and busts, but I think it is more of the USA 1900s variety, with higher highs, because the continent sized economy is undergoing structural transformation and definitely not in a cyclical boom-bust steady-state churning.
And I do not believe the aggregate of China-based manufacturing is selling at a loss. They are selling at a low cost, and selling at thin margin.
In the inevitable eventuality of global recession/stagflation/debt implosion, China-based manufacturing will become even more important, because of its low cost, high quality, and further room to improve both, by the existing manufacturers expanding capacity inland and cutting out international middlemen.
Bottom line, the baby is growing rapidly, its appetite ferocious, and its learning capacity is not in doubt.
The next bust will be a period of growth, learning, and exercise for competition, as opposed to a time of terminal illness.
For investors, we should anticipate and look forward to the bust, as an all-clear signal to rush in, pile on, and party early.
Chugs, Jay
P.S. On cost vs profit Message 19377792 <<October 7th, 2003>> |
