What is the future of manufacturing?

Ed, I have been going to China every single year at least once, since 1989. I spend at least 15% of the year there, Have two offices,plenty
of staff, and have learned the culture to a point of comfort.
I have seen China grow immensely during this time. As a matter of fact, I have never seen anything or read anything like it in history.It has been amazing. 2-3 years ago, China built a second international airport on the far side of Shanghai, called Pudong. It is at least 30 miles from the center of the city. Withing a few years, you will see all skyscrapers all the way to that airport. It has already begun. Mixed in those skyscapers will be factories and residences. Those factories will become the most modern facilities in all of Asia, with the very best of infrastructure to support them. I know China well. Real well. Thats my job. To monitor their economy and keep my offices rolling between the graft, corruption and business.
My wife worked for years for a prominent economist, so Economics is a staple in my house.
Since the beginning of time, companies have always been reinventing themselves. It is a law of nature. Look at Corning? From dishes and glass to fiberoptics. Now it will be something else. They are smart and aggressive. Because of it, they dont feel the downturns for very long, because they are always preparing.
Other than the current basis for free trade, what would you propose that would advance economies of the world? If you are negative about having companies fight to innovate and reinvent themselves, I can only imagine how positive you would be for a different method of economics. What method works? Protectionism? Ask South America and Asia how that has worked. China alone will import record number of goods this year. While they have surpluses with us, they dont with everyone. They are buying foreign goods at an amazing growth rate. They have learned that Protectionism gets one nowhere, except inflation, wasted resources, and more debt. Its all a matter of economic history.

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I don't ever recall Ed advocating protectionism. Quite the opposite.

I'm gonna go out on a little bit of a limb here, and make a guess that most of whatever they did import, they did not import from the US.
Jim
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bg says...

True, but here he is stating that he believes free trade does not work. Well, what is the alternative? 2 others are commonly practiced, outright protectionism, or "fair trade", which is a go between the two others. Fair trade basically stands for protect what you need to protect, when you want to, on a limited basis.
If he is looking for another method, he can wait a century or so, when someone may come up with a different economic structure.
Within 5 years Most of the developing countries will have decreased any import duties to reasonable levels, as a result of WTO membership. There will always be fights and squabbles, but thats humanity's factor. At that time, where does the argument free or fair or protectionism stand? Another method? The argument loses its relevance in a matter of time. The process is already in place. China's duty for metalworking equipment and tools I believe is currently 17% max, scaled down for different divisions.

Stong limb, Jim. They do not purchase that much from the USA on scale. However, my point is that they are amassing large amounts of foreign currency, but their trade surplus is a pittance compared to Japans (diue to large imports from Asian countries who have the surplus over China for their own trade balances). South America has been outright protectionist for years and look at the shape they are in. We have to bail them out every 5 years and still they dont learn.

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The irony here, bg, is that you advocate "innovation," and "change or die," for the people in US manufacturing who are having the slats cut out from under them by low wages. But, when I suggest that we need an innovative idea in trade relations, you limit us to the solutions from the past, and suggest that it will take a century or two to come up with something new.
What's wrong with this picture?
-- Ed Huntress (remove "3" from email address for email reply)
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Ed,
Whats all the huff and puff for?
Look, it would be great to come up with a new economic theory that will fix all the economic disparities in the world today. But its not something that will happen tomorrow. People need solutions near-term. So if that is a given, we need to work within the systems we have available as best we can.

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But I have *told* everyone what the near-term solutions are going to be. All the executives are starting to act on my proposal as we converse.
Simply fire all the US workers, and move production over to China, where they make exactly the same thing that was being made in the US, for 1/20 of the cost. Import the widgets, and sell them for more profit than before.
Continue until you run out of a) widgets b)folks to make widgets, or c) folks (with money) to buy widgets. For the head of a corporation, this is not only a no-brainer but indeed they would be remiss in their responsibilities to the stockholders if they did *not* do this in its entirety.
Jim
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bg says...

Before I left Honeywell 18 months ago, I suggested that my boss (I reported in to the Indian software organization) needed to start hiring MBAs from the Indian Institute of Management (literally right across the street) so that the company could start exporting the product management jobs. The amount of money to be saved would be staggering, and actually made a lot of sense given that the engineering would be done there anyway.
It's happening.
Pete
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says...

This for me is the really infuriating part. The better we do, the harder we get hit. And to the uninitiated, (at least discussing the job flight) it looks like our own CEOs that are handing them the sticks!
Jim
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Only two possibilities? Perhaps that's because of the way the issue has been framed by the ideologues, who have overwhelmed the debate for so long. And those ideologues tend to be people who have a financial interest in the outcome.

The steel industry is far from transparent. The fact is that U.S. primary steel producers are too small to compete on world markets. Until now, they've been unable to consolidate because they're all carrying enormous legacy liabilities in the form of unfunded pension obligations and retirement healthcare plans. No one with the capital to do it will touch them.
The idea behind the tariffs was to give them some profitibility, which would interest investors in buying them up and consolidating them. It hasn't worked so far, and it may never work. But it's a good example of how such things are seldom what they seem.

"The solution is evident"? So, what's the solution?
What does it mean when the "strong" get there only by paying their workers 80 cents/hour? What other "strength" do the Chinese have? Have they innovated any manufacturing technologies? Do they have geographic advantages? Resource advantages? More efficient production? Is their competitive edge explained by better schemes of industrial organization and efficient automation, like the Japanese have innovated? No. They have low wages, and a command-and-control economic structure that focuses on exports. Period.
And their low wages are attracting astronomical amounts of FDI (foreign direct invertment). The new "paradigm" seems to be, as Alan Tonelson puts it, a race to the bottom.
The goals of economic development, the old "paradigm," run towards improvements in labor productivity, economic opportunity, and innovations in products and manufacturing. So the equation has been stood on its head. The real question now, for a country that wants its economy to grow, is what goals they should establish. Keep cutting wages? There's a winner for you...

It isn't a matter of belief. It's a matter of facts. And one key fact is that the Chinese are addicted to their state-run enterprises, which are their employment buffer that keeps a lid on unrest, even while they run their banking system into the tank. Their banks are insolvent. If they opened up their state banking system to competition, as they've promised the WTO they will do, there would be a run on those banks tomorrow, and they would collapse within a week. All of their money is loaned out in non-performing loans, which can never be paid back. They knew they would never be paid back when they loaned the money -- to state-run enterprises, exclusively. There's no way to call those loans in. The money is all gone.
For both practical and ideological reasons, China's government is unable to do anything about it. They can't get off of the merry-go-'round they've created. They're sweating it. So is the world banking community.

Not. VW has by far the largest market share in China, at 40%. From "The Business Times," August 4, 2003: "China, the land of $50 VCRs and $3 haircuts, remains too uncompetitive a place to make cars for export. And it could take up to five years before the country exports cars, according to a top VW executive yesterday."
From Automotive News Europe, July 16, 2003: "Volkswagen, which has complained frequently about the high cost of auto parts in China, will follow the example of Ford Motor Co. and General Motors and begin sourcing parts here for its global operations."
Opinion is a kind of low-level ailment, bg. The cure for it is facts. Unfortunately, they require some effort to research.
But they can really help clear your head.
-- Ed Huntress (remove "3" from email address for email reply)
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Actually three I know of in the same format. Fair trade is actually middle ground between free trade and outright protectionism.

Lousy decision. Look at the consequences to this action. As if these metalworkers here were not already fighting an uphill battle. Bush was thinking of the political ramifications, not the economical. He doesnt know better. >

Change or die. Its cold, but has always been true. The milkman, diaper man, Knife sharpening truck, etc. If they didnt change the paradigm, they starved.

Nothing, If you produce a different item in that same industry or another.
What other "strength" do the Chinese have? Have they

Maybe. I dont see the relevance here.
Do they have geographic

Over most countries, yes.
Resource advantages? Over most countries, yes.
More efficient production? Is their

This is true for the most part.

This is true.

Why hasnt it been stood on its head? You listed economic opportunity. Moving production for certain items is good economic opportunity. Innovation is lacking. That si the basis for my argument. It is lacking.
The

Goals? Provide sound govt economic planning - we dont Provide ample economic infrastructure - we dont Provide money and resources for research and dev. - we need more.

Chinas banks have been in garage sale mode for the past three years selling off bad assets in a fire sale, even to foreigners. The loans are being written off and they are working on getting the program on track.
But you are mistaken to think there is no competition. Froeign bnaks now work in local currency, give loans and sell financial instruments. I suggest you get your facts straight.

"A shipment of 252 Xiali economy cars manufactured in north China's port city of Tianjin is on its way to the United States market. Tianjin is the leading manufacturing center for economy cars in China.
The cars, produced by Tianjin Auto Group in cooperation with Toyota, are the first batch of Chinese-made economy cars to be exported. They are part of a deal signed in April between the manufacturer and American Automobile Network Holdings Inc., which will be the sole agent for Xiali economy cars on the international market.
According to the deal, the American company will be responsible for selling at least 25,000 Xiali cars during the next five years"
GM Shanghai is also exporting cars to the Phillipines (I have a relative who recently left GM Asia to work for one of their major parts suppliers - at least 5 factories in China now).
I suggest that you take some medicine for that ailment Ed.You need some more research to come up with facts.
BG
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Ah, the old free-trade mantra raises its little head. So, you're comparing a skilled moldmaker, who works with 3D CAD and 5-axis high-speed machining centers, with a guy who sharpens knives on the back of a truck?
You sound like Grant Aldonis, Assistant Sec. of Commerce. He thinks our productivity is too low to compete. He apparently didn't read his own department's figures, which show that we have the highest productivity in the world.
As you sit there telling other people what they must do, bg, what is it you suggest? Should they all start becoming middlemen for China?

You don't understand the question. Geographic advantage relates to an advantageous climate or low-cost trans-shipping. In terms of trade with the US, China has neither.

We aren't talking about "most countries." We're talking about the US. Again, no advantage overall.

And your argument is utter nonsense. The US is the most innovative economy in the world. So, your cure for an assault by low-wage mercantilism is to do something that you can't think of yourself, and that this country already does better than anyone else. That sounds like a self-serving excuse to me, bg, when it's coming from someone who's engaged in foreign trade himself. Your prescription seems to be, "go away, I have mine."

you...
Ooh, more government planning and spending. They're going to take your Junior Libertarian Free-Trade Decoder Ring away from you if you keep talking like that, bg. <g>

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You neglect to mention that this is only in a few select cities, and most of the foreign banks' RMB services are only allowed to Chinese businesses, not to the foreigners doing business in China. The phased "liberalization" of foreign banks in China won't be complete until 2007.
Meanwhile, our Fed. Reserve estimates that the non-performing loan (NPL) percentage among major Chinese banks is around 60%. In a competitive marketplace, banks are usually insolvent when their NPL goes above 20%. Their capital-adequacy ratios (CARs) are still far below the international norm of 8%, while they're demanding far higher ratios, well ABOVE the international norm, from foreign banks that want to do business in China. At the same time, they have limited the inter-bank loans from Chinese banks to foreign banks, which is one of their few sources of RMB, assuring that their growth will be limited, and that Chinese banks won't have to compete with them except at that margins, for quite a long time to come. They're barely sticking to the letter of their WTO agreements, but it's obvious they're doing everything they can to hold back the tide.
But China's banks are not in a competitive marketplace. If they were, as I said, they'd have a run and go belly-up before week's end.

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Ah, bg, that ship set sail in June of 2002. Maybe your subscription to the People's Daily is running a little behind. <g>
American Automobile Network Holdings Inc. was the remnant of the collapsed Daewoo dealer network in the U.S. All hat, no cattle. No cars, either.
The cars were slated to land in Port Everglades, Fla., but the US government wouldn't allow them to pass through customs because they don't meet US emissions standards. The ship was re-routed to Mexico, and then apparently it was decided they'd land in Port Everglades after all, for trans-shipment to Africa.
They haven't been heard from since. They may have tried to cross the Bermuda Triangle...
There could be a connection, though, with an incident in which the golf carts at the Boca Raton Country Club were replaced in the dead of night by a fleet of funny little hardtops with radios and turn signals, and with tear-off pads of Chinese takeout menus stuffed into the glove boxes. Under the vehicles' insignia, which no one recognizes, are the words "Happy, Happy, Joy, Joy."
Golfers are generally pleased with the new vehicles, although they complain about the lack of air conditioning and a noxious odor coming from their trunks. "It smells like somebody has been living in there for weeks," says Boca Raton police chief Billy-Bob Turkle. "But it can't be, because those trunks are so small you could barely stuff a Chinaman in there."
The mysterious replacement of the golf carts, which turned up in a hand-laundry parking lot near Clearwater, is under investigation. Police report that the carts were missing their batteries and tires.

Yeah, a grand total of 900 luxury Buicks. But I was responding to this statement of yours: "VW, audi, Peugeot, Toyota, Honda and Nissan have all been benefitting greatly. I dont believe all have been exporting full vehicles, but many have." One assumes that the Shanghai VW executive quoted in that article knows where the cars that his company makes are going.
The total passenger car exports from China this year, which are all trial balloons, run to less than 2,000 vehicles, including SUVs, to other parts of Asia, Turkey, Iran, and Africa. The joke is that they're all being bought by Chinese foreign diplomats. That isn't trade. That's cultural exchange. <g>

Yeah, more research. Maybe you can send me your year-old "People's Daily's" so I can find out what happened last year. <G>
Any word on the Xiali ghost ship?
-- Ed Huntress (remove "3" from email address for email reply)
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Only in the respect that they reinvented themselves. They were forced to adapt. I have given you cases and examples in our postings of companies that have been forced to do so and have done so successfuly.

I dont believe that at all. I am the one saying that I have confidence in our productivity. You seem to be the one throwing in the towel, not even willing to attempt innovation.

I am suggesting that we need innovation, nothing else. It is conceptual,but some people will become middlemen, some laborers, some engineers, and so on. I believe what we are seeing is a natural state of economics.

Ed, why all the huffnpuff? You did not specify you were looking for climate or low cost shipping. You merely stated geography. And in the general sense of the term, yes, they do have certain advantages. But yes, they dont have anything special over us, geographically.

Correct. But agin, you were not specific.

huffnpuffing.Why?
Innovation is not utter nonsense. Thousands of companies all over the world are planning for it everyday. How many times has IBM reinvented itself? Countless. Yes, we are the most innovative economy in the world. It is our greatest advantage, and have said/alluded so in my previous posts. That is why we should continue to put more effort in this area. How do you relate this to be self serving? It is our countries greatest economic asset!

I am talking about simple things, like instead of that 2 lane road, think big and make a 6 lane road. It is easy for countries like China to do it, because they are starting from ground zero. But we have to think along those lines. Improving roads, ports and other infrastructure. They are the foundation of any working economy.
I admit, I dont always like the free trade deal. It seems that it is never negotiated to perfection. But then I am not confident we will ever see perfection in my lifetime.

Thats true. And they would definitely fall on their faces if forced to float their currency right now. Thats why they are fighting it. But they are on the right track. I watched all the other Asian economies wait until disaster struck. At least they are doing something about it before hand, even though so much more needs to be done.

Ed, all of those mfrs are benefitting greatly. Some of them have plans in the works, now building factories for export purposes. My initial question was in regards to why they have waited so long to buy parts from China. You reply with a quote from a VW exec,which was not exactly correct.
You want to focus on the petty word "many"? Lets get on to solving the worlds problems. What are you picking at this stuff for? I think we're making progress. Its nice to discuss issues like this with someone who has a good background. I learn from it. You dont have to get snappy...

Hey, I just did a quick search. I didnt bother to think that I was reading something out of Laurel And Hardys Ghost Ship short.
bg
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-- Ed Huntress (remove "3" from email address for email reply)

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That's actually not a stupid suggestion. Just ask Archer Daniels Midland about how profitable it can be to be a middleman. Or ask your friends in manufacturing who made the most money, an assembly line worker, or a company commission salesman (manufacturer's rep).
Gary
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wrote:

you
For an individual, it's actually a very profitable idea. For an economy as a whole, it's a stupid suggestion.
Ed Huntress
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Think of it this way: If we all paid each other to shine the other's shoes, which would raise the GDP, would it be good for the economy? <g>
Importing and distributing are services that serve us best when they are a very small proportion of the economy -- just enough to get the job done. It's the goods and their transportation to their destination that add value.
Ed Huntress
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Is the effect of a capital-flow deficit different from a balance-of-trade-deficit?
Less capital would seem to mean fewer jobs, *unless* we can create jobs that are less capital-intensive than the ones we're losing (including the capital spent on education & training). This seems to be what you're implying when you mention jobs in the financial sector.
Back in 1987 Tom Peters wrote a book that argued (among other things) that moving manufacturing overseas meant giving up an important source of innovation, because a lot of it comes from interactions between the design guys and the production guys, which is difficult if they're on different continents.
Of course you can always move the design people overseas as well. Then all that's left for us to do is consume the result-- unless too many of us are unemployed (oops).
The service sector is said to be doing well, but it's hard to increase productivity when services have to be rendered in person. And all wealth comes from productivity.
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It also gives up independence and freedoms.
Shipping manufacturing jobs overseas does what when that country or group of countries decides not to send our stuff out or back... e.g. They control now.
When War breaks out - what politics take play ?
This was a poor plan if it was ever planned. I think we were sold down the river myself. NAFTA was one thing, China et. al. is another.
Martin
--
Martin Eastburn, Barbara Eastburn
@ home at Lion's Lair with our computer snipped-for-privacy@pacbell.net
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writes:

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Yes, much different. But don't ask me to explain how. That's an entire course in economics.

Jobs in the financial sector depend on having access to, or control of, vast amounts of capital. It isn't the same thing as an investment in plant or equipment but you don't have financial jobs unless you're sitting on a mountain of capital.

Yes, and I believe that still holds. We are in danger of losing the *source* of innovation in manufacturing.

Yup.
In dollar terms, the service jobs that count the most are the ones that can be delivered electronically from halfway around the world. Thus, the movement of financial and even some legal service jobs to India.

Be very wary of that old bromide. Productivity has little meaning outside of its importance in competition. The direct effect of a 5% increase in productivity is almost unmeasurable in terms of its effect on our lives -- or on the accumulation of wealth. But it can make the difference between profit and bankrupcy for a corporation.
Ed Huntress
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says...

To be somewhat fair one would have to point out this has always been true to some degree. During the 20s the black boxes were radios - and most folks had little idea what was inside. Then the boxes became TVs, and again only a small percentage of the population understood the principles.
I think you are certainly correct though that now most of the average US citizen's day is occupied with manipulating machines that are completely obscure to the operator, as far as the real internal workings go.
The difference is, in the 30s there might have been one or two items that fit that catagory, and they were strictly amusement or pleasure devices. Now nearly eveyone simply cannot do their job when the worm shuts down their computer network or the power goes off. No gas for the car? No way to get around. The technology basically has a full turn around the workers and is starting to squeeze. This is how constrictors work.
Jim
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