Archive for ‘Manufacturing’


All you need to know about business in China | McKinsey & Company

A lot of people view China business as mysterious. Relax. Consumers behave pretty much the same everywhere. Competition is pretty much the same everywhere. You just need to ignore the hype and focus on the basic fact that in China today, there are six big trends (exhibit). That’s it. Six trends shape most of the country’s industries and drive much of China’s impact on the Western world. They are like tectonic plates moving underneath the surface. If you can understand them, the chaotic flurry of activity on the surface becomes a lot more understandable—and even predictable.

Coauthors Jeffrey Towson and Jonathan Woetzel discuss China’s six megatrends with Nick Leung, the managing partner of McKinsey’s Greater China office.

These trends move businesses on a daily basis. They’re revenue or cost drivers that show up in income statements. Deals, newspaper headlines, political statements, and the rising and falling wealth of companies are mostly manifestations of these six trends, which aren’t typically studied by economists and political analysts. In fact, we happen to think that Chinese politics or political economics are wildly overemphasized by some Westerners in China. So let’s tell a story about each of these megatrends, with some important caveats. They’re not necessarily good things. They’re not necessarily sustainable. For every one of them, we can argue a bull and a bear case. Most lead to profits or at least revenue. Some may be stable. Some lead to bubbles that may or may not collapse. We are only arguing that they are big, they are driving economic activity on a very large scale, and understanding them is critical to understanding China and where it’s headed.

via All you need to know about business in China | McKinsey & Company.

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Chinese Exports Plummeted Last Month. Puzzled? We Have You Covered – China Real Time Report – WSJ

China’s exports were down 6.6% on year in March, confounding economists, many of whom expected growth of over 4%.

What’s going on?

First, it’s important to remember that China’s trade statistics in the first quarter are often skewed by the Chinese Lunar New Year holidays, when activity slows down in much of East Asia.

But economists expected exports to show signs of a pickup in March, the first month not affected by the holidays, which this year fell in late January and early February.

One explanation is the March data was warped by over-invoicing. This is a practice by which Chinese companies dodge capital controls by using fake export invoices to get money into the country to benefit from relatively high onshore interest rates.

Beijing cracked down on the practice last spring, but over-invoicing was still prevalent in March 2013. Since then it has decreased because of tighter regulatory controls. The government’s efforts to guide the yuan currency lower this year also has diminished the attraction of such a carry trade.

That could mean the year-ago comparison was artificially boosted, making March 2014’s numbers look poor by comparison.

“Do not worry about the export data,” wrote Louis Kuijs, an economist at RBS in Hong Kong, in a note to clients.

RBS estimates year-on-year export growth in March 2013 was inflated by 11.8 percentage points due to over-invoicing. The bank also thinks export growth on-year in March this was 5.2% adjusting for over-invoicing.

“The competitiveness of China’s manufacturing sector is still solid, allowing its export sector to benefit from global demand growth,” Mr. Kuijs wrote.

Andrew Tilton, an economist at Goldman Sachs in Asia, agreed with this assessment.

“The main reason is that the over-invoicing distortions were peaking last year around this time,” he said. Now, “the increased currency volatility and deprecation is discouraging that activity from a financial incentive perspective.”

via Chinese Exports Plummeted Last Month. Puzzled? We Have You Covered – China Real Time Report – WSJ.

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Two Visions for India’s Economy, Sort Of – India Real Time – WSJ

India’s national election, which kicked off Monday, is a contest of old-fashioned socialism versus market liberalism, of handouts to the poor versus pro-growth reforms that will benefit all. Right?

Sort of. At least judging by the two main contenders’ official platforms.

The Bharatiya Janata Party — out of power for a decade — looks set to win big this year, helped by its popular prime ministerial candidate Narendra Modi, who promises to reboot India’s economy with a combination of smart policy and able administration.

But now that the BJP has at last released its election manifesto after multiple delays, it’s easier to see where exactly its economic policy ideas differ from the incumbent Congress party’s – and, perhaps more interestingly, where they don’t.

Both parties promise to revitalize India’s manufacturing sector, long a laggard amid the country’s economic rise. Both say they will implement a national goods and services tax, known elsewhere as a value-added tax. Both want to create a “single-window system” to expedite land, environmental, power and other approvals for investors. Both back the current system of food subsidies, though the BJP highlights that the program should be efficient and corruption-free.

And both parties want to build high-speed rail, stem inflation, modernize infrastructure, make housing affordable, create jobs, expand cities and make taxation more predictable. (Though the BJP wins style points for referring to retroactive taxes as “tax terrorism.”) The BJP even matches the splashiest item in Congress’s manifesto — a commitment to providing “universal and quality health care for all Indians” — with its own call for universal health care.

All of that said, the manifestos alone do give the BJP an edge in terms of structural reforms that many economists, businesses and investors have long craved from India’s government.

The party’s manifesto speaks of addressing “over-regulation” in business and “bottlenecks” in the delivery of public services. Its section on developing agriculture focuses more on investing in productivity-enhancing technology than on increasing government subsidies, which the Congress manifesto notes as a major achievement of its decade in office.

The BJP says it will “rationalize and simplify the tax regime,” which the party calls “currently repulsive for honest taxpayers.” The Congress manifesto merely reiterates its support for the Direct Tax Code, an earlier legislative effort to eliminate tax distortions and improve compliance that has stalled in Parliament’s lower house.

The BJP also says it will review India’s creaking labor laws, which it decries as “outdated, complicated and even contradictory.” The Congress manifesto, meanwhile, “recognizes the need for creating flexibilities in the labor market” while redoubling its commitment to “protecting the interests of labor through more progressive labor laws.” The World Bank said in a report last year that India’s “cumbersome and complex” labor policies “have unambiguously negative effects on economic efficiency.”

via Two Visions for India’s Economy, Sort Of – India Real Time – WSJ.

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Why China’s Manufacturing Sector Has Hit a Wall – Businessweek

More bad economic news out of China: A key indicator released on March 24 showed that the manufacturing sector of the world’s second-largest economy contracted for the fifth straight month.

The HSBC and Markit purchasing managers’ index fell to 48.1 in March, below the 48.7 expected by analysts in a Bloomberg News survey (a number above 50 indicates growth). “The weakness appears even more pronounced given that there is usually a seasonal rebound after the Chinese New Year holiday,” said Julian Evans-Pritchard, China economist at London-based Capital Economics, in a March 24 note.

The lackluster showing of the so-called Flash PMI (usually based on results from 85 percent to 90 percent of companies surveyed; the final reading will be released April 1) follows weak investment, industrial production, and export numbers in the first two months. “The old growth engine is losing steam,” Chen Xingdong, chief China economist at BNP Paribas in Beijing, told Bloomberg News.

via Why China’s Manufacturing Sector Has Hit a Wall – Businessweek.

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India Wants to Build Its Own Chips to Satisfy Electronics Demand – Businessweek

India’s IT services companies are tops in outsourcing, with Tata Consultancy Services (TCS:IN) and Infosys (INFY) competing globally with IBM (IBM) and Accenture (ACN). The cities of Bangalore and Hyderabad are well established as research centers for such multinationals as Microsoft (MSFT), General Electric (GE), and Intel (INTC).

Pedestrians pass in front of smartphone wholesale outlets at Gaffar Market in New Delhi on April 9, 2013

But when it comes to hardware, India is behind. In 2013 it imported $33.5 billion worth of electronics, from semiconductors to smartphones. That’s more than it spent on any imports except oil and gold. With India’s large and growing middle class buying more digital devices, the reliance on imported semiconductors and other hardware is likely to increase. By next year, according to market analysts Frost & Sullivan, such imports will top $42 billion. “Our manufacturing has not kept pace with our consumption,” says PVG Menon, president of the Indian Electronic & Semiconductor Association. India does some assembly of TVs, mobile phones, computers, and set-top boxes.

The government of Prime Minister Manmohan Singh is trying to address this technology gap. The Indian cabinet on Feb. 14 approved plans for two semiconductor manufacturing projects, requiring an investment of $10.2 billion, with IBM, Geneva-based STMicroelectronics (STM:FP), and Israel’s Tower Semiconductor (TSEM:IT) taking part.

via India Wants to Build Its Own Chips to Satisfy Electronics Demand – Businessweek.

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Posco plant in India gets environment clearance – Businessweek

India\’s environment ministry has cleared South Korean steel giant Posco\’s planned $13 billion steel plant in eastern India but has asked the company to spend more on social welfare, an official said Friday.

The clearance was given a few days ago and will allow Posco to go ahead with the massive plant in Odisha state, the official said on condition of anonymity because he was not authorized to speak to the media. He did not give further details.

The clearance comes days before South Korean President Park Geun-hye is to begin a four-day visit to India on Jan. 15.

The Odisha steel plant would be the largest-ever foreign investment in India. The country has been embroiled in fierce debates over how to protect its environment while lifting hundreds of millions of people out of poverty through investment and infrastructure development.

via Posco plant in India gets environment clearance – Businessweek.

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Spotted Again in America: Textile Jobs –

More signs that the era of ‘cheap’ Chinese manufacturing is on the wane.  See -

“Zhu Shanqing, who owns a yarn-spinning factory in Hangzhou in China\’s Zhejiang province, is struggling with rising costs for labor, energy and land. So he is boxing up some of his spindles and moving.

To South Carolina.

Mr. Zhu is one of a growing number of Asian textile manufacturers setting up production in the U.S. Southeast to save money as salaries, energy and other costs rise at home. His company, Keer Group Co., has agreed to invest $218 million to build a factory in unincorporated Lancaster County, not far from Charlotte, N.C. The new plant will pay half as much as Mr. Zhu does for electricity in China and get local government support, he says. Keer expects to create at least 500 jobs.

There is another benefit. As costs continue to increase in China, Keer can ship yarn to manufacturers in Central America, which, unlike companies in China, can send finished clothes duty-free to the U.S.

The move by Mr. Zhu and others will scarcely revive a once bustling Southern textile industry. But it illustrates how shifts in global trade are creating advantages for U.S.-based manufacturing.

China Real Time

Why One Chinese Textile Maker Sees His Future in the U.S.

\”We are on the leading edge of a mature cycle\” with rising costs pushing Asian companies to consider moving to the U.S., said Robert Hitt III, South Carolina\’s commerce secretary.

In October, Mumbai-based ShriVallabh Pittie Group announced it would build a $70 million yarn operation in rural Sylvania, Ga., bringing 250 jobs. The company wants to avoid paying U.S. duties and to secure \”cheap, plentiful and importantly reliable\” energy, crucial in yarn production yet erratic in India, said Zulfiqar Ramzan, vice president for international development. Yarn spinning runs 24 hours a day, seven days a week, for most of the year, and any energy disruptions cause substantial delays and waste, he said.

In April, Alok Industries, 521070.BY +1.88% another Mumbai textiles producer, said it would build a yarn-spinning factory in the South, though it hasn\’t said where. The company expects to save on duties by making yarn in the U.S. and pay less than 10% of what it pays for energy in India, said Chief Executive Arun Agarwal.

In September, JN Fibers Inc. of China agreed to build a $45 million plant in South Carolina that turns plastic bottles into polyester fibers used to stuff pillows and furniture. That investment is expected to create 318 jobs. Development officials in South Carolina and Georgia say more Asian textile manufacturers have contacted them this year.”

via Spotted Again in America: Textile Jobs –


Christmas 2013: Inside a Chinese toy factory – Telegraph

Please note the last sentence in this abstract: “… an even bigger problem, which will hit in four to five years’ time, is that workers do not want these jobs any more. It’s not so much about the money, they just don’t want them.”

Good news for next level countries seeking to manufacture for developed countries.

“Yang Jiandong is a Chinese Christmas elf; toys and gadgets division. Here in steamy South China, 6,000 miles away from your front room, the trim and sprightly 39-year-old runs one of the thousands of factories that make the iPads and Furbies, Transformer robots and LeapPads that will soon be waiting under our Christmas trees.

English: Remote Controlled Car

English: Remote Controlled Car (Photo credit: Wikipedia)

This year, his favourite gadget is a remote-controlled flying battle drone from the movie Avatar. He giggles when, after navigating it around the showroom, it crashes into the wall. “No problem,” he smiles. “These ones are hard to break”. His company, Attop, turns out 800,000 remote-controlled helicopters a year but also makes accessories for Barbies, puzzles and Hot Wheels cars for Mattel.

In his biscuit-coloured factory, hundreds of workers man the production lines: teenage boys with spiky orange-dyed hair and studded leather jackets, old aunties in woollen trousers and young women who diligently focus on snapping together the shell of the toys or soldering the electronics inside.

One floor down sit the £100,000-a-piece injection moulding machines that crank out the plastic components. Two floors above sit the painters, the most skilled and highly-paid workers in the plant.

They spray the toys with colour or stamp them before moving them to another line for final testing and then boxing.

In the warehouse, boxes of remote-controlled helicopters are marked to go to Costa Rica and Guatemala while Hello Kitty toys are bound for Brazil. “The shipment to the UK left a while back,” a worker says.

There are two commonly held beliefs about Chinese manufacturing. The first is that Chinese factories only churn out cheap, disposable tat.

The second is that they resemble Dickensian workhouses.

But while small, dirty, polluting factories do exist in South China, they are increasingly being squeezed out of the market by well-run, advanced plants like Mr Yang’s.

A recent Chinese scandal which found medical waste being melted into plastic for new toys actually helped Mr Yang’s business, he said. “We had to write to our customers to let them know we did not have any problems,” he says. “Now more buyers turn to trust-worthy companies like ours”.

There is a 100-seat “business academy” with lessons for workers after their shifts, a grand piano in the hallway (“Anyone can play it over lunch”), a mini farm for workers to “relax by growing their own vegetables”, and a research and development department that designed all the Avatar toys in house.

Other plants are even more impressive. Three years ago, a spate of suicides at Foxconn’s Longhua factory convinced the world that the giant factories making our iPhones and iPads are vast, alienating and uncaring.

Today, after intense public pressure, Longhua has become a model factory, with football pitches, reduced working hours and a robot-assisted production line.

Behind the change is consumer pressure. “Ten years ago,” says Mr Yang, “Foreign companies would pick you to make their toys if you could give them a cheap price. They did not care about certification or research and development. But now the first thing they do is check whether you have safety certificates, and whether you are able to certify new toys. It costs huge amounts to get these tests done each time.”

At Attop, the managers believe the smaller toy makers, the ones who have provided cheap toys for years, will soon hit the wall. Christmas next year will be more expensive, and so will the Christmas after that.

“The golden years of the toy business were 1985 to 2000 but since then it has gone really downhill,” said Dave Cave, the British founder of Dragon-i toys in Hong Kong. “First the EU demanded to have all these tests in place. It has made the toys safer, but it has also made them more expensive.”

“Then the Chinese government decided to pay factory workers a fair wage, which of course I support. But costs are rising. And an even bigger problem, which will hit in four to five years’ time, is that workers do not want these jobs any more. It’s not so much about the money, they just don’t want them.””

via Video: Christmas 2013: Inside a Chinese toy factory – Telegraph.


U.S. Electronics Maker Knowles Adapts to a Changed China – Businessweek

If you’ve ever used a smartphone, phone, tablet, laptop, or camera, chances are you’ve used a Knowles Electronics product—and it may have come from Knowles’s factory in Suzhou, China. Based in Itasca, Ill., Knowles makes the tiny receivers and microphones that go into many products of Apple (AAPL), Samsung (005930:KS), BlackBerry (BBRY), and Huawei (002502:CH), among others.

Knowles, a subsidiary of manufacturing conglomerate Dover (DOV), is trying to figure out how to stay in China, which has changed beyond recognition since the company arrived in Suzhou in 1995. “When we came it was obvious that very low-cost labor was an important driver,” says Steven Lu, China managing director of Knowles, which also makes components for hearing aids. “Now wages for some positions have gone up five times and even more.” Rising land and raw materials prices and an appreciating yuan have further upended the business model.

Low-end producers of textiles, sneakers, and toys have been shutting their China operations and relocating to Vietnam, Cambodia, and India. That’s not an option for businesses that pack a lot of engineering knowhow into their products. “In the past 10 to 20 years, China has developed a very complete supply chain for us. The whole ecosystem is right here,” says Lu. “And all the major cell phones are now produced in China. Staying close to them is a major driving force” to stay put.

via U.S. Electronics Maker Knowles Adapts to a Changed China – Businessweek.


Guest post: Senkaku – accelerating the China relocation trade? | beyondbrics

The debate continues on the motivations and risks of China’s decision on November 23 to announce an East China Sea Air Defence Identification Zone (ADIZ) which critically includes the disputed Senkaku Islands (know in China as Daioyu). There is little dispute that the standoff between China, Japan and the US has the capacity to escalate into something much more dangerous unless US Vice-President Joe Biden’s recent Asia trip is effective in ratcheting down tensions.

Has China miscalculated in terms of the rapid US response of B52 bomber sorties over the disputed Islands or prospective US naval deployment build-up in the region? Or is this the preliminary phase of a much longer-term slow creep by China in fulfilling its ambitions in establishing a more dominant regional role? Vietnam, the Philippines, Taiwan, Malaysia and Brunei (all US allies) are – like Japan – enmeshed in arguments with Beijing over relatively minor but potentially strategic bits of maritime real estate. Does the US administration have the willingness to back its allies on all fronts

Others have argued that the new Chinese leadership under President Xi Jinping are using nationalist sentiment to distract the Chinese public from the growth slowdown as well as solidify support among the Chinese military. Meanwhile Japan has been busily building up mutual defence and security ties across southeast Asia, and with Australia and India, as a hedge against Beijing. The state visit of the Japanese Emperor to India to has taken on even more significance.

While the geopolitical dynamics remain fluid and uncertain, a more definite consequence of the dispute may well be to accelerate the China relocation macro theme with major implications for FDI flows in the rest of the region. Up until now the primary motivation for foreign companies with large scale manufacturing operations to relocate from China has been the rapid rise in Chinese labour costs and the growing signs of worker shortages. The case was made most effectively by former World Bank Chief Economist Justin Yifu Lin (see Chandra, Lin and Wang (2012)) who suggested that:

industrial upgrading has increased wages and is causing China to graduate from labor-intensive to more capital-and technology-intensive industries. These industries will shed labor and create a huge opportunity for lower wage countries to start a phase of labor-intensive industrialization.

This process, which they called the Leading Dragon Phenomenon, offers an unprecedented opportunity to low-income countries where the industrial sector is underdeveloped and investment capital and entrepreneurial skills are leading constraints to manufacturing. They also note that low income countries such can seize the opportunity and resolve the constraints by attracting some of the FDI flowing currently from China, India and Brazil into the manufacturing sectors of other developing countries.

So the relocation of factories as a result of China economic rebalancing is a multi-year structural trend that is likely to be the dominant macro theme for developing economies for the next decade and beyond. But it is becoming more apparent that political risk mitigation in the face of resurgent Chinese regional territorial ambitions and aggressiveness will re-inforce the macroeconomic justification for diversifying away from China. Japanese outward FDI has increased for two years in succession, with 2012 the second highest increase in history ($122.4bn, an increase of 12.5 per cent over the previous year). Japan’s total outward FDI stock exceeded $1tn. However what is more interesting, as illustrated in the diagram below, is that Japan’s FDI flow to ASEAN has grown relative to that towards China.

Even if it’s a remote scenario, what if accidental engagement between Japanese and Chinese fighters in the newly announced ADIZ rapidly escalated into a more serious conflict or even declaration of war? The hundreds of billions of dollars of Japanese investment into factories in China would appear at risk. Even if we exclude the expropriation of factories directly, at the very minimum, the experience of Chinese nationalist protests over the Yasukune shrine visits by Japanese politicians or in the more distant past the US bombing of the Chinese embassy in Belgrade are clearly risks that policy makers and boards of Japanese multinationals must be increasingly worried about. And, unlike Chinese holdings of US treasuries that could be liquidated reasonably quickly, albeit potentially at the risk of self-destructively causing a meltdown in global financial markets, FDI in factory assets is, by its very nature, immobile. Moreover Japanese managers and workers in China would also be vulnerable. One might argue that there is a risk of a similar level of concern developing in Seoul or Taipei or perhaps even Washington.

via Guest post: Senkaku – accelerating the China relocation trade? | beyondbrics.

Ifty Islam is the managing partner of AT Capital in Dhaka, Bangladesh. Ifty.islam@


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