The objective of this podcast is to shed light on some of the myths surrounding globalization and China.
Some days it seems there is more misinformation being presented about globalization and China than there is information.
This troubles me, and so I thought I would take a few minutes here to speak my piece.
For example, an article appeared in The New York Times early in August entitled "Shipping Costs Start to Crimp Globalization."
The article described how a pioneer in electric-powered cars set out to make a luxury roadster for the American market. The UK firm planned to manufacture 1000-pound battery packs in Thailand, ship them to England to be installed in the cars, which would then be shipped to California.
When the company began production they encountered "terrible transportation costs" and so they decided to make the batteries and assemble the cars in California.
The article goes on to explain that due to shipping costs, many companies will be bringing manufacturing back to America. Wow! Where do I begin?
I guess with the title of the article. I would not have entitled the article "Shipping Costs Start to Crimp Globalization." I would have titled the article "Doing Dumb Things with Cheap Oil That Are Even Dumber with Expensive Oil." Let me ask you a few basic questions:
If you were going to make, in Thailand, 1000-pound battery packs for a car to be sold in California, which way would you ship the battery packs from Thailand: east or west? I think east.
If you were going to sell electric-powered cars in California, where would you assemble the car? Not quite so simple, but the last answer I would give to this question would be England.
Now maybe on a bit more of a global basis, excuse the pun here, when the article suggests bringing manufacturing back to America I would love to share a glass of wine with the author on the topic of where back is? You see in my view, back isn't here anymore. Back has moved somewhere else, and it is not back in America. Let me explain: I see three reasons why back is no longer here:
1. Labor
2. Factories
3. Capital
You see, the labor back here has moved on. The factories have been torn down or converted to other purposes and the capital back here is very hard to find, and for starting a factory very, very hard to find.
Let me attack another myth found in this article and many other articles I have read over the last month. The myth has to do with fuel costs and the impact fuel costs have to do with globalization. Yes, it is clear fuel costs have gone up.
Gasoline is now 35% higher than it was a year ago and diesel is 45% higher than a year ago. Let's say just to keep things simple fuel has gone up 50% over the last year. And just to be sure we look at things correctly: Is the 50% increase a year an ongoing trend? Well, no.
In fact, the fuel costs (gasoline and diesel) in September 2006 were the same in September 2007. So what we are dealing with is a one year adjustment, a one year increase of, say, 50%. How important is this? Let's begin this discussion with an understanding of how important transportation costs are to the total delivered cost of a product.
If you decide to ship 1000-pound battery packs three-quarters of the way around the world, it may really be high. But across the board, about 5% of the total delivered cost is transportation. Of this 5%, about 40% is fuel costs.
So the impact of fuel on the total delivered cost of a product in the United States is about 2%.
A 50% increase in the cost of fuel results in a 1% increase in the total delivered cost of the product. This when compared to the 20-40% or higher savings in the purchase price when buying product from the low cost countries is obviously not very significant.
Nevertheless, let's pursue this from an energy conservation and an environmental perspective. What are the facts here? Is ocean freight good or bad from a fuel efficiency prospective? The facts are, from a fuel consumption perspective, measured in BTUs/Short Ton Mile, the most fuel efficient and environmentally friendly transportation is Ocean Containership.
In fact, if ocean had a fuel efficiency rating of 1:
Rail would be 1.5
Truckload would be 7
Less-Than-Truckload would be 10
Ground Parcel- 11
Air- 19
Ocean containership is the most fuel efficient mode of transportation, with only rail being close to the same efficiency.
Enough for now on globalization myths, let me turn my attention to some of the misinformation about China. To simplify this discussion I have decided to group several topics together, and in so doing I came up with 4 categories of China myths. I will address on this Podcast:
1. Quality and recalls
2. Counterfeiting and intellectual property
3. Labor costs and labor laws
4. Government and human rights
The first topic of quality and recalls is an absolute non-topic. Two ways to approach this: First, is to present the facts on the high quality coming out of China, and the facts that recall percentages for China are amongst the lowest in the world. The second approach is to look into why quality problems and recalls happen. In my experience the fault most often lies not with China, but with the sourcing groups that push too hard for cost savings, and essentially place the Chinese manufacturer in a position where quality problems and recalls will occur. Integrity in sourcing and clear specifications will result in high quality coming from China. That is a fact.
The second topic of counterfeiting and intellectual property has been a very important subject. But the key phrase here is 'has been.' Certainly, ten years ago this was a major issue. Today, China has raised the standards here, and although there are dishonest folks in China, just as in every other country, today the laws in China protect Intellectual Property just as well as in the United States.
The third issue of labor costs and the new labor law is another interesting issue. It is clear that labor costs in China last year went up 8-12%. It is also clear that for manufacturers that had not put in place the most basic of fair treatment of labor, the new labor law can easily add an additional 5-8% to the costs of operations.
However, once you consider that the average wage is in the 50-60 cent range, and most firms doing exporting already had implemented the new labor standards, the bottom line impact of the cost increases and the new labor law is less than 10 cents/hour.
The last issue of government and human rights is very interesting and one that we Americans have a difficult time coming to grips on. Many Americans, when asked what type of government exists in China, say Communism. This is absolutely untrue. In fact, China is a wonderful example of Capitalism. But it is different than American capitalism. China has a one-party Capitalism. That one party is the Communist party, but China is clearly all about Capitalism.
One-party Capitalism has many benefits and many disadvantages. Let me demonstrate both with a single example.
Let's say a new road is needed to move product from a manufacturing city to the port. Unfortunately, along the path of this new road are several houses. Further, there is a forest that is the home of a spotted owl, that some people believe should be a protected animal.
In the US, we know this road will require years of study, many hearings, environmental impacts and spotted owl meetings. In China, the party evaluates that the greatest benefit to the most people is to build the road, and the road is built.
What about the people who have to move, what about the spotted owl? Our values are that the people and the owl need to be listened to. In China, they build the road. So the issues of government and human rights are difficult issues, and I do not want to sweep them under the carpet. But China is China, and we need to be careful of trying to inject our values on them when we do not really understand the magnitude of the transformation they are making happen.
So I suggest there is a lot of noise out there on globalization and China. There is a lot of misinformation on globalization, coming back to America, fuel costs, China quality and recalls, China counterfeiting and intellectual property, China labor costs and labor laws, China government and human rights.
I suggest with more information, less emotion and more understanding, we will see globalization as a major opportunity to work with China to improve both the China economy and the world standard of living.
Glad you were with me today. In my next podcast I want to begin to help you improve your global supply chain by helping you assess where you are and identifying some priorities for action.
