The Fallacies of Cheap Labor

As I mentioned previously, I just got back from a trip to China. The trip was a tour sponsored by the business school, so as a part of this we got to visit a variety of companies, both Chinese and multi-national.

One of the most interesting visits was to Lenovo, the Chinese computer manufacturer who recently purchased IBM's PC division. They showed us around their new manufacturing facility, including a completely automated warehouse. The warehouse was stacked several floors up, and had aisles just wide enough to accomodate the tracks the robotic forklifts ran on, as they zipped back and forth to pick up the parts needed to fill orders for computers.

The most interesting part came with the explanation from our guide, that when the warehouse was built, they reduced the number of workers required from 100, to just 5. This is in China, the country that built the Great Wall with cheap labor, and has only added to its reputation since. But for them, the way to compete was still to become more efficient, to do more with less, smarter.

Another company that we visited, which will remain nameless, specialized in outsourcing certain data processing activities to China. They recruited a bunch of college graduates, because they needed people who could speak foreign languages, to sit in front of monitors and type in data all day. One of the managers grumbled to us that their only advantage, cheap labor, was being challenged, because wage rates were going up, and so other companies in lesser developed regions of China. The competition for skilled labor in their city was so great it was pushing up wages.

Even in China, you cannot fool with the laws of supply and demand.

Between which of those two companies will succeed, I will put my money on Lenovo.

The Chief in China

I haven't been posting much recently, one of the reasons being because I spent 2 weeks in China. It was a rather interesting trip. One of the reasons I decided to study Russian politics and history in college was because I found it complex, but they have nothing on the Chinese. How do you hope to understand a country with 1.3 billion people and a 5,000 year old culture, which simulataneously has a thriving capitalist entrepeneurial class, and a Communist dictatorship?

Going to China has also turned me into a bit of an environmentalist. I have no idea how they intend to host the Olympics next year, unless they shut down Beijing for 2 months. The smog was horrible. How ironic that they were exempted from the Kyoto Accords, given their air pollution was far beyond the worst nightmare of the Sierra Club types, not to mention the lack of sewage systems.

Here are some photographs I took. Hopefully a picture is worth a thousand words:

Mass Transportation in Beijing

The Reds are still there, and this was on a clear sunny afternoon

My artistic photo, at a kindergarten we visited in Beijing.

The Crash

Being in the Pacific Northwest we have been studying China a fair amount in B-school, so this is not that surprising:

Yesterday's plunge in stock prices around the world, including the steepest percentage decline in the Dow Jones Industrial Average in nearly four years, signals that investors may finally be re-evaluating their insatiable appetite for risky investments.

The catalyst was Tuesday's nearly 9% fall in stock prices in Shanghai, one of the hottest and most volatile markets in the world. That helped send U.S. stocks on a roller coaster that ended with the DJIA down 416.02 points, or 3.3%, to 12216.24.

While China has had phenomenal industrial growth over the last two decades, their financial and regulator systems are still rather backwards, so get ready for a rough ride. Many companies are poorly managed, and accounting systems tend to be rather... uh... loose. Hopefully things will shake themselves out over the next two decades, and not disrupt the world markets.

I am actually visiting China for a couple of weeks on a study tour, starting next week, including visiting the Shanghai Stock Exchange. Maybe I can get some tips?