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Archive for the ‘China’ Category

Rising Wages in China Make Mexico More Competitive But Challenges Remain

In China, Economy, Mexico on September 17, 2012 at 11:51 pm

Mexico’s favorable geography

Rising wages in China make Mexico more competitive by comparison.  From a Wall Street Journal article by David Luhnow and Bob Davis [1], highlights follow:

Mexican wages, including benefits, average $3.50 an hour, compared to $2.50 an hour in China, after wage pressures there.  Given Mexico’s proximity to the United States, especially for border cities like Juarez, the slightly higher Mexican wages are often a better deal on account of quick time to the US market as well as lower shipping costs.

Because most parts are sourced locally, Mexican production is better for US suppliers than Chinese.  Most manufacturing inputs in China are made either there or in nearby countries like Malaysia or Thailand, whereas many inputs for Mexican production are made in the US.But, Mexico has disadvantages.  One factor going for China is its own gigantic domestic market of over one billion consumers.  Factories in China can ship to the local market as well as for export to the US.  The Mexican homicide rate (18.2 people per 1000,000 people) is higher than five in the US and 1.1 in China.

Lastly, an accompanying chart shows the woeful problem of the Mexican public education system.  Whereas China rates #54 for overall quality of eduction system (and #5  for tertiary education enrollment, #33 for availability of scientists and engineers), Mexico rates #107 for education (#79 tertiary enrollment, #86 for availability of scientists and engineers).Geography and hard-working people have Mexico in a favorable economic place.  But, decades of underperforming education, especially in math and science, hurt its competitiveness.  Furthermore, the legacy of local Mexican police corruption and spillover from demand for illicit drugs in the United States have led to horrific violence from cartels and criminal gangs. 

Mexican Maquiladora

[1] http://timesofnews.co/2012/09/17/for-mexico-an-edge-on-china

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It Isn’t All Labor Costs… Shale Energy & Shipping Costs Impact Imports

In China, Job Creation, Mexico on February 26, 2012 at 7:23 pm

Two container ships pass in San Francisco Bay

Lots of factors enter into decisions about where companies manufacture.  Without question, a lot of US manufacturing has gone abroad, but not all; some may even be coming back due to cost equation changes.  Not everything goes to the country with the lowest wages (which would be in sub-Saharan Africa, not China, anyway) because of matters like productivity of the workforce, energy costs, shipping costs, the time for products to be received back to the US, local taxes, corruption, safety and rule-of-law in the other country, etc.

Mexico is actually gaining on China as a more attractive place to manufacture despite slightly higher wages, on account of the evolving cost equation.  An interesting piece in the Business section of the San Antonio Express-News gives some details why.

“Production workers in the U.S. make about $15 an hour, according to data from the U.S. Bureau of Labor Statistics. Industrial workers in Mexico make about $3.50 an hour, as opposed to $3 an hour in China, according to a report from the National Council of Maquiladora and Export Manufacturing Industry.”

“But the savings in labor are eroded with the higher cost of shipping from Southeast Asia. It costs $4,300 to ship a 40-foot container from Hong Kong to San Antonio via Long Beach, Calif., and will take 24 to 26 days to get there, according to DHL Global Forwarding. It costs $1,800 to drive a 40-foot trailer from Ciudad Juárez to San Antonio, and the trailer will get there in eight to 10 hours.” [1]

I often hear “$1 a day” bandied about as a wage in other countries, but as noted in the article, industrial workers in China earn about $3/hour and Mexican workers $3.50/hour.  That is certainly less than US norms, but probably higher than most people think.

Note the key driver of expense here:  shipping.  A standard forty-foot container costs $4,300 to get from Hong Kong to San Antonio, TX.  It still costs $1,800 for the same container to make it from the major Mexican manufacturing city of Juarez (across the Rio from El Paso) to San Antonio.  I point out time is valuable for manufacturers, too, so the more distant manufacturing is, the more of a hassle it is for extending the supply chain.  A container easily takes a month by ship from China to here.  Mexico is closer and local US manufacturing is closest of all.  It is no surprise a lot of manufacturing where time is critical (e.g. food processing) or very heavy, bulky items that won’t fit in a standard shipping container (e.g. making concrete or pre-manufactured housing) take place in the US because of the savings on time and shipping costs for heavy, bulky items.

The article continues:

“Manufacturing costs in China are about 94 percent of U.S. manufacturing costs, according to a 2009 report from consulting firm AlixPartners. In Mexico, manufacturing costs are only 75 percent of what they would be in the U.S., according to the report.” [1] [2]

China has become less attractive vis-a-vis Mexico because of a 20% appreciation in the Chinese Yuan, rising wages in China, and higher shipping costs, presumably reflecting higher fuel prices. [2]

Did I say rising wages?  Yes, another article in the Wall Street Journal also refers to rising wages in China because “the pool of Chinese workers is getting shallower.  China’s one-child policy and cultural preference for boys have led to a shrinking population of young people, particularly the women who work the floors of the apparel and electronic firms.” [3]  The WSJ continues, “labor costs are going up faster than productivity increases” in China.

This will have an impact on next door Mexico and even on the US as some companies look at the overall cost-benefit equation and decide to bring some operations home. [3]

El paso border station photo

Energy costs also matter.  There is very good news for American workers in the shale-gas boom states.  Another Wall Street Journal article points out how the rapid increase in low-cost natural gas from the shale drilling boom is cutting energy costs.  Shale states like West Virginia, Pennsylvania, and on the Gulf Coast are seeing interest from chemical companies opening brand new manufacturing plants to be near low-cost natural gas energy.  Shale gas now accounts for 1/3 of all natural gas in the US. [4]  “The US chemical industry is the biggest potential winner from the shale boom.” [4]

It is important to keep in mind that manufacturing siting locations are not exclusively about wages because energy costs, shipping costs, unionization, worker productivity, proximity to markets, corruption, safety and rule-of-law are all factors.  Some factors we can control (shale energy) are helping US manufacturing attractiveness while some other factors beyond our control (higher wages in China and higher global shipping costs) are also helping.

[1] http://www.mysanantonio.com/news/mexico/article/Despite-drug-war-trade-with-Mexico-is-booming-1360569.php   Note the article also speaks of the negative impact of drug war gang violence in Mexico.

 [2] The research the Express-News refers to is: http://www.alixpartners.com/EN/portals/0/pdf/AlixPartners%202009%20Manufacturing-Outsourcing%20Cost%20Index%20HIGHLIGHTS_2.pdf.  See page 13 for China and page 14 for Mexico.  Notice wages rose in each country between 2005-8.

[3] http://online.wsj.com/article/SB10001424052970204662204577201361904633428.html (behind paywall, get slightly more free on reprint at http://www.mexbiznews.com/chinas-export-pain-might-be-mexicos-gain).

[4] http://online.wsj.com/article/SB10001424052970204844504577100421253005122.html (behind paywall).

Pictures (container ships; Ciudad Juarez, Mexico; El-Paso/Juarez border crossing; natural gas drilling rig) from Wikipedia Commons.

 

Chicago & New York “Fall Behind” Shanghai & Beijing Without Amtrak?

In Amtrak, China, Federal Deficit, High Speed Rail, Obama Administration on July 30, 2011 at 2:51 am

Imagine increasing the population of the United States by fourfold.   Then squeeze these 1.3 billion imagined Americans into a smaller area:  the area east of the Missouri River south to the Gulf of Mexico.

Keep metro New York City in the same place with the same size metropolitan area but double the population of Staten Island. 

Keep Chicago where it is but increase its metro population by 2.5 times (from 9.5 million to 23.1 million).  Then squeeze this mega Chicago into a much smaller area about three times more densely populated than New York City.  No longer is Chicagoland sprawling but instead a tightly packed, vertical city. [1]

Next, remove most of the cars.  In fact, whereas the United States you know has nearly one car for every man, woman and child, our imagined United States would have only about one car per twenty people. [2] [3]  Take away America’s automotive culture, leaving a society where few drive but most aspire to someday drive.  Essentially, it is a lot like the United States automotive culture circa 1920.  Lastly, remove most of America’s passenger air travel. 

What we have imagined is a lot like China.  The New York -2.5X Chicago pairing is very close in actual distance and imagined densities and populations to the Beijing-Shanghai endpoints on the new Chinese high-speed railroad. 

We also need to imagine a feeder network of other high-speed trains in our imagined 1.3 billion person United States.  Imagine we obtain this extra population by plunking down an extra 200 metro San Antonios anywhere we can find space east of the Mississippi, keep our imagined Chicago of 23.1 million and supersize all other major American cities.  The Chinese municipality of Chongqing has 28.8 million people – about five times the population of metro Miami – so let’s substitute Chongqing for Miami and build a train there, too. [4]

Some believe higher speed Amtrak passenger trains are essential for the United States.  President Obama has repeatedly pushed for high-speed Amtrak, saying we will “fall behind” China if we do not.  Obama warned, “In the race for the future, America is in danger of falling behind. That’s just the truth.” [5]  The President said, “We should be able to agree now that it makes no sense for China to have better rail systems than us”.  On another occasion, Obama stated, “They’re [China] playing for first place, and we need to play for first place.” [6]

But the imagined America example above frames up how China is not like the United States.  Few Chinese can afford a car, China has few expressways and little air travel.  Many Chinese already use conventional passenger rail systems and are habituated to taking a (slow) train between cities.  China is arguably ideal for intercity passenger rail because it is much more populous than the United States and Chinese cities are closely packed along its eastern and southern seaboards and in the Yangtze River valley.   If you live in suburban Tampa and want to visit your parents in suburban Orlando, you can drive your car there in just over an hour, easily find free parking on your parent’s driveway and use your car around town.  If you lived in a Shenzen, a Chinese city of 10 million, and want to visit your parents in nearby Hong Kong, you and your parents are highly unlikely to own a car and most likely live in high-rise apartments lacking parking.  You’d have little choice but a bus or train. 

Amtrak’s Acela rides the most successful of Amtrak’s routes and it is no coincidence the Acela travels through America’s densely populated Northwest Corridor between some of the few American cities where many residents do not own cars.  Wisconsin Governor Scott Walker received much grief for canceling a proposed Milwaukee to Madison high-speed rail line due to cost concerns.  Yet, metro Madison had 561,505 residents in 2010 and metro Milwaukee had 1.6 million [7], not even remotely close to the mega-cities on China’s lines. 

Should we mimic everything China does?  China imprisons those who criticise its government!  China has a fast-growing economy and many positive attributes but the idea that China’s rail system poses a ‘threat’ the United States will “fall behind” is quite a stretch.  Western Europe is also much more densely populated than the United States, meaning the European experience with high-speed trains is not instructive for America.

China’s new rail system is hardly a total success.  It suffered cost overruns, corruption in awarding of contracts [8] [9], priced out customers with higher than expected ticket prices [10], and safety lapses such as last Saturday’s train collision that killed 39 and injured 210 people [11] [12].

Even a high-speed Amtrak proponent, Robert D. Yaro, conceded, “At an estimated $500 billion, a national high-speed rail system won’t come cheap.” [13]  At a time when the nation is suffering a debt crisis with annual budget deficits north of $1 Trillion, can we afford another half trillion for Amtrak?

In a capitalist society like the United States where a number of profitable, well-run freight railroads already run networks between all the major cities, we have to ask why Union Pacific or BNSF aren’t clamoring to do their own high-speed passenger rail trains on the tracks they already own?  If you believe large corporations will always try to make a profit, why wouldn’t CSX and Norfolk Southern be planning their own passenger rail lines if they thought the usage would justify the investment?

China administrative.svg

[1] City data includes 2,812 people/sq. mile in metro NY, 3,023/sq. mile in Beijing municipality and 9,403/sq. mile in Shanghai Municipality.  Note regions like Tibet, Xinjiang and Inner Mongolia in western and northern China are sparsely populated, largely desert, arid and mountainous (e.g. Tibet 3 million people, Xinjiang 22 mil., Inner Mongolia 25 mil.)  http://en.wikipedia.org/wiki/China.  This link is also the source of the public domain map of China.  Shanghai Municipality population is 23.1 million http://en.wikipedia.org/wiki/Shanghai.  Beijing Municipality 19.6 million http://en.wikipedia.org/wiki/Beijing.  New York 18.9 million http://en.wikipedia.org/wiki/New_york . Chicago, 9.5 million http://en.wikipedia.org/wiki/Chicago

[2] The small number of cars produced in China:  http://en.wikipedia.org/wiki/Chinese_car

[3] “Overall, there were an estimated 254.4 million registered passenger vehicles in the United States according to a 2007 DOT study.” http://en.wikipedia.org/wiki/Passenger_vehicles_in_the_United_States

[4] http://en.wikipedia.org/wiki/Chongquing and http://en.wikipedia.org/wiki/Miami.

[5] http://abclocal.go.com/wtvd/story?section=news/local&id=7826410 

[6] http://www.businessweek.com/magazine/content/10_48/b4205042094905.htm

[7] http://en.wikipedia.org/wiki/Milwaukee,_Wisconsin and http://en.wikipedia.org/wiki/Madison,_Wisconsin.  These two small metros are sprawling and lack a subway to bring riders to rail hubs.

[8] “Millions of dollars in funds for China’s high-speed rail link between Beijing and Shanghai were embezzled in 2010, the state audit agency has said.  Officials said 187m yuan ($28.5m; £17.5m) had been stolen by individuals and construction companies. The judicial authorities are investigating.” http://www.bbc.co.uk/news/world-asia-pacific-12828057

 [9] “Those concerns come as Beijing is investigating corruption accusations against high-ranking railway officials and allegations that some unqualified companies may have been awarded contracts for part of the $400 billion project.” http://articles.economictimes.indiatimes.com/2011-07-27/news/29820696_1_high-speed-rail-train-collision-railway-officials

[10] http://www.infrastructurist.com/2011/01/19/is-chinas-high-speed-rail-pricing-out-passengers/

[11] http://www.telegraph.co.uk/news/worldnews/asia/china/8658959/Anger-in-China-as-bodies-fall-from-carriages-during-train-crash-clean-up.html

[12] http://www.nytimes.com/2011/07/27/world/asia/27china.html

[13] http://www.nytimes.com/roomfordebate/2010/10/13/will-we-ever-have-high-speed-trains/an-investment-we-have-to-make