The worldwide network of getting goods made and sold is becoming even more complex. But here's how investors can benefit.
The global economy is loading up the moving vans again. Consider this example:
The world's fastest-growing economies
The company's existing production base in Shenzhen will be used for research and development.
Certainly a rash of recent suicides at Foxconn's Shenzhen factory added to the urgency. But these moves are all part of a long-term strategy at Foxconn -- and at other manufacturing companies in industries from high technology to textiles -- to move production from the coastal cities of southern China to the less-developed areas of central and northern China.
The purpose: to cut labor costs.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=4d098f70-a8ce-4f1e-bdc1-5c6986498911,05bcfca0-2f6f-488c-bb99-68e5083df0aa,c51ba357-33cd-4e21-9a14-3326584790ff,6bfddac6-01aa-4b0b-9af5-2cb2a319ed61,4b8f2a96-b042-4bc1-982e-ef827c5d582a,ddc6d148-95f5-4459-8ed3-8f48a989bf71,a0085300-d698-406c-a00a-0fe8270a2814,200bbe07-7fe0-4eef-b324-4250f035e59d,3d93044c-493e-46d6-936c-aadbac183495,cf6316fa-916e-4a88-b356-2c4eb85248d6,012e0557-fdf4-4c21-974e-f3fc6e87b4ec", "player.fr": "iv2_en-us_money_article_16x9-Investing-JubaksJournal"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=4d098f70-a8ce-4f1e-bdc1-5c6986498911,05bcfca0-2f6f-488c-bb99-68e5083df0aa,c51ba357-33cd-4e21-9a14-3326584790ff,6bfddac6-01aa-4b0b-9af5-2cb2a319ed61,4b8f2a96-b042-4bc1-982e-ef827c5d582a,ddc6d148-95f5-4459-8ed3-8f48a989bf71,a0085300-d698-406c-a00a-0fe8270a2814,200bbe07-7fe0-4eef-b324-4250f035e59d,3d93044c-493e-46d6-936c-aadbac183495,cf6316fa-916e-4a88-b356-2c4eb85248d6,012e0557-fdf4-4c21-974e-f3fc6e87b4ec;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');The Foxconn move is just the tip of a global iceberg. Chinese companies are moving inland to cut costs because their customers are looking to cut their costs by eliminating inefficient, high-cost suppliers and squeezing suppliers on prices. When possible, production will be moved from higher-cost countries such as China to lower-cost labor markets such as Vietnam or Bangladesh.
What we're seeing is a huge restructuring in the global supply chain aimed at reducing costs -- again. The predictable result will be -- again -- the elimination of high-cost, low-value-added producers.
The underappreciated result -- and here's the opportunity for investors -- will be a vast increase in the complexity of an already terribly complex global supply chain. The beneficiaries of that increase will be a handful of companies that are positioned to execute the new complexities of sourcing, coordination, logistics and transportation that this iteration of the global supply chain presents.
In this column, I'm going to outline some of the dimensions of this next generation in the global supply chain, then give you the names of three companies that are in a position to take advantage of this development.Cutting costs is job No. 1 The reason for all the change is simple: cost. In China, there's actually a worker shortage in the coastal areas that have long formed the basis of that country's world factory. And that's led to a bidding war for workers, forcing huge increases in the wages manufacturers have to pay. On March 18, for example, coastal Guangdong, China's biggest exporting province, announced a 20% increase in the provincial minimum wage. That increase brought wages in Guangdong to parity with those in provincial rival Jiangsu, which had raised its minimum wage by 13% the previous month. The increase brought the average monthly pay -- after adding in bonuses based on output -- to a little less than $300 at current exchange rates.
Chinese manufacturers don't really have much choice but to try to cut costs somehow. They can't eat the extra wages themselves; many Chinese companies are barely profitable, with margins of 3% or less. And they can't pass the costs on to their customers because those customers have grown accustomed to annual price decreases over the past decade. (Remember that one of Alan Greenspan's explanations for why inflation was so low during the boom in the 1990s was that constant price decreases resulted from companies moving production to China's world factory.)
Those companies are taking steps of their own to make sure that prices to them keep on falling.
For example, Wal-Mart Stores (WMT, news, msgs) has launched a huge supply-chain overhaul designed to increase the percentage of goods it buys directly from manufacturers. Wal-Mart wants to cut out as many middlemen as it can. The company has said the effort will emphasize the $100 billion in sales (out of $400 billion) that Wal-Mart gets from its own private-label goods, which are manufactured by someone else to be sold under an in-house label such as Faded Glory. Right now, Wal-Mart buys only about 20% of those private-label goods directly from manufacturers.
The company estimates it can save $4 billion to $12 billion by shifting the way it buys its private-label goods.
Continued: Globalizing the pain More from MSN Money and MoneyShow.com
Are China's banks in trouble?
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Oh yeah, there's money to be had.
And that means all chips on the table, communist, slave child labor, or not.
Someone's membership in the mucky muck club is at stake here.
ReplyReport AbuseMore stupidity #5Friday, August 13, 2010 6:13:54 AM
I'm just waiting for the price of bananas to go up when companies run out of humans & start hiring chimps. When will we all learn? When the chimps are running the companies? Too late for that?
Too bad we all couldn't put as much energy into making this world a better place for everyone instead of screwing it up? Or, is this world really a big light bulb, just waiting to be screwed, switched & lit up?
ReplyReport Abusejohnjojon #6Friday, August 13, 2010 6:58:05 AMThis is a very well explained article. The results beggar the question, "Will Walmart be passing these savings on to the people who shop there because they cannot afford to go elsewhere or is their move merely aimed at fattening the wallets of their stockholders?"ReplyReport AbusesteveG1956 #7Friday, August 13, 2010 7:22:38 AMthe move fattens the wallets of CEO's. stockholders? they get the bananas or peanuts......ReplyReport AbusesteveG1956 #8Friday, August 13, 2010 7:23:51 AMi wonder if this means in the long run investing in international transportaion companies is a long term good buy? as well as the software companies that product MRP, ERP software? (enterprise resource planning software like EPICOR?)ReplyReport AbuseLost Dollar #9Friday, August 13, 2010 8:25:01 AMI think this piece by Jim is not only interesting but accurate for things to come. I have been saying for several years now that companies will merely pick up out of one Emerging Market and plop down in another to reduce Labor Costs, prevent complaints/worker backlash,lower productivity, lower morale, and continue treating the Labor Pool like "Rented Mules". For $300 per month, how many hours and days a week do you think these Employees are working? How do you think their conditions are? Your answer: Who cares, they are on the Far side of the World. Yet, we are buying this "crap" that they manufacture (thru Wal-Mart).
I know Jim has an article to write and stay optimistic about potential Companies to watch for, but the reality is and will be this ongoing movement to reduce Labor Costs at all Costs. (His article does not even mention Patent Infringements/Patent Dress Violations for Companies that are doing business there now, and other companies manufacturing "Fake" items and getting them into Port in California--Shipping Containers.)
If this is the new Reality, how do we as a society stay optimistic? What Short and Long Term Goals does our Government and Corporations have to try to turn this Ship around? Do they owe the American anything? Should we just say,"Let's go all in on the Afghanistan War no matter the costs of Life or Costs of War for a means of Population Control or just to give us something to do so we are not unemployed."--I know this is a Sick thought. When I start going down this road, I try not to get too depressed, and tell everyone just to stay single,childless, and keep hoarding and saving what you have.
ReplyReport AbuseMESIMPSON #10Friday, August 13, 2010 8:25:45 AMCapital still finds the lowest cost resources, except in the boardroom.ReplyReport Abuse1 - 10 of 52PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/JubaksJournal/global-markets-pain-moves-to-China.aspx?','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*What we're seeing is a huge restructuring in the global supply chain aimed at reducing costs -- again. The predictable result will be -- again -- the elimination of high-cost, low-value-added producers.
The underappreciated result -- and here's the opportunity for investors -- will be a vast increase in the complexity of an already terribly complex global supply chain. The beneficiaries of that increase will be a handful of companies that are positioned to execute the new complexities of sourcing, coordination, logistics and transportation that this iteration of the global supply chain presents.
In this column, I'm going to outline some of the dimensions of this next generation in the global supply chain, then give you the names of three companies that are in a position to take advantage of this development.Cutting costs is job No. 1 The reason for all the change is simple: cost. In China, there's actually a worker shortage in the coastal areas that have long formed the basis of that country's world factory. And that's led to a bidding war for workers, forcing huge increases in the wages manufacturers have to pay. On March 18, for example, coastal Guangdong, China's biggest exporting province, announced a 20% increase in the provincial minimum wage. That increase brought wages in Guangdong to parity with those in provincial rival Jiangsu, which had raised its minimum wage by 13% the previous month. The increase brought the average monthly pay -- after adding in bonuses based on output -- to a little less than $300 at current exchange rates.
Chinese manufacturers don't really have much choice but to try to cut costs somehow. They can't eat the extra wages themselves; many Chinese companies are barely profitable, with margins of 3% or less. And they can't pass the costs on to their customers because those customers have grown accustomed to annual price decreases over the past decade. (Remember that one of Alan Greenspan's explanations for why inflation was so low during the boom in the 1990s was that constant price decreases resulted from companies moving production to China's world factory.)
Those companies are taking steps of their own to make sure that prices to them keep on falling.
For example, Wal-Mart Stores (WMT, news, msgs) has launched a huge supply-chain overhaul designed to increase the percentage of goods it buys directly from manufacturers. Wal-Mart wants to cut out as many middlemen as it can. The company has said the effort will emphasize the $100 billion in sales (out of $400 billion) that Wal-Mart gets from its own private-label goods, which are manufactured by someone else to be sold under an in-house label such as Faded Glory. Right now, Wal-Mart buys only about 20% of those private-label goods directly from manufacturers.
The company estimates it can save $4 billion to $12 billion by shifting the way it buys its private-label goods.
Continued: Globalizing the pain More from MSN Money and MoneyShow.com
Are China's banks in trouble?
1 | 2 | next >
Check out Jim's top stocks for the next 12 months.
Read how to invest with Jubak's showcase portfolio.
Follow the long-term portfolio from Jim's book "The Jubak Picks."
See Jim's new portfolio to help navigate the treacherous interest-rate environment.
What the hell are we doing dealing with a communist nation anyway, huh?
Oh yeah, there's money to be had.
And that means all chips on the table, communist, slave child labor, or not.
Someone's membership in the mucky muck club is at stake here.
I'm just waiting for the price of bananas to go up when companies run out of humans & start hiring chimps. When will we all learn? When the chimps are running the companies? Too late for that?
Too bad we all couldn't put as much energy into making this world a better place for everyone instead of screwing it up? Or, is this world really a big light bulb, just waiting to be screwed, switched & lit up?
I think this piece by Jim is not only interesting but accurate for things to come. I have been saying for several years now that companies will merely pick up out of one Emerging Market and plop down in another to reduce Labor Costs, prevent complaints/worker backlash,lower productivity, lower morale, and continue treating the Labor Pool like "Rented Mules". For $300 per month, how many hours and days a week do you think these Employees are working? How do you think their conditions are? Your answer: Who cares, they are on the Far side of the World. Yet, we are buying this "crap" that they manufacture (thru Wal-Mart).
I know Jim has an article to write and stay optimistic about potential Companies to watch for, but the reality is and will be this ongoing movement to reduce Labor Costs at all Costs. (His article does not even mention Patent Infringements/Patent Dress Violations for Companies that are doing business there now, and other companies manufacturing "Fake" items and getting them into Port in California--Shipping Containers.)
If this is the new Reality, how do we as a society stay optimistic? What Short and Long Term Goals does our Government and Corporations have to try to turn this Ship around? Do they owe the American anything? Should we just say,"Let's go all in on the Afghanistan War no matter the costs of Life or Costs of War for a means of Population Control or just to give us something to do so we are not unemployed."--I know this is a Sick thought. When I start going down this road, I try not to get too depressed, and tell everyone just to stay single,childless, and keep hoarding and saving what you have.
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