PRC Economy - New Reflections : April 20 2015

member_23365 · Post by **member_23365** » 17 Aug 2015 23:43

Mahadevbhuji,
Didn't the last administration let everything to be imported from China and in turn destroyed manufacturing in India. We do need labor intensive factories in India to employ semi skilled workers.
I don't think relaxing imports further from China will help us in medium or long term. We need to build up capacity and should encourage local industries.

hanumadu · Post by **hanumadu** » 18 Aug 2015 04:22

Mahadevbhu is a troll. He keeps repeating the same arguments in spite of many people pointing him the fallacies in his argument.

nachiket · Post by **nachiket** » 18 Aug 2015 04:37

gakakkad wrote:i don't believe only 100 people died in Tianjin...I mean look at the freaking parking lot...is that pic real?

You mean this one? https://pbs.twimg.com/media/CMTO7KeUcAEE8bq.png

Don't think that is a parking lot. Those were newly built cars waiting to be exported.

TSJones · Post by **TSJones** » 18 Aug 2015 13:46

good discussion about Chinese economy.......

http://www.bloomberg.com/news/videos/20 ... cmpid=yhoo

hiring slowing down in China

ArmenT · Post by **ArmenT** » 18 Aug 2015 20:00

First rainfall since Tianjin explosion leaves city covered in mysterious white foam

The first rainfall to wash over Tianjin since a series of blasts struck a warehouse in the Binhai district last week has sparked a new wave of concern as an unidentified white foam has appeared on the streets.
Some who made contact with it are reporting a burning sensation on their face and lips, while others are reporting a stinging sensation on their arms. Some have said they experienced an itchy sensation, according to a NetEase News report.

TSJones · Post by **TSJones** » 20 Aug 2015 02:41

vietnam is devaluing its currency in response to china. I wonder who is next.....

http://finance.yahoo.com/news/vietnam-d ... 23457.html

Austin · Post by **Austin** » 20 Aug 2015 10:54

IMF Will Not Include Yuan in Reserve Currency Basket Until October 2016

somnath · Post by **somnath** » 20 Aug 2015 11:39

atamjeetsingh wrote:Mahadevbhuji,
Didn't the last administration let everything to be imported from China and in turn destroyed manufacturing in India. We do need labor intensive factories in India to employ semi skilled workers.
I don't think relaxing imports further from China will help us in medium or long term. We need to build up capacity and should encourage local industries.

The answers are not always simple and obvious. Cheaper Chinese electronic components help us assemble cheaper TV sets, enables mass scale TV penetration in the country. Cheaper Chinese mobiles are driving smartphone penetration (next month 50% of all mobile phones sold will be smartphones) - leading to all sorts of externalities like growth in mobile banking, ecommerce etc.

We can of course argue that we should be making the cheaper electronics and phones, but question is, can we? Just as its not easy or possible for M'sia to replicate a Bangalore in Putrajaya, its not easy to replicate a Guangdong in India.

At a theoretical level, we should concentrate on areas where we have a "comparative advantage" (not absolute, but comparative) - Ricardo et al. In real life, these decisions are a complex mix of political and economic factors.

NEt net, its no good to boycott Chinese goods, we should build up our own capacities and max the areas where we have an advantage.

vina · Post by **vina** » 20 Aug 2015 15:03

somnath wrote: The answers are not always simple and obvious. Cheaper Chinese electronic components help us assemble cheaper TV sets, enables mass scale TV penetration in the country. Cheaper Chinese mobiles are driving smartphone penetration (next month 50% of all mobile phones sold will be smartphones) - leading to all sorts of externalities like growth in mobile banking, ecommerce etc.

We can of course argue that we should be making the cheaper electronics and phones, but question is, can we? Just as its not easy or possible for M'sia to replicate a Bangalore in Putrajaya, its not easy to replicate a Guangdong in India.

At a theoretical level, we should concentrate on areas where we have a "comparative advantage" (not absolute, but comparative) - Ricardo et al. In real life, these decisions are a complex mix of political and economic factors.

NEt net, its no good to boycott Chinese goods, we should build up our own capacities and max the areas where we have an advantage.

Welcome back ji. Was missing all the super comprehension for a loooooong time. However, this kind of answer would do the JNU ding-dongs of the Prabhat Patnaik kind with his wonky models that work perfectly in some alternate make believe universe. Of course you would protest that you quoted Ricardo onree, who would be simply verboten to the the JNU ding-dongs.

Trouble is that Ricardo style of free market too makes assumptions on free exchanges of goods and services and basic free markets. Here reality is that you are dealing with a command and control economy that follows a mercantilist trade policy that relies on the openness of other markets to skew terms of trade. So applying Ricardo mamu to this real world of Chinese Commie mercantilism is as crazy as the JNU ding dongs pushing their alternate reality models on us poor dhoti clad folks.

TSJones · Post by **TSJones** » 20 Aug 2015 18:24

China has no intention of letting "comparative advantage" work. It is not in their lexicon. If they don't how, they'll steal it. Everybody owes them for gun powder anyway, to their mode of thinking.

The only thing in the long run they want to import are raw commodities.

That's the reason why the let the "market determine the value of the yuan" is an inside joke.

It's all managed. No market to it.

hanumadu · Post by **hanumadu** » 20 Aug 2015 19:13

somnath wrote: We can of course argue that we should be making the cheaper electronics and phones, but question is, can we?

What's the big deal? The primary differentiating factor is cheap labour and we have plenty of it. The rest like land, electricity, water can be made available with a pro active govt. Anyway, we import most of our electronics. The new govt policy is net zero import in electronics.

http://www.livemint.com/Industry/j6Pvas ... de-de.html

New Delhi: India’s trade deficit in November jumped to an 18-month high of $16.86 billion and the geek in you, Constant Reader, needs to partly share the blame.

India imported $31 billion worth of electronic items in 2013-14; $10.9 billion of this was accounted for by phones.

India imports 65% of its current demand for electronic products. If the situation is left unchanged, the country’s electronics import bill may well surpass its oil import expenses by 2020.

While the demand for electronics hardware in India is projected to increase to $400 billion by 2020, the estimated domestic production could rise to $104 billion only, creating a gap of $296 billion, which has to be met through imports, according to a report by Deloitte Touche Tohmatsu India Pvt. Ltd.

Electronic items are the third most valued category of imports after petroleum products and gold. While India’s fascination for the yellow metal is well-established and the government, from time to time, imposes restrictions on it, at least part of this gold is re-exported in the form of jewellery. For example, gold imports in November was at $5.6 billion, while gems and jewellery exports during the same month was $3.7 billion. That is not the case with electronic items.

India imports most of its electronic equipment, including smartphones, from China. According to the commerce ministry data, import of phones has grown from $665.47 million in 2003-04 to $10.9 billion in 2013-14. And most of it comes from China. Import of phones from China has grown from a paltry $64.61 million to $7 billion during the same period.

India’s trade deficit with its northern neighbour was $36 billion in 2013-14, and just telephone sets contribute one-fifth of it.

The real jump in import of phones from China started in 2008-09 when import of phones almost tripled to $4.9 billion from $1.8 billion the previous year.

What happened that year?

Google’s Open Handset Alliance launched its Android phones.

somnath · Post by **somnath** » 21 Aug 2015 09:01

TSJones wrote:China has no intention of letting "comparative advantage" work. It is not in their lexicon. If they don't how, they'll steal it. Everybody owes them for gun powder anyway, to their mode of thinking.

The only thing in the long run they want to import are raw commodities.

That's the reason why the let the "market determine the value of the yuan" is an inside joke.

It's all managed. No market to it.

No one "lets" anything work. Global trade (large parts of it) operates on pretty standard rules now, thanks to WTO. In order to circumvent, sovereigns have two levers: One is currency, whcih is what is used by everyone to its best interest. The other one are trade pacts and treaties, that are longer term affairs.

Singha · Post by **Singha** » 21 Aug 2015 09:07

the core of modern smartphones are a single board with all integrated peripherals and CPU usually by mediatek and broadcom. I think both make it in taiwan. the rest of it battery, optical module(usually sony for the good ones), plastic case, the touchscreen, uSD card are sourced from korea, japan, taiwan perhaps malaysia, thailand, singapore.

we should be able to establish local manufacturing at scale for the "rest of it" part above. even chinese smartphones import the main board I think from mediatek taiwan. once assembly ops at large scale begins it becomes convenient for the parts suppliers to also cluster together and start local ops. Elcoteq came to sriperumbudur when nokia started ops.

as the 2nd largest smartphone market in the world , with high nos of up-buying also , we are in a sweet spot if play cards right to wring concessions.

vina · Post by **vina** » 21 Aug 2015 10:56

Yes.. The Chinese model for electronics manufacturing is large scale import of component / local manufacture of components in a cluster based on foreign IP, usually by foreign companies, all feeding into a giant foxconn type assembly shop, and the PRC supplying the manpower from the interior, herded into huge dorms and all centralised etc.

However for this to work, there should be absolutely free and frictionless movement of goods and services into the SEZs/ Factories from within China and from outside and the ability to export easily. This is where the Chinese scored big by building out great infra (ports, roads, rail, power etc) and jawboned any opposition and cleared out all the thickets that might impede that.

While here, we are fighting over how much land to acquire, how will labor laws be, who will invest in ports , what about railways etc. That is the strength of the command and control system. Once you decide on an architecture (like in an Engg /IT-vity project), you can ramrod the rest of the stuff in and jawbone any opposition and execute.

In India with it's democratic system, it would be difficult to even articulate such a vision (think Commies screaming labor vs capital and labor laws and "imperialism" etc), much alone implement it.

Singha · Post by **Singha** » 21 Aug 2015 11:06

i believe most of the parts used in global electronics industry, as well as finished goods moves by air cargo. high value goods with low volume and weight. machinery for the factories ofcourse need to come by road, and reliable power and taxation/paperwork/good local roads is a must as you said.

there are organized gangs of thieves at major hubs like LAX that are able to target high value shipments of electro-optical goods (like say lenses or memories or cpus) and steal them.

amit · Post by **amit** » 21 Aug 2015 12:05

Here's one of my favourite charts. Even though it's a bit dated I have no reason to believe anything has substantially changed with regard to the manufacture of the iPhones

The reason why folks like Foxconn and others are abandoning China or at least looking at other countries is that when the value add is so small even a minor increase in salaries skews profits exponentially. The only reason why companies are still sticking to China is because, as Singha mentioned, the great infrastructure and pliant labour laws.

As India moves towards a manufacturing based economy by welcoming the Foxconns of the world, perhaps it's time to think if we want to be another China with minimal value add to the end product or do we want to be like Japan or Korea?

somnath · Post by **somnath** » 21 Aug 2015 12:30

amit wrote:The reason why folks like Foxconn and others are abandoning China or at least looking at other countries is that when the value add is so small even a minor increase in salaries skews profits exponentially. The only reason why companies are still sticking to China is because, as Singha mentioned, the great infrastructure and pliant labour laws.

Actually, Foxconn isnt "abandoning" China. For the scale that Foxconn has, it needs 3 things

1. Large trained labour pool (it employs something like 1 million people in China).
2. Large land parcels to set up factories and associated townships to house labour
3. General infrastructure, specifically power and roads.

The fact is that the first two are nearly impossible to find in most EMs - Vietnam, Bangladesh. India could be the only alternate game in town, that is why they are exploring.

Further, issue around labour isnt just the wages, but productivity. Study after study shows that Chinese labour productivities are much higher than India (and many of the other east Asian countries). Small increases in salaries are hence not that sensitive on operating leverage terms.

Foxconn isnt going to be able to make do without China, not in the next few years anyways. In their explorations in India, the general impression is that they have been taken in by the govt sales pitch (not a bad thing, per se). But their expectations are pretty high - so we will see.

Obviously one of the reasons why CNY was devalued was to get some protection for Chinese manufactures. Makes sense as well, as China is a large net exporter. The equation isnt all that clear for India, as we are a large net importer - hence devaluation of ccy hurts domestic consumer and industry.

amit · Post by **amit** » 21 Aug 2015 12:51

Somnath,

There are two types of productivity. You can have high productivity because you pay low wages, give minimum or no benefits (like for example medical) and you make your workers work long hours. There is plenty of documentary evidence of how Foxconn workers - at least in earlier years - didn't even get toilet breaks except for scheduled ones. The irony of it all is that this happened in a Communist haven which is supposed to be a worker's paradise.

You can also have higher productivity due to skill sets and innovation of the workers which drive productivity. That's why German productivity is AFAIK the highest in the world and much higher than the Chinese despite the huge gap in wages and the number of hours worked per week.

My reckoning is that as the Chinese get richer the newer generation are revolting against such working conditions.

This is what the Wall Street Journal has to say about this:

China’s productivity is slipping away, the miracle days are largely over and the best way for Beijing to slow its slide into “the middle-income trap” is through meaningful structural reform, two reports argue, a process that has so far remained largely in the slow lane.

China’s economy, once described as miraculous, is now struggling with rapid wage increases and a declining number of new workers, so productivity gains increasingly must come from structural reform, automation, greater company efficiency and innovation, the reports say.

Also:

China’s 1% average annual growth in total factor productivity between 1978 and 2012 – a period when average per capita annual incomes rose from $2,000 to $8,000 — compares with 4% annual gains for Japan during its comparable 1950-1970 high-growth period, 3% for Taiwan from 1966-1990 and 2% for South Korea from 1966-1990, he said, when purchasing power in the relative economies is taken into account.

The point is that China's productivity myth is a function of brutal labour laws, low wages and slave like working conditions.

In India none is this is replicable which is why we need to set up a strategy of how we want to approach this manufacturing boom that is likely to happen.

Foxconn will of course need China but I'm thinking that the Taiwanese company may try a different strategy in India. It produces a lot of stuff in the electronics supply chain and some intermediary stuff which potential higher value add than final assembly may be done in India. Of course some assembly will be done here but it will be mainly for the domestic market. India will never replace China as a global final assembly hub for electronics.

Singha · Post by **Singha** » 21 Aug 2015 13:24

foxconn has a surprising number of plants in EU and NA.

looking at the report below, for a smallish investment tasks like the below could easily be automated. far more complex tasks like precisely cutting metals in 3d and soldering chips to boards are done routinely.

http://tumblr.thefjp.org/post/314004549 ... -5-facorty
http://www.thewire.com/technology/2012/ ... ted/56769/

An iPhone 5 back-plate run through in front of me almost every 3 seconds. I have to pickup the back-plate and marked 4 position points using the oil-based paint pen and put it back on the running belt swiftly within 3 seconds with no errors. After such repeat action for several hours, I have terrible neckache and muscle pain on my arm. A new worker who sat opposite of me gone exhausted and laid down for a short while. The supervisor has noticed him and punished him by asking him to stand at one corner for 10 minutes like the old school days. We worked non-stop from midnight to the next morning 6 a.m but were still asked to keep on working as the production line is based on running belt and no one is allowed to stop. I’m so starving and fully exhausted.

Suraj · Post by **Suraj** » 21 Aug 2015 13:45

TSJones wrote:China has no intention of letting "comparative advantage" work. It is not in their lexicon. If they don't how, they'll steal it. Everybody owes them for gun powder anyway, to their mode of thinking.

The only thing in the long run they want to import are raw commodities.

That's the reason why the let the "market determine the value of the yuan" is an inside joke.

It's all managed. No market to it.

What they are doing applies to everyone at their phase of growth . You don't patiently wait for others to gently let you in. You force your way in. There was a time when the U.S. did everything necessary to obtain technology, including as war booty.

Rules are made when someone gets powerful enough and ends to preserve that status who to benefit their standing in the system . Those rules will be broken by the upstarts who decide those rules don't help them grow fast enough . I support China doing what it's doing, and I encourage India to do more of it too. If anything, we have also been gaming the system, but not as well as they have.

Suraj · Post by **Suraj** » 21 Aug 2015 13:53

somnath wrote:Further, issue around labour isnt just the wages, but productivity. Study after study shows that Chinese labour productivities are much higher than India (and many of the other east Asian countries). Small increases in salaries are hence not that sensitive on operating leverage terms.

I'm not sure I'd agree with this entirely . In general yes productivity in China is probably higher, partly due to some things artificially depressing costs - ability to hire/fire, run continuous work shifts for men and women, no unionization, etc. however, treating Foxconn as a best in class investor , the one comparison we have - the Nokia Chennai plant - was extremely productive . In fact, it was much more so than Nokia originally projected, and generated billions in excess production and exports over what it was originally set up for . With supportive MH government backing , there's no reason why Foxconn Navi Mumbai cannot generate productivity comparable to Dongguan . They will have easy access to JNPT and the current and new Mumbai airports too.

somnath · Post by **somnath** » 21 Aug 2015 14:13

amit wrote:There are two types of productivity. You can have high productivity because you pay low wages, give minimum or no benefits (like for example medical) and you make your workers work long hours. There is plenty of documentary evidence of how Foxconn workers - at least in earlier years - didn't even get toilet breaks except for scheduled ones. The irony of it all is that this happened in a Communist haven which is supposed to be a worker's paradise

Amit, this is one of the enduring myths of Chinese miracle, ie, workers are put through "slave labour" conditions. This might be partially true, but like everything else is more stereotyping than reality (a bit like honour killings in India - it happens sometimes , but isnt a characteristic of Indian society).

Chinese min stat wages are ~5 times India's
http://www.ilo.org/ilostat/faces/help_h ... odk1fjo_46

Its obvious that Chinese TFRs would slow down eventually as they reach middle income levels. But that doesnt mean that an average chinese worker is less productive than the average Indian worker. quite to the contrary. Just as the average German worker is far more productive than the average Chinese worker.

What makes us attractive is numbers, and our relative poverty. We have large numbers of (trainable) people, and @ very low wage rates. Germany has neither - hence for low value-added manufacturing we become a game in town as an alternate to China.

Suraj wrote:I'm not sure I'd agree with this entirely . In general yes productivity in China is probably higher, partly due to some things artificially depressing costs - ability to hire/fire, run continuous work shifts for men and women, no unionization, etc. however, treating Foxconn as a best in class investor , the one comparison we have - the Nokia Chennai plant - was extremely productive . In fact, it was much more so than Nokia originally projected, and generated billions in excess production and exports over what it was originally set up for . With supportive MH government backing , there's no reason why Foxconn Navi Mumbai cannot generate productivity comparable to Dongguan . They will have easy access to JNPT and the current and new Mumbai airports too.

Again, some of the above we should be doing, isnt it - like hire and fire? some of the rest, like work shifts etc, are there but the issues are hardly of the scale that WSJ would have us believe. Remember, even Maruti workers alleged pretty much the same things of the company in India, very recently. And remember, Chinese workers get paid (and have a qualiy of life) much superior to India's.

The Nokia plant is symptomatic of what all can go wrong with companies in general. Nokia kept up its bets on low priced feature phones even when Android was taking over the market with low cost smartphones. The reason why the plant worked for as long as it did was Nokia's bet on continuation of feature phones - Indian players like Micromax beat them (basically shut the business down!) by importing from China! Plus, this is symptomatic of all that can go wrong in India, like tax policies.

Not to say Foxconn cannot succeed, but its a long way away for us to think we would be as good as China in this area.

Singha · Post by **Singha** » 21 Aug 2015 14:31

micromaxx/karbonn/lava must be shitting bricks now. without the ability to produce their own designs, and with likes of lenovo and xiaomi coiling up to start assembly here, with far deeper engineering resources and back ends.

that might explain their newfound love to also start factories in india! while they were happy importing everything in the past.

amit · Post by **amit** » 21 Aug 2015 14:36

somnath wrote:
amit wrote:There are two types of productivity. You can have high productivity because you pay low wages, give minimum or no benefits (like for example medical) and you make your workers work long hours. There is plenty of documentary evidence of how Foxconn workers - at least in earlier years - didn't even get toilet breaks except for scheduled ones. The irony of it all is that this happened in a Communist haven which is supposed to be a worker's paradise
Amit, this is one of the enduring myths of Chinese miracle, ie, workers are put through "slave labour" conditions. This might be partially true, but like everything else is more stereotyping than reality (a bit like honour killings in India - it happens sometimes , but isnt a characteristic of Indian society).

Chinese min stat wages are ~5 times India's
http://www.ilo.org/ilostat/faces/help_h ... odk1fjo_46

Its obvious that Chinese TFRs would slow down eventually as they reach middle income levels. But that doesnt mean that an average chinese worker is less productive than the average Indian worker. quite to the contrary. Just as the average German worker is far more productive than the average Chinese worker.

What makes us attractive is numbers, and our relative poverty. We have large numbers of (trainable) people, and @ very low wage rates. Germany has neither - hence for low value-added manufacturing we become a game in town as an alternate to China.

Somnath I would have expected that you'd understand that the 5 times more wages than India is not that simple a calculation.

Let's take your data. According to the ILO chart in 2013 Indian minimum wage was Rs2,990 while the Chinese minimum wage was 1,400 yuan. Doing a simple currency conversion you get 290 yuan as being the minimum wage for Indian workers. So far so good.

But there are other factors that need to be put into the calculation to get a better picture. For example medical and other fringe benefits are unknowns as is the average work hours per week. We don't know the wage per hour of Chinese and Indian workers.

However, more importantly according to this site,

Consumer Prices in China are 88.29% higher than in India
Consumer Prices Including Rent in China are 121.65% higher than in India
Rent Prices in China are 268.01% higher than in India
Restaurant Prices in China are 100.25% higher than in India
Groceries Prices in China are 86.15% higher than in India
Local Purchasing Power in China is 9.03% lower than in India

So it's not a straightforward calculation as you can see. At the end of the day I would reckon that the real purchasing power as well as the savings power of the Indian minimum wage earner is not much different from that of the average Chinese minimum wage earner. And this despite the fact that the Chinese economy is 4-5 times the size of the Indian economy.

Regarding the working conditions, all I can say is that there is too much anecdotal evidence out there to deny the plight of the Chinese unskilled workers.

Suraj · Post by **Suraj** » 21 Aug 2015 14:52

The failure of Nokias plant has very little to do with what India provided it , or did not, and mostly to do with Nokias own business strategies.

Singha · Post by **Singha** » 21 Aug 2015 15:01

visitors to china also confirm the prices of high quality american brands like say fischer price toys, iphones, xiaomis, nike shoes or generally any MNC stuff is similar to india...despite being made in china in many instances!! so MNCs are not cutting their profit margin there. i have seen a business school case study that said a typical nike $90 shoes has around $5 of labour salary component and only around $20 in real cost to nike adding other things.

their middle and rich class is larger, so these things sell more there ofcourse.

just as in india or SFO, there are certain cities with a lot of high end jobs, but very costly to live in. for typical white collar job family paying home EMI+car expenses+kid(s), two incomes are needed.

overall almost none of the very low production cost in manufactured goods or presumably housing (since they produce mountains of cement and steel) is being passed on to the consumer . at the very low end one might find really cheap shaky stuff, such stuff is also imported into india and sold by traders. this is used by blue collar workers, rural poor.

only the business owning, entrepreneur class and those with ties to the CCP are making out like bandits, with audis and bmws galore.

costs of certain things like cancer tablets are 3X that of india as they are not price controlled I think. chinese visitors and workers in india tend to buy such stuff for relatives here if needed. they are expensive even in india...so 3X is pretty unaffordable.

Austin · Post by **Austin** » 21 Aug 2015 15:06

Biggest slowdown in Chinese manufacturing in 6yrs

somnath · Post by **somnath** » 21 Aug 2015 15:13

amit wrote:Somnath I would have expected that you'd understand that the 5 times more wages than India is not that simple a calculation.

Let's take your data. According to the ILO chart in 2013 Indian minimum wage was Rs2,990 while the Chinese minimum wage was 1,400 yuan. Doing a simple currency conversion you get 290 yuan as being the minimum wage for Indian workers. So far so good.

Of course, life isnt simple! At a topline level, using CNYINR of ~10, the min wage rate in China is INR 14k. You can also look at other development indicators as a proxy for well being (life expectancy, IMR etc). In general, the Chinese numbers would be far superior to ours.

In terms of PPP deflators, of course China with a higher level of income will have a lower PPP deflator to USD than India. But thats ~2 times. In other words, the Macdonalds burger is ~2 times more expensive in nominal terms in China than in India. Even then, the chinese chap with 5 times more wage rate is better off.

Anyways, the issue isnt one of quibbling around the numbers. The fact is that in terms of overall manufacturing ecosystem, we have a really long way to go to match, or even somewhat rival China.

Singha wrote:micromaxx/karbonn/lava must be shitting bricks now. without the ability to produce their own designs, and with likes of lenovo and xiaomi coiling up to start assembly here, with far deeper engineering resources and back ends.

that might explain their newfound love to also start factories in india! while they were happy importing everything in the past.

Not really - Alibaba is in talks to Micromax for a massive equity infusion in the company. They wont be doing so if the investee was "shitting bricks". There are advantages of manufacturing mobiles in India - large domestic market, tax incentives and of course a large labour/land resource. But lets see how long it takes!

A_Gupta · Post by **A_Gupta** » 21 Aug 2015 15:26

amit wrote: So it's not a straightforward calculation as you can see. At the end of the day I would reckon that the real purchasing power as well as the savings power of the Indian minimum wage earner is not much different from that of the average Chinese minimum wage earner. And this despite the fact that the Chinese economy is 4-5 times the size of the Indian economy.

I thought that was the whole point of PPP (purchasing power parity), on which China is $13,216 per capita and India is $5833 per capita (2014, World Bank).

Of course, even that is difficult: https://en.wikipedia.org/wiki/Purchasing_power_parity

Anyway, there are all these consultants who both point out that Indian manufacturing productivity needs to go up dramatically, but also point out that it is feasible.
http://www.mckinsey.com/insights/operat ... ing_sector

Arjun · Post by **Arjun** » 21 Aug 2015 16:13

Foxconn’s India Move will Ripple through Supply Chain

Also, the outsourcing waves of the 1990s skipped over India and many of the top global EMS companies ignored India in the rush to establish production facilities in China. Even a few of the Asian Tiger nations benefitted more from the Western OEMs’ outsourcing of production than India, according to observers.

That’s set to change. With labor costs rising sharply in China and amidst continuing concerns about the need to diversify production, even companies like Foxconn that have extensive facilities in the country are beginning to rethink their strategy. Manufacturers are questioningly once-solid assumptions about China and appear more inclined to take actions that could result in a steady shift of production activities from the country to other locations.

Factors on the minds of executives at OEMs, contract manufacturers and designers include the diversification of production to reduce systemic risks that can result from economic and geopolitical developments. They are also concerned about rising wages in China, dangers to intellectual property, logistics and transportation hurdles that could negatively impact time-to-market and recent actions by the Chinese government throttling demand for Western products in favor of local enterprises.

China may have also been tripped up by its own overwhelming success. The country accounts for a disproportionate portion of global electronics production and assembly activities and currently accounts for more than one quarter of worldwide semiconductor demand, according to the Semiconductor Industry Association (SIA). While figures for other electronic components are not readily available it can be easily surmised that China is also the key destination for other parts, including interconnects, passives and electromechanicals. That trend will remain for the foreseeable future.

India would seem like the next natural spot for global production. It has a large, highly-educated population and has been taking steps to make itself better suited to the production demands of global companies. Those actions, which include judicial reforms and a better climate for business registration, management and liberalization of components importation rules and regulations, have dragged on for years but appear to be speeding up under Prime Minister Narendra Modi.

India will not replace China immediately in the electronics supply chain but it will provide an alternative that could make its economically bigger rival review its own competitiveness. That can only be good for manufacturers and, by extension, consumers too.

ArmenT · Post by **ArmenT** » 21 Aug 2015 20:25

The biggest strength of Chinese manufacturing is their supply and transport ecosystem. This is what is going to take years to replicate anywhere else. For instance, they have reliable and cheap sources of electricity, even though it comes from coal burning power plants. Also, they have thousands of subcontractors close to the manufacturing areas, that are able to deliver the bits and bobs that go with manufacturing anything. For instance, if I was to manufacture (say) a portable mp3 player, it isn't just the workers in an assembly line factory that I need, but I also need suppliers for the various electronic parts, a plastic manufacturer to make the plastic bodies of the player, a leather manufacturer for the leather cases, a paper manufacturer for the packaging box, a printer for printing out the packaging and instructions etc. The Chinese have gradually built up an ecosystem where all this can be sourced from various subcontractors, no matter what the size of the buyer is (i.e.) anyone from the size of Apple to mom and pop business that only needs 1000 mp3 players.

amit · Post by **amit** » 22 Aug 2015 06:24

somnath wrote: Of course, life isnt simple! At a topline level, using CNYINR of ~10, the min wage rate in China is INR 14k. You can also look at other development indicators as a proxy for well being (life expectancy, IMR etc). In general, the Chinese numbers would be far superior to ours.

In terms of PPP deflators, of course China with a higher level of income will have a lower PPP deflator to USD than India. But thats ~2 times. In other words, the Macdonalds burger is ~2 times more expensive in nominal terms in China than in India. Even then, the chinese chap with 5 times more wage rate is better off.

Anyways, the issue isnt one of quibbling around the numbers. The fact is that in terms of overall manufacturing ecosystem, we have a really long way to go to match, or even somewhat rival China.

Somnath,

It's not my intention to propose the hypothesis that somehow Indian workers are more productive than the Chinese workers. However, I do question the premise that the Chinese workers are super duper productive. The empirical evidence I've seen shows that Chinese productivity is a function of low wages, minimum benefits and long work hours in very bad conditions. It is not due to innovation.

This is one of the reasons that even a slight wage increase scares Foxconn and others into looking for alternative places for production.

But yes the Chinese advantage is not just in labour, it's in the supply chain ecosystem in the electronics sector. They have managed to build up a supply chain that can almost rival the Japanese and that immediately puts them at an advantage in terms location.

Not all of it good. If we go back to the iPhone example, a lot of toxic materials go into its production. See here for reference.

Now interestingly while China contributes so little value add to the iPhone (see the chart I posted earlier) it produces ALL the toxic materials that go into the manufacture of the phone. For example this report notes:

Violations found at Catcher Suqian included the following:

•Significant amounts of aluminum-magnesium alloy shreddings on the floor and dust particles in the air (this dust is both flammable and combustible). Lack of proper ventilation poses a health and fire safety risk

•Inadequate personal protective equipment (PPE) for handling toxic materials, such as metal cutting fluids. Skin is exposed directly to these toxins and there are no ventilator masks

•Locked safety exits. There is no means of rapid egress if there is a fire or explosion.

•Workers have not participated in fire drills in the past year

•A lack of safety training for workers

• Dumping of industrial fluids and waste into groundwater and nearby rivers

•Many student workers (16-18 years old) are employed in the same positions as adults, 10+ hour days

•Excessive hours for all workers, including student interns

•Forced overtime. Workers are not allowed to turn down requests they work overtime An estimated 6 hours of unpaid overtime per worker per month (Roughly $290,000 in owed wages for all employees)

•Hiring discrimination based on age and presence of tattoos

•A grievance process that retaliates against workers for raising valid workplace issues

Or look at this report:

It could be argued that China’s dominance of the rare earth market is less about geology and far more about the country’s willingness to take an environmental hit that other nations shy away from.

The point is that even if we get the labour part right, building the ecosystem and supply chain that makes it possible to produce millions of iPhones (or Samsung Galaxy phones) in China will be very difficult to build in India. I would argue it's not even worth the effort to try and do so.

We should aim to be more like Korea, Japan and even Germany in terms of manufacturing. The hit we have to take in order to become a duplicate China - a low cost, no concern for environment or workers dystopian worker's paradise - will not work in a democracy.

amit · Post by **amit** » 22 Aug 2015 06:30

A_Gupta wrote:I thought that was the whole point of PPP (purchasing power parity), on which China is $13,216 per capita and India is $5833 per capita (2014, World Bank).

I think we are a talking about two different things. One of the reasons for high GDP growth in China (whether in US$ terms or PPP) is government spending, particularly on infrastructure projects.

Now PPP is a good measure as it takes out exchange rate out of picture and so gives a better measure of comparative prosperity of two nations based on purchasing power.

But here we are talking about minimum wage and the purchasing power of the minimum wage earners in both countries. It is possible for China to have a high PPP per capita while at the bottom end the minimum wage earner makes a pittance. Since per capita, whichever way you measure it, gives you a gross average it does not reflect that actual situation at various strata of society.

Anyway, there are all these consultants who both point out that Indian manufacturing productivity needs to go up dramatically, but also point out that it is feasible.
http://www.mckinsey.com/insights/operat ... ing_sector

I'm also quite hopeful about a manufacturing boom/increased productivity in India. But it will have to be a Indian model not a Chinese model transplanted into India. That is simply not possible in a pluralistic democracy like ours.

ashashi · Post by **ashashi** » 22 Aug 2015 06:33

China’s Monumental Ponzi: Here’s How It Unravels
http://davidstockmanscontracorner.com/c ... -unravels/

somnath · Post by **somnath** » 22 Aug 2015 07:48

amit wrote:Somnath,

It's not my intention to propose the hypothesis that somehow Indian workers are more productive than the Chinese workers. However, I do question the premise that the Chinese workers are super duper productive. The empirical evidence I've seen shows that Chinese productivity is a function of low wages, minimum benefits and long work hours in very bad conditions. It is not due to innovation.

Ill tell you the problem with this hypothesis. It assumes that somehow high productivity can be flogged out of human beings, despite the impact of physical stress, poverty etc. Just doesnt pass basic smell tests.

Juxtapose that with all available research, Chinese TFRs in industry outpace India by large margins. (situation is better in services, where we are better - and that is refelcetd in the headline economic numbers).
http://www.brookings.edu/~/media/resear ... sworth.pdf

Further add in to the equation vastly superior education and health stats for Chinese citizens, and the axiom of large armies of slave labour driving Chinese manufacturing doesnt really add up.

Doesnt mean India cant do the same, but as of now we are far behind.

amit wrote: This is one of the reasons that even a slight wage increase scares Foxconn and others into looking for alternative places for production.

Actually Foxconn's interest in India is not as a replacement for china, but as an alternative. Its basic risk management, given the large dependencies on China.

Theo_Fidel · Post by **Theo_Fidel** » 22 Aug 2015 08:16

Not quite.

I know for sure the Chennai area industries comfortably beat China for NPV and have been doing so for a long time. stuck in airport on phone so can,t track down the data right now. The situation is complex. A handful of states like TN, GJ, MH, DELHI, etc can beat China NPV. The vast heartland however is not there.

The only labor difference as I see it is the army of high school graduates China is able to deploy. China is 90% HS vs India which is less than 40% HS. China can afford to waste HS graduates painting pimple on the dimple on the right a$$ cheek of ant while paying them the same wage as the average illiterate thozhillali. India is unable to mobilise a similar army right now.

Every place India has been able to deploy its limited army of engineering graduates, China has been comfortably beaten. Unfortunately India graduate army is even smaller. IIRC less than 5%.

This is why I have long advocated that we should ignore the indifferent quality and keep pumping out the armies of engineers. It is our competitive advantage. Paraphrasing Stalin, Volume has a quality all its own...

Mukesh.Kumar · Post by **Mukesh.Kumar** » 22 Aug 2015 19:51

X-Post from China Watch Thread:

Mukesh.Kumar wrote:Looks like Diwali's come early to China this year.
BBC:China explosion: Fires at Shandong chemical plant
Shandong Province:

And here was the earlier one in Tiajin. What gives?

Edited later:Update from People's Daily Twitter feed-

[CT Alert]Looks bad. Have a sinking feeling that this is an Insurance scam to claim damages for redundant inventory. [CT Alert off]

Melwyn · Post by **Melwyn** » 24 Aug 2015 03:23

Theo_Fidel wrote:Not quite.
....
This is why I have long advocated that we should ignore the indifferent quality and keep pumping out the armies of engineers. It is our competitive advantage. Paraphrasing Stalin, Volume has a quality all its own...

Theo sir, that is a very interesting observation. Can India do better with army of ITI diploma holders instead of Engineers?

Austin · Post by **Austin** » 24 Aug 2015 11:07

Shanghai Composite Index is down to 3200

http://www.bloomberg.com/quote/SHCOMP:IND

Arjun · Post by **Arjun** » 24 Aug 2015 11:09

X-posted:

Arjun wrote:Lets see where the carnage stops in China. Looking at the charts 3000 seems to be resistance, so markets may not fall by much more - in which case they are still up 50% from June 2014. If they decisively breach that mark - all their fancy billionaires will get 'resized' for sure