Phi points to an article about how the outsourcing-to-China business is on a downturn:

Where once low-tech factories and scant wages were welcomed in a China eager to escape isolation and poverty, workers are now demanding a bigger share of the profits. The government, meanwhile, is pushing foreign companies to make investments in areas it believes will create greater wealth for China, like high technology.

Many companies are striving to stay profitable by shifting factories to cheaper areas farther inland or to other developing countries, and a few are even resuming production in the West. {…}

“I have 15 major clients. My job is to give the best advice I can give. I tell it like it is. I tell them, put your helmet on, it’s going to get ugly,” said {outsourcing advisor Rick} Goodwin, who says dissatisfied workers and hard-to-predict exchange rates are his top worries.

A while back I wrote a post that I cannot find (maybe it was on another blog) regarding the outsourcing of IT work. The perception among many is that with manufacturing gone (it isn’t, though granted it’s certainly not what it used to be) the next logical step is for us to lose the IT jobs because, after all, the Indians and Chinese are willing to do it for cheaper! I wouldn’t say that the threat is not there, but one of there were and are some flaws in the assumptions that underly it. One of the assumptions is that they will get to do anything that they can do cheaper there than we can do here. Another assumption is that this is something that will continue in perpetuity (or until something is done).

The problem with the first assumption is that they don’t just have to be cheaper. They have to be a lot cheaper. Every experience I have had that has involved outsourced talent in India, China, or Russia has reinforced this notion. It’s a heck of a lot easier to build stuff here. For a lot of jobs, it can require multiple people to do the same job that one person can do over here. And because of cultural and language differences, they’re less likely to get it right. Now, oftentimes despite all of these things it can still be cheaper and better (from the company’s point of view) to do things over there than over here. And the margin does not need to be as much when it comes to low-skill jobs like manufacturing (though shipping can be an issue, depending on what is being built and shipped). It’s important to keep in mind, however, that if they can build it here for $5 and there for $4, we’ve got a really good chance.

The problems with the second assumption applies particularly to high-skill workers but also to low-skill ones and definitely to the governments of those countries. They don’t want to be our errand boys forever. They don’t want to work for pennies on the dollar forever. Right now they are willing to do these things because they have to. However, as these countries get more wealthy, they’re going to start to be less willing to. As their citizenry gets more educated, they’re going to want to design their own stuff. They’re going to want to build the stuff that they design. And they’re going to want to own the company that makes the profits from the stuff they design and build. And as they start more and more of their own companies, their labor and manufacturing capacity diminishes and they have to start charging more. This is particularly true in the high-skill realm where it costs a lot of money to educated a relatively small portion of the population with the intelligence required to do the work and do it well. But even with manufacturing, they have to get the infrastructure in place and build the plants and round up the people.

Granted, China has a lot of excess capacity and it may take a long time before they officially start running short on people. But the factories don’t magically appear and as they have difficulty keeping up the prices they will be able to command will also go up and the difference between how much it costs American companies to build something over here and over there will become less startling. That’s if they don’t start leaving China for other countries, which will then often undergo the same pressures and transformations. I’m not suggesting the jobs are going to start marching right back to the States. Most of those that are gone will stay gone. But over time, I expect less of the new jobs to leave.

That’s not to say that it won’t be a rough transition or that everything is just going to be hunky-dory. Nor is it meant as an argument against trade restrictions that would make it more difficult to buy things in China. I lean against them, but there are arguments in favor of them not really discussed in this post. That’s my way of saying that I don’t want to make this about whether free trade is, in the aggregate, a good or bad thing. All of the above can be entirely true and it may still be a bad idea.

The main point I am making is that a lot of people seem to be of the mind that of the mind that China will be able to have its cake and eat it, too. They’ll be able to be this new hyperpower that runs our errands while paying its workers pennies on the dollar. Success in a country breeds expectations among its people. It’s what happened in Europe; it’s what happened in Japan; it’s what happened in the United States. They’ll demand better pay or better services from their government in order to bring their lifestyles – and hence their wages – more in line with the first world’s.

Category: Market

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6 Responses to Chinese Stars

  1. PeterW says:

    Curious; what’s with the new blog header and subtitle?

  2. trumwill says:

    There was an exchange a little while back where a reader revealed that she was in East Asia and Sheila commented that Hit Coffee has gone international. I decided to do a gag header like I did when I got the NC17 rating.

  3. Nanani says:

    Wow, I get my own header! Awesome, thank you.

    More on topic – the people demanding things from the government in China is rather more difficult than it has been in more democratic countries.
    A lot more needs to change before a genuine free market can exist there.

    Just saying.

  4. trumwill says:

    Happy to do it!

    The fact that it’s not a democracy and a free market certainly hinders things, but the way I figure it the government is going to have to keep its people in line. They can do this with the iron fist, but that gets harder as a country gets more prosperous and it derails resources they need for further development. The most effective way to keep them in line is to keep them poor, and closed off, which is not what they’re doing. Hence, even at this early stage in the game labor is starting to make demands that is complicating things for their government.

  5. Nanani says:

    Quite true.

    I’m already convinced that more growth can only be good for China, and especially the Chinese people as distinct from the government. If that growth can gradually become less reliant on outsourcing from elsewhere, so much the better.

  6. Maria says:

    The current way we trade with China is unsustainable from a resource conservation point of view:

    Few people really seem to give a thought to how wasteful much of outsourcing is from a resource point of view.

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