Setting the Stage

By Ryan Miller

In this blog entry, I want to paint a picture of economic events as they pertain to manufacturing in Asia.  I would like to begin with the story of Chinese labor rates.  Those of us in the Western Hemisphere receive a constant barrage from the media talking about the “emerging Chinese middle-class.”  So I wanted to understand this concept a little further.  How does the rising middle-class impact the cost to manufacture overseas?  I started my research with the US Bureau of Labor Statistics.  From their home page, click International Labor Comparisons, click China.  Up pops a table of Chinese manufacturing labor data from 2002 to 2009.  After a little data crunching, I realized that during this period China experienced 17% labor inflation per annum.  Wow, that’s a huge number or roughly 300% growth from ’02 to ’09!

Hourly Compensation per Employee

Year	Labor in USD	Delta	%change
2002	$0.60	--	--
2003	$0.68	$0.08	13%
2004	$0.74	$0.06	9%
2005	$0.83	$0.09	12%
2006	$0.95	$0.12	14%
2007	$1.21	$0.26	27%
2008	$1.59	$0.38	31%
2009	$1.74	$0.15	9%
Average	--	$0.16	17%

But wait, where is the data for 2010 through today?  I called the bureau of labor statistics.  Their data stops at 2009 and due to sequestration, the office that manages these statistics is no longer in existence.  My next step was to reach out to a business friendly think tank in Washington DC.  They did not have info when I called but said they would look into it.  If I hear anything back I will update this blog.  From what I gather, this information is somewhat difficult to come by for obvious reasons.  Nobody wants to air their dirty laundry, especially not the second largest economy in the world.

According to an article written by The Economist, “the [labor wage for the] average Chinese factory worker rose by 10% a year between 2000 and 2005 and speeded up to 19% a year between 2005 and 2010, according to BCG. The Chinese government has set a target for annual increases in the minimum wage of 13% until 2015.”  You can read the article yourself here: http://www.economist.com/news/special-report/21569570-growing-number-american-companies-are-moving-their-manufacturing-back-united  Evidently they have a direct line to Beijing to garner such facts.

All this to say, wages in China are on the rise.  I did a little further research.  Countries across the rest of Asia average approximately a 9% labor wage increase (source: International Labour Organisation [10 year avg]).

Now I want to shift my focus to the domestic.  We all know the United States has a massive trade deficit.  I think the latest number I heard was just shy of $18-trillion.  (The great part about writing a blog is that you can say things like “I think” or “I’m pretty sure.”)  While this deficit is not going away any time soon, I want to look at micro trends in imports and exports.

Source: US Department of Commerce Bureau of Economic Analysis

From 2005 to 2013 there was no doubt a huge trade deficit in goods.  What I want to point out however is that while imports grew $15,804,000,000, exports grew even more per quarter by $19,266,000,000.

Now I want to look very closely at the last two years.












Source: US Department of Commerce Bureau of Economic Analysis

You will notice that imported goods dipped by $2,702,700,000 per quarter while exports grew by $5,677,500,000.  Exports actually decreased slightly.  In summary, US manufacturing is showing growth to exported markets.

There is clearly a change of trajectory here.  Adjusted for economic conditions, that trajectory changed even more dramatically in the last two years.  I am not implying causation saying that rising labor costs are the cause of export growth and growth to the manufacturing sector in North America… but I kind of am.

Labor costs are only a small piece of total cost of ownership.  Deciding where to manufacture a product should be based on many more factors.  In fact, to make a decision solely based on labor rates would be foolish.  In my opinion, the greatest savings can be achieved when manufacturing and supply chains are located as close to their markets as possible, but total cost of ownership can be the meat behind my statement.

All good blog posts should have a nice picture.  Unfortunately I did not have a good picture associated with my topic.  So instead I will leave you with a shot of Lenawee Mountain at Arapahoe Basin from March 8th.

Email me at ryan.miller@yourlocalconnection.net