Thursday, August 28, 2008

More Jobs Americans won't do

Walking horses and cleaning stables for $5/hr and 4 to a room bedbug-ridden dormitories.

Employed by the wealthiest racehorse-owning Americans .

This snapshot is surely a microcosm of the plight of real American workers today also. Jobs moving to lower cost workers overseas by corporate managers earning lottery winning compensation each and every year .


August 28, 2008

Racetrack Workers Aren’t Paid Minimum Wage, State Agency Finds

With its stately beau monde setting, the Saratoga Race Course is the place to be in August for highbrow horse lovers. But a State Labor Department investigation has found a far less attractive picture for the track’s 1,200 backstretch workers.

The state labor commissioner, M. Patricia Smith, announced on Wednesday that 80 percent of the 110 backstretch workers investigators interviewed — grooms, hot walkers and night watchmen — were not paid minimum wage or time and a half for overtime.

The backstretch workers are employed by individual trainers, who typically train horses for several thoroughbred owners. Some workers told investigators that they were paid just $5.06 an hour, far less than the state minimum wage of $7.15 an hour, Ms. Smith said.

In addition, workers told of being bitten by bedbugs in the racetrack’s dormitories and of eating at soup kitchens because they could not afford the restaurants in Saratoga Springs.

“The violations we uncovered were extensive and significant,” Commissioner Smith said in a telephone interview. “With many workers forced to go to soup kitchens, one can only conclude that the work at the backstretch at Saratoga is a bad bet.”

She estimated that the 1,200 backstretch workers were cheated out of $70,000 in pay each week because of wage violations. Some workers said their pay had not risen in a decade.

Beginning in late July, when the track opened for the season and Saratoga Springs swelled with racetrack fans, 10 state investigators descended on the historic track and interviewed workers in the dorms and horse stalls, where track visitors rarely go.

The investigators found that most of the workers — more than 95 percent of whom are Hispanic — were required to work seven days a week, and often more than 360 days a year when their work included time at the two New York City-area tracks, Aqueduct and Belmont, the Labor Department said.

The hot walkers walk the horses to cool them down after they exercise, while the grooms brush and bathe the horses, rub them down and muck out their stalls.

Lauro Ventura, 61, a groom for 15 years, said in a telephone interview on Wednesday that living conditions at the track were bad. “Three or four of us sleep in a room that’s 10 by 10,” he said in Spanish. “Some guys sleep on air mattresses, some buy little cots, and some just sleep on the floor.”

Bedbugs are a big problem in the dorms, he added. “A lot of the workers bring their sleeping bags from Belmont, where the bedbug problems are much worse,” he said.

Ms. Smith said her department would hold seminars on labor laws for all horse trainers doing business in New York. She said she also wanted to work with the State Racing and Wagering Board to see whether labor law violations should be taken into account in licensing trainers.

Charles Hayward, chief executive of the New York Racing Association, which runs Saratoga, Belmont and Aqueduct, the state’s largest thoroughbred tracks, said the association was concerned about the findings of the investigation.

“N.Y.R.A. shares Commissioner Smith’s concern that workers who are employed by independent trainers on the backstretch are treated fairly and with dignity,” Mr. Hayward said, “both in respect to their living conditions and their ability to earn a living wage.”

The investigators interviewed 88 of the Saratoga track’s 115 trainers, and concluded that 77 of them had failed to keep legally required time and payroll records, Ms. Smith said. The trainers interviewed did not dispute the wage and hour figures that investigators found, she said.

The Labor Department computed that the hot walkers were underpaid by an average of $71.65 each week and the grooms by $82.31.

Mr. Ventura said he was paid $475 a week for about 55 hours of work, which comes to slightly more than $7.15 an hour when overtime is included. But he said that some friends who worked the same schedule were paid only $300 a week.

Jose Ramon Rivera, a hot walker, said in a telephone interview, “We’re fighting for all the grooms, hot walkers and night watchmen to get paid the minimum wage of $7.15 an hour, and overtime after they work 40 hours.”

Ms. Smith said the Labor Department would continue the investigation at Aqueduct and Belmont when the workers moved back there.

The racetrack investigation is part of a stepped-up effort by the department to uncover wage violations in low-wage industries. Two weeks ago, Ms. Smith announced that labor investigators had visited 84 carwashes across the state and found $6.5 million in wage violations involving 1,380 workers.

Mr. Ventura, the groom, discussed another issue that investigators found troubling: the conditions under which the backstretch workers travel when they accompany horses from track to track.

“The trainers want us to be inside the trailer with the horse because sometimes the horse goes crazy,” Mr. Ventura said. “They want us to calm him. The trailer is so small there is no chair for us to sit on. Sometimes we just sit on the floor and risk getting stepped on.”

On one trip, the driver slammed on the brakes, Mr. Ventura said, and he went flying under the horse. His hand and back were stepped on, and his eye was gashed open. He said a track doctor told him he should take a few days off from work, but when the trainer said he would not pay him for missed days, Mr. Ventura decided to work anyway.

“If we don’t work the days we’re injured, we don’t get paid,” he said.

Tuesday, August 19, 2008

Having Children - a 'phase of life'

This is an interesting way of viewing the world and the researcher uses a subtle phrasing that actually displays a radical new view of the world, a feminist view that women are doing other things, perhaps more important , and need not consider having children.

“A lot of women are not having any children,” said Jane Lawler Dye, a Census Bureau researcher who did the report, which looked at women of childbearing age in 2006. “It used to be sort of expected that there was a phase of life where you had children, and a lot of women aren’t doing that now,” Ms. Dye said.

I remember that one of the tenets of biology, one that is still taught in High Schools, is that a 'living organism, i.e. LIFE' is defined as something that has movement, consumes resources AND reproduces. If it doesn't have all of these, it can't be defined as 'living'.

Now reproduction is viewed as merely a 'phase of life', one involving choice, and therefore having no children is a sensible, rational choice. Certainly there is much truth to this. Usually this choice meant 'when', not 'if' .

But, If everyone made this 'no children' choice then either:
- Human Life will cease to exist
- or biologists will need to redefine what a 'living entity' is


August 19, 2008

More Women Than Ever Are Childless, Census Finds

Women are waiting longer to have children, and more women than ever are choosing not to have children at all, according to a new Census Bureau report.

Twenty percent of women ages 40 to 44 have no children, double the level of 30 years ago, the report said; and women in that age bracket who do have children have fewer than ever — an average of 1.9 children, compared with the median of 3.1 children in 1976.

“A lot of women are not having any children,” said Jane Lawler Dye, a Census Bureau researcher who did the report, which looked at women of childbearing age in 2006. “It used to be sort of expected that there was a phase of life where you had children, and a lot of women aren’t doing that now,” Ms. Dye said.

Women with advanced degrees are more likely to be childless, the study found. Of women 40 to 44 with graduate or professional degrees, 27 percent are childless, compared with 18 percent of women who did not continue their education beyond high school, the data show.

The numbers are consistent with a 2006 report Ms. Dye issued on the same subject. While year-by-year change is slow, Ms. Dye said, the data show that women of the baby boom generation are continuing to transform the American family.

Hispanic women are the only group bucking the trends found in the study, averaging 2.3 children each by their 40s. The number of children a Hispanic woman has decreases sharply, however, depending on how many generations her family has lived in the United States, the data show.

One in five new mothers in 2006 were foreign-born, the study found, with California having the highest number of foreign-born new mothers.

Of all the women who had children in 2006, nearly 60 percent worked, with the highest numbers of working mothers in the Midwest. That may be explained by another census study, which found that, for children under 5, the Midwest has more child care available than any other region. Researchers said the numbers seemed to be consistent with other demographic trends, including the rising age of women marrying and having children for the first time, as well as women with more education having fewer children later in life.

“Clearly women have competing alternatives for the use of their time, with the labor market and employment being one and delayed marriage, which has been another trend,” said Suzanne Bianchi, chairwoman of the sociology department at the University of Maryland. “The interesting question is, has it stopped? Is this it, or will we see even higher rates of childlessness among future generations?”

Of women who gave birth in 2006, 36 percent were separated, widowed, divorced or never married. Five percent were living with a partner.

The study also shows sharp geographic differences among children who were born into poverty in 2006. Nearly every Southern state had more children born into poverty than the national average of 25 percent.

Monday, August 18, 2008

Red Flag for US manufacturing

In a world rife with political and social instability this is a major warning signal that is being ignored by corporations and the government alike, based on responses in the article below.

Even those industries that maintain some manufacturing here in the States do NOT plan on increasing that capacity.

They have blinders on and are hoping that the world continues the course, even in the face of rising fuel costs and deadly oil politics as evidenced by Russia's invasion of Georgia.

In the better than average chance that worldwide instabilities cause a significant negative impact on many of these off-shored manufacturing companies, there is a good chance that they may not survive another 5 years.

Not to mention the fact that the US no longer even has the ability to manufacture many products here anymore, leaving us vulnerable politically and economically to foreign manipulations ala OPEC.

The critical paragraph from this article :

Weakening demand abroad accounts for some of the decline. But the manufacturers themselves acknowledge that they gradually undercut their ability to export as they moved more and more production to factories overseas. Bringing that production back to this country, so that it could be exported, would dismantle global networks constructed relentlessly over the last 25 years.

And how about this little tidbit, just briefly noted in the article ?

Since when does a country insist on all manufacturing needing to be done in that country ? It sounds like they have a full-employment policy for their people and we have nothing similar, in law or custom, over here.

In addition, as American companies set up operations in, say, China, they insist that their suppliers locate nearby, for quick and efficient delivery — and that draws more manufacturers overseas.

What do they get if they move everything overseas:

“Our customers just love for us to make our stuff near their new operations,” Mr. Pistell said, “and if we do, they reward us with a lot of business.


August 18, 2008

Export Boom Helps Farms, but Not American Factories

Exports are the bright spot this year in an otherwise bleak economy. But the world is not suddenly snapping up made-in-America goods like aircraft, machinery and staplers. The great attraction is decidedly low-luster commodities like corn, wheat, ore and scrap metal.

This helps explain why manufacturing jobs are continuing to disappear by the tens of thousands and factories are closing even during a miniboom in exports. While the surge in commodities is a welcome relief, it is an unreliable prop for an industrial power.

“The historical data tell us clearly: don’t get too used to commodity export booms; as any third world country will tell you, they tend to go away pretty quickly,” said L. Josh Bivens, a trade expert at the labor-oriented Economic Policy Institute.

His point was that while Boeing’s aircraft or Caterpillar’s tractors are distinctive and sought after, corn grown in Iowa is virtually interchangeable with corn grown in Argentina or any other bread-basket country. “Over a long period,” Mr. Bivens said, “commodities contribute right around zero to export growth.”

Commodity sales have been helped greatly this year by rising prices, particularly for grains, and also by the decline in the value of the dollar, which reduces the cost of American exports in other currencies. Both trends, however, have recently reversed, suggesting that the rise in commodity sales will not be sustained, and that exports might shrink, weakening the economy another notch.

“What amazes me,” said Robert L. Thompson, an agriculture specialist at the University of Illinois, “is that we have been able to greatly increase corn exports while also using it for ethanol. Only by increasing the acreage devoted to corn have we been able to do this, and by squeezing down the use of corn for domestic livestock feed.”

An analysis of trade data by the federal Bureau of Economic Analysis illustrates just how lopsided the gains have been between manufactured goods and unprocessed commodities.

All exports of goods and services in the first half of the year rose at a $52 billion annual rate, adjusted for inflation, up 7.1 percent. Commodities accounted for 41 percent of the increase and manufactured products contributed just 12 percent, the bureau reported. (The figures strip out such items as arms sales and exports to American territories, like Puerto Rico and the Virgin Islands.)

Such unevenness, favoring commodities, is unusual, given that manufactured products, even by this definition, account for 40 percent of the nation’s exports, while commodities make up only 26 percent and services 30 percent. Indeed, not since the bureau began compiling detailed trade data in 1977 have commodities outpaced manufactured exports for two consecutive quarters.

Weakening demand abroad accounts for some of the decline. But the manufacturers themselves acknowledge that they gradually undercut their ability to export as they moved more and more production to factories overseas. Bringing that production back to this country, so that it could be exported, would dismantle global networks constructed relentlessly over the last 25 years.

“We have achieved a worldwide manufacturing base, and we are not going to shut down our factories overseas,” said Franklin J. Vargo, vice president for international economics at the National Association of Manufacturers. “But on the margin, we will shift a little bit of manufacturing back to the United States.”

That has happened recently, in response mainly to soaring transportation costs and the weaker dollar. DESA LLC, for example, known for its heating devices, recently moved some production back to Bowling Green, Ky., from China.

The contrast with commodities, which cannot be shifted overseas, is striking. John Hardin Jr. and his son, David, focus their attention on growing as much grain as they can on 2,500 acres near Indianapolis, counting on exports to absorb their harvest. Meanwhile, Sarah Bovim, a Whirlpool Corporation executive, points to expanding global operations at her company, where production abroad has eclipsed its exports.

“We are looking to expand in emerging markets,” Ms. Bovim said, “which means we are looking to set up shop there.”

The Hardins have every acre of their mostly rented land planted with corn, soybeans and wheat — devoting more acreage to corn in anticipation of huge demand. The nation’s corn exports, measured in tons, have risen nearly 20 percent this year, outstripping the gains of nearly every other commodity. And farmers are on schedule to harvest the second-largest corn crop in the nation’s history, the Agriculture Department reported this week.

“We were in a situation where there wasn’t enough corn in the world to go around,” John Hardin said, noting that damaged harvests in other countries had pushed up the price. The weak dollar also made American corn more attractive.

But even with both of those props disappearing, the Hardins are betting heavily on corn again next year because of its use in ethanol and because of rising demand for livestock feed in India and China, where a rapidly growing middle class increasingly wants meat in its daily diet.

“It is my fondest hope that exports will stay strong,” Mr. Hardin said, “although I don’t think it is realistic to expect a percentage increase equal to what we are seeing this year.”

Whirlpool is proud of its exports but intent on manufacturing more abroad. Ms. Bovim, who is Whirlpool’s director of Congressional relations and trade policy, speaks with equal enthusiasm about sales from the company’s factories abroad and those in the United States. Both are up, she says, and she cites sales of washing machines and dryers to make her point.

Machines that load clothes from a door on top are made only in the United States, principally at a plant in Clyde, Ohio, and are exported to satisfy overseas demand. A newer and increasingly popular model, one that is loaded from a door in the front, is made only at factories in Germany and Mexico.

Whirlpool recently opened its Mexican plant, deciding to bypass the United States. It was a decision that shifted income, investment, employment and exports to Mexico that might otherwise have shown up in the Bureau of Economic Analysis’s accounts as economic growth in the United States.

“We have a supply chain that facilitates entry into new markets,” Ms. Bovim said. “Locating abroad puts us on an equal footing with domestic suppliers” in those countries.

Many American manufacturers argue that as factories spread across the globe, exporting is no longer an effective means of competing against sophisticated and ever more numerous local manufacturers. In addition, as American companies set up operations in, say, China, they insist that their suppliers locate nearby, for quick and efficient delivery — and that draws more manufacturers overseas.

It is certainly a reason that Parker-Hannifin, a Cleveland-based manufacturer of hydraulic pumps and industrial controls, is expanding overseas, said Tim Pistell, the chief financial officer. “Our customers just love for us to make our stuff near their new operations,” Mr. Pistell said, “and if we do, they reward us with a lot of business.”

Parker-Hannifin’s overseas sales have risen to 55 percent of its annual revenue, up from 33 percent in 2002, Mr. Pistell says. Exports, on the other hand, contribute no more than $400 million of its $12 billion in annual revenue, about half the percentage of a decade ago.

Currency fluctuations rarely alter these long-term commitments, and profits stay abroad. “Most of the money we make overseas, we keep there,” Mr. Pistell said, “and then plow it back into growing the business overseas.”

The Bureau of Economic Analysis, tracking this trend for all of America’s multinational companies, says 70 percent of the multinationals’ operations — measured in employment, investment and value added in turning metal into aircraft or wood into furniture or silicon into computer chips — take place in the United States.

That, however, is down from nearly 75 percent in 1999 and, as the shift overseas continues at many manufacturers, commodities inevitably jump to prominence from time to time.

“We have a tremendous capacity to grow corn and other crops in this country,” said Daryll E. Ray, an agricultural economist at the University of Tennessee, “and we are intent on doing so.”

Friday, August 15, 2008

Solid as a BRIC

The current round in the latest surge in historical globalization, affecting the BRIC countries, seems to be hitting political , social , and even economic walls:

Brazil - Social-- Tremendous inequality and poverty with entrenched gang culture has lead to periods of open warfare in it's major cities. The middle-class live in armed enclaves and fear of kidnapping is high. Bulletproof cars are a booming business
Economic -- Lack of skilled workers is leading to higher wages.

Russia - Political -- after their invasion of Georgia they are becoming persona non grata in the world community. Their usage of their oil/gas monopoly with Europe and their readiness to turn off the spigot for political reasons is not winning any friends.
Social -- they have incredibly low birth rate and Muslim insurrections throughout their borders. The State controls most major industries. Gang activity is endemic and is reflected in the State model of governing.
Economic -- A culture lacking in intellectual property rights. The home of much of computer/internet illegal activities and hacking.

India - Political -- problems with their Muslim minority leading to bombings and with their Muslim neighbor Pakistan and the Kashmir question.
Social -- inequalities increasing. A strong intractable caste system. Terrorism.
Economic -- Rising wages. High tariffs for imports. Laws against open foreign investment. Subsidized goods/products such as oil and food.

China- Political -- problems with their Muslim minority . Lack of freedom leading to protests. Policy problems with Tibet, Taiwan and other neighbors including Japan.
Social -- inequalities increasing. Terrorism. Pollution of air and water.
Economic -- Rising wages. High tariffs for imports. Laws against open foreign investment. Subsidized goods/products such as oil and food.

It looks like we are entering the BBRIC age (Beyond BRIC, pronounced like a Scotsman would).
These 'new' developing countries - Vietnam, Cambodia, Malaysia, Philipines, etc. in the East, along with Africa now being targeted, with South Africa and Egypt the first of the African wave.

All the BBRIC nations have the same underlying problems that the BRIC nations have.

If this new globalization wave leaves BRIC behind, then those BRIC nations will have only partially risen politically/socially/economically, leaving them in a precarious social state and they will suffer tremendously by this incomplete metamorphosis.

Look for an acceleration of negative political and social forces in these societies.

Unintended consequences of this latest globalization phase -
- The prospect of War , not peace and greater prosperity, may be the outgrowth of unchecked globalization.
- Economic protectionism and global depression may be another result.
- The rise of religious fundamentalism in the face of serious social instability.

The issue is not whether globalization per se is needed or whether it is a good or bad thing. This process has been going on for millenium. The question is whether the rate of change now going on will stress existing political, social and economic systems, and the ability of humans to adapt quickly, so as to cause massive instability and unrest in the world.


August 15, 2008

India says peace talks with Pakistan under threat

Filed at 7:30 a.m. ET

NEW DELHI (AP) -- India's prime minister said Friday that the peace process with Pakistan was in danger of failing because of attacks like last month's bombing of New Delhi's mission in Afghanistan.

India and Afghanistan say Pakistan's powerful Inter-Services Intelligence agency orchestrated the attack, which killed 58 people. Islamabad denies playing any role but has promised to investigate the allegation.

''If this issue of terrorism is not addressed, all the good intentions that we have for our two peoples to live in peace and harmony will be negated,'' Prime Minister Manmohan Singh said in an Independence Day speech. ''We will not be able to pursue the peace initiatives we want to take.''

Hindu-majority India and Muslim Pakistan were born during the bloody partition of the subcontinent at independence from Britain in 1947. The split sparked one of the most violent upheavals of the 20th century and created a rivalry that has led to three wars.

But relations between the nuclear-armed rivals have improved considerably since the start of a peace process in 2004, and India's leader has pledged to continue the talks despite the allegations of a Pakistani role in the embassy attack.

''I have personally conveyed my concern and disappointment to the government of Pakistan,'' said Singh, speaking from behind a bulletproof screen atop the ramparts of the historic Red Fort, the massive 17th-century sandstone palace built by the Muslim Mogul emperors who ruled much of India before the British arrived.

India also accuses Pakistan of playing a role in more than a dozen bombings that have hit India in the past three years, and the two sides have blamed each other for a surge in shootings across their heavily fortified de facto border in Kashmir, the divided Himalayan region at the center of their rivalry.

The latest reported shooting -- the 20th so far this year -- came Friday when India said its forces along the frontier, called the Line of Control, were fired on by Pakistani forces armed with rocket-propelled grenades.

No casualties were reported by the Indian side, and Pakistani officials were not immediately available for comment.

Kashmir, an overwhelmingly Muslim region, is claimed by both India and Pakistan and has been the focus of two of their three wars.

There were regular exchanges of gunfire along the Line of Control before the two sides signed a cease-fire in late 2003.

But the recent shootings have led to a familiar round of accusations, with Pakistan blaming India for violating the cease-fire and New Delhi accusing Islamabad of helping Islamic rebels sneak into its part of Kashmir.

Nearly a dozen Islamic rebel groups have been fighting for Kashmir's independence from India or its merger with Pakistan. More than 68,000 people, most of them civilians, have been killed in the conflict since 1989, and India routinely accuses Pakistan of assisting the insurgents, a charge Islamabad denies.

Tuesday, August 12, 2008

Banking and finance accelerating offshoring

Any industry that runs on digitized data will be offshored.

Banking and the security industries are the perfect target for this economic revolution but it wasn't the first industry affected.

Note that this article defines 'grunt' work as '...The jobs most affected so far are those with grueling hours, traditionally done by fresh-faced business school graduates — research associates and junior bankers on deal-making teams — paid in the low to mid six figures....'
Yup... $100- $500k is grunt work compensation for newbies on Wall Street.

Also, they are taking a page from the I/T industry and have started to use the same euphemisms:

Press officers for most banks asked not to be quoted or argued over semantics. For example, one spokesman said his bank’s fast-growing India support operations are not an outsourcing facility, but a “center of excellence”; another argued that large cost cuts at his bank’s New York and London headquarters were really “re-engineeringso the bank should not be included in such an article.


This is because the model used to be that just labor-intensive work that didn't require critical thinking or evaluation were the targets of offshoring. In the past 5 years the process has drastically changed, for all industries, and those jobs requiring the highest levels of analysis and the highest levels of responsibilities in companies are now being offshored.

It used to be thought that the 'creative' talents for some skills were indigenous to specific people and perhaps to educational systems and corporate cultures at home in the West that promulgated these attributes.

This is why executives at the topmost levels of the corporate world commanded the highest, increasing levels of compensation. These people are deemed, by their very compensation, to be uniquely qualified to handle the work and produce their fabulous results, i.e. they were virtually irreplaceable.

Now the tide is changing and many of these mid-level executive jobs will be going offshore also.

I'm still waiting for the very top executive ranks to start moving to lower-cost countries.

Barring political and social unrest in the world today, this too will happen.



August 12, 2008

Cost-Cutting in New York, but a Boom in India

GURGAON, India — On the top floor of a seven-story building in this dusty aspiring metropolis, Copal Partners churns out equity, fixed income and trading research for big name analysts and banks. It is a long way from the well-cooled corridors of Wall Street, and quarters are tight; business is up about 40 percent this year alone.

“This is one bulge-bracket bank,” said Joel Perlman, president of Copal, pointing toward a team behind an opaque glass wall. “And this,” he said, motioning across a narrow corridor “is another.”

The banks edit and add to what they get from Copal, a research provider, then repackage the information under their own names as research reports, pitch books and trading recommendations.

Wall Street’s losses are fast becoming India’s gain. After outsourcing much of their back-office work to India, banks are now exporting data-intensive jobs from higher up the food chain to cities that cost less than New York, London and Hong Kong, either at their own offices or to third parties.

Bank executives call this shift “knowledge process outsourcing,” “off-shoring” or “high-value outsourcing.” It is affecting just about everyone, including Goldman Sachs, Morgan Stanley, JPMorgan, Credit Suisse and Citibank — to name a few.

The jobs most affected so far are those with grueling hours, traditionally done by fresh-faced business school graduates — research associates and junior bankers on deal-making teams — paid in the low to mid six figures.

Cost-cutting in New York and London has already been brutal thus far this year, and there is more to come in the next few months. New York City financial firms expect to hand out some $18 billion less in pay and benefits this year than 2007, the largest one-year drop ever. Over all, United States banks will cut 200,000 employees by 2009, the banking consultancy Celent said in April.

The work these bankers were doing is not necessarily going away, though. Instead, jobs are popping up in places like India and Eastern Europe, often where healthier local markets exist.

In addition to moving some lower-level banking and research positions to support bankers and analysts in New York and London, firms are shipping some of their top bankers from those cities to faster-growing developing markets to handle clients there.

Owing in part to credit weaknesses and billion-dollar charges from the subprime crisis, “people who were off-shoring high value jobs are increasing the intensity of that, and people who were not are now in the planning stage,” said Andrew Power, a financial services partner at Deloitte Consulting.

Wall Street banks started cautiously sending research jobs to India a few years ago, hiring employees by the handful and running pilot programs with firms like Copal, Office Tiger, Pipal Research and Tata Consultancy Services.

In 2003, JPMorgan and Morgan Stanley said they planned to move a few dozen research jobs to Mumbai, Lehman Brothers was working on a pilot program to create research presentations in India and both Merrill Lynch and Goldman Sachs said they had not moved any research to the country.

Five years later, the trickle is a flood. Third-party firms say they are seeing a 20 to 40 percent upswing in business this year alone.

Morgan Stanley has about 500 people employed in India doing research and statistical analysis. About 100 of Goldman Sachs’ 3,000 employees in Bangalore are working on investment research.

JPMorgan has 200 analysts in Mumbai working for its investment banking operations around the world, doing industry analysis, and compiling data and charts for marketing materials. It has an additional 125 analysts in Mumbai supporting the bank’s global research division.

Citigroup employs about 22,000 people in India, several hundred of whom work in investment research. Deutsche Bank has 6,000 employees in India, according to the bank’s Web site. Deutsche started a pilot program to outsource some research in 2003, and would not provide any update.

Theoretically, as much as 40 percent of the research-related jobs on Wall Street, tens of thousands of jobs, could be sent off-shore, said Deloitte’s Mr. Power, though the reality will be less than that.

The jobs off-shore are more likely to come from the investment bank and trading divisions of Wall Street firms, rather than the sales side, which produces analyst reports about companies and industries, said Andy Kessler, a former analyst who has written several books about Wall Street.

“There’s a huge amount of grunt work that has been done by $250,000-a-year Wharton M.B.A.’s,” Mr. Kessler said. “Some of that stuff, it’s natural to outsource it.”

He added, “These are middle of the office jobs, not back office, but they’re not the people on the front line.”

After research, the next wave may include more sophisticated jobs like the creation of derivative products, quantitative trading models and even sales jobs from the trading floors.

Proponents of the change say Wall Street’s wary embrace of the activity may signal the beginning of a profound shift in the way investment banks are structured, with everyone but the top deal makers, client representatives and the bank management permanently relocated to cheaper locales like India, the Philippines and Eastern Europe.

In the future, executives in India like to joke, the only function for highly paid bankers in New York or London will be to greet clients and shake hands when the deals close.

“Wall Street has to look at the world differently,” said Manoj Jain, the chairman of Pipal Research, a 400-person firm with offices in Chicago, Delhi and Gurgaon. Moving high-value jobs out of high-cost cities is “no longer a hypothesis,” he said.

Pipal has “more work than it can take” right now, he said, and is seeing new clients beyond United States banks, like investment management companies and European financial firms. Like analysts at most offshore research operations, Pipal’s number crunchers do not make recommendations, or generally put their name to the research they write. Instead, they work with the big-name bank or fund analyst to create the research that they want.

Permanently moving banking jobs out of New York or London is a touchy subject on Wall Street. Many investment banks, including Morgan Stanley, Goldman Sachs, Merrill Lynch and Citigroup, would not make executives available to discuss the topic.

Press officers for most banks asked not to be quoted or argued over semantics. For example, one spokesman said his bank’s fast-growing India support operations are not an outsourcing facility, but a “center of excellence”; another argued that large cost cuts at his bank’s New York and London headquarters were really “re-engineering” so the bank should not be included in such an article.

“Some of that is self-serving,” Octavio Marenzi, chief executive of Celent, said of the impulse to keep quiet. “If I admit that research analysts can be off-shored to India, that means that I could too.”

He said the “more advanced firms” will be able to use the cost differences and talent pools in India, and in the future in China, to their advantage.

A few banks have openly embraced off-shoring. Credit Suisse has 6,500 employees around the world working in lower-cost locations in India, Poland and Singapore. Of these about 500 are doing high-value jobs.

“We have people helping the execution of deals, data gathering, helping to build financial models, writing research, and doing scenario analysis,” said Vineet Nagrani, head of knowledge process outsourcing at the bank.

The bank has small teams working on fixed-income research, credit research and foreign exchange research, “all of which are going to grow” Mr. Nagrani said. Credit Suisse is also doubling the number of investment bankers and private bankers in India who deal with local clients in the next 12 months.

The bank’s clients, so far, seem happy. “As long as clients get a good quality product and can talk to their favorite research analyst” they do not care if the grunt work is done in New York or India, Mr. Power said.

Third-party outsourcing firms face two hurdles when winning this business, N. Chandrasekaran, chief operating officer of Tata Consultancy Services, said. First, banks need to be confident that third parties are capable of doing the work. Second, they need to decide whether they want to move the work out of the bank at all.

To address the first issue, Tata sets up pilot programs with clients. A new Tata office in Cincinnati, which will employ 1,000 people in three years, is intended to give the company a United States presence.

In addition to growth outside India, these outsourcing experts are bringing in Chinese nationals, Arabic speakers and even the very people they are replacing: business school graduates from America.

Daniel Peng, who will be a senior at Dartmouth next year, is working in the equity research department of Copal Partners as a summer intern. “I thought it would be a good emerging markets experience,” he said.

Tellingly, Mr. Peng still hopes for an old-fashioned Wall Street job when he graduates. New York would be “ideal,” he said.

Tuesday, August 5, 2008

Slowdown in China

For all those economists (most of them) that are saying that the developing countries will be unaffected by a global slowdown, this must be a bit sobering.

Initial reports of market changes usually minimize the actual effects which follow. This happened with the dot.com and real estate booms in the U.S. The actual changes more resembled a crash than a minor, gentle pullback.

Here they are pointing at growth going from 11% to 9%. But look at the things that are changing and note that these are not just some numbers but that unpredictable human emotions play the major role in any economic downturn (or upturn) .

Chinese factories reported a plunge in new orders last month. Exports are barely growing. The real estate market is weakening, with apartment prices sinking in southeastern China, the region hardest hit by economic troubles.

While there are virtually NO economists that would say that central, government-managed economies run well or efficiently, here is the NYTimes saying that China is doing a great job:

How Chinese authorities manage a slower economy, and its effect on China’s 1.3 billion people, will be a test for the regime. It seems to be responding quickly.

A Politburo meeting on July 25 replaced the previous national economic goals, preventing overheating of the economy and controlling inflation, with new targets. As enunciated by President Hu Jintao in recent appearances, the objectives now are to seek fast and sustained economic growth while still keeping inflation under control.

Including manipulating it's currency which has been widely criticized as being an unfair tactic that allows Chinese goods to underprice their global competitors . Aren't Globalization and free trade great !?

For example, after letting China’s currency rise sharply against the dollar in the first half of this year, China’s central bank has actually pushed it down against the dollar in each of the last four trading days, including a decline of 0.13 percent on Monday. This is helping to preserve the competitiveness of Chinese exporters in foreign markets, although at the risk of angering the United States and other trading partners.

And subsidizing their industries. Aren't Globalization and free trade great !?

In the last several days, Chinese authorities have also raised export tax refunds for garment manufacturers — an industry previously slighted by regulators, who remain more interested in promoting higher-tech industries.

And they have a nascent real-estate bubble that may be imploding soon. No doubt this will be blamed on America as a consequence of our meltdown and the worldwide credit crisis. oil skyrocketing and subsequent economic meltdown.

More serious for the broader Chinese economy are signs that the real estate market is weakening after years of climbing prices that had prompted warnings of a possible bubble. Here again, the biggest trouble seems to be in southern China.

Min Hwa, a real estate broker in Shenzhen, a city of at least 12 million people near Hong Kong, said that residential real estate prices dropped by 10 percent over the last year in desirable neighborhoods near the city center and nosedived by up to 40 percent in outlying neighborhoods.

Lastly, they are suffering coal shortages to generate the electricity to power their industries.

Cheap energy is the basis for driving the global world economy and if we are indeed entering a period, short or long, of expensive energy costs, then the current globalization model is bankrupt.


August 5, 2008

Booming China Suddenly Worries That a Slowdown Is Taking Hold

HONG KONG — Many Chinese have been expecting a post-Olympics economic slowdown, but it has already started and the Games have not even begun.

Chinese factories reported a plunge in new orders last month. Exports are barely growing. The real estate market is weakening, with apartment prices sinking in southeastern China, the region hardest hit by economic troubles.

The trends, which actually have little to do with the Olympics (the Games themselves, which open Friday, are small compared with the size of the economy), are being felt worldwide.

China’s slowing growth is one reason that gasoline prices have fallen in the United States, for example. Similarly, world prices for metals like copper, tin, zinc and aluminum have tumbled in the last several weeks, as voracious Chinese factories have closed, or cut back their consumption.

But while China’s difficulties may reduce inflationary pressures around the world, they threaten to slow further the already tenuous global economic growth.

“China has slowed down a lot already, but it’s going to slow down more,” said Hong Liang, the senior China economist at Goldman Sachs.

Economists expect growth to slip from its recent pace of 11 percent or more annually to as low as 9 or 9.5 percent over the coming year.

Most nations would envy that rate. But 9 percent growth will make it much harder to supply jobs to the millions of Chinese moving to cities from rural areas in search of work. And any slower growth could prove a shock to workers who have been receiving double-digit pay increases each year, as companies struggle to find enough labor to keep factories open.

How Chinese authorities manage a slower economy, and its effect on China’s 1.3 billion people, will be a test for the regime. It seems to be responding quickly.

A Politburo meeting on July 25 replaced the previous national economic goals, preventing overheating of the economy and controlling inflation, with new targets. As enunciated by President Hu Jintao in recent appearances, the objectives now are to seek fast and sustained economic growth while still keeping inflation under control.

“We must maintain steady, relatively fast development and control excessive price rises as the priority tasks of macro adjustment,” he said on Friday at a rare news conference.

Having put a series of brakes on the economy over the last five years to keep inflation under control, Chinese policy makers are now removing some to prevent growth from slowing too much.

For example, after letting China’s currency rise sharply against the dollar in the first half of this year, China’s central bank has actually pushed it down against the dollar in each of the last four trading days, including a decline of 0.13 percent on Monday. This is helping to preserve the competitiveness of Chinese exporters in foreign markets, although at the risk of angering the United States and other trading partners.

In the last several days, Chinese authorities have also raised export tax refunds for garment manufacturers — an industry previously slighted by regulators, who remain more interested in promoting higher-tech industries.

Policy makers have also reportedly moved to ease lending limits on banks.

Weak demand from the United States over the last year, and now from Europe as well, is part of China’s emerging problem. On Sunday evening, the port here was less full of containers than usual, part of a broader slowing of export growth.

This weakening of exports has been particularly true of light manufactured goods from southeastern China, one of the country’s two main export areas, along with the Yangtze River delta region around Shanghai.

At Union Bags, a luggage maker in Dongguan, about 40 miles up the Pearl River from Hong Kong, sales to the United States have dropped 20 percent in the last year.

“We have had to cut back on our own orders to our local suppliers of zippers, nylon and polyester,” said Jim Jiang, the company’s sales manager.

Demand is beginning to weaken for big-ticket purchases. J. D. Power and Associates just cut its forecast for car sales in China this year to 5.95 million — still up from 5.42 million last year, but much less of an increase than the company’s previous forecast of 6.2 million.

More serious for the broader Chinese economy are signs that the real estate market is weakening after years of climbing prices that had prompted warnings of a possible bubble. Here again, the biggest trouble seems to be in southern China.

Min Hwa, a real estate broker in Shenzhen, a city of at least 12 million people near Hong Kong, said that residential real estate prices dropped by 10 percent over the last year in desirable neighborhoods near the city center and nosedived by up to 40 percent in outlying neighborhoods.

“We have seen a lot fewer prospective buyers in recent months,” he said.

Northern China tends to produce a higher proportion of industrial goods and fewer consumer goods than southern China, and seems to be faring better. Exports are still rising, for example, from the port of Tianjin, near Beijing.

But there, a few provinces like Shandong and Shanxi are suffering from power shortages. The shortages are forcing factories to limit their operating hours because not enough coal is being mined to fuel some of the many new power plants that opened in the last two years.

Andy Rothman, a China economist at CLSA, a Hong Kong brokerage, said that nearly half of China’s provinces had scattered power shortages this summer. But the slowing of the economy will prevent the problem from becoming widespread before cooler weather brings an end to air-conditioning season, he said.

The timing of the slowdown at the beginning of the Olympics appears to be largely coincidental.

Beijing accounts for slightly more than 1 percent of China’s people and less than 5 percent of its economic output. So even heavy spending in the Beijing area on Olympic sites is unlikely to have had much of an effect in lifting growth in the last months or in depressing growth now that the construction has ended.

But fears of a post-Olympic slowdown have become part of popular culture in China, and a subject of great interest among stock market investors. Chinese stocks have fallen by more than half after soaring to records in October.

The earthquake in May in Sichuan Province does not appear to have hurt the economy, and may even help economic output as towns in the area start rebuilding with heavy government spending.

More broadly, China’s enormous investments in new roads, ports, rail lines and other transportation networks are starting to show productivity gains that could help the country weather a global economic downturn better than most.

And foreign investment is still pouring into the country, increasingly directed at higher-technology industries, although other Asian countries are also drawing more investment.

Chris Woodward, the managing director for China at Ryder, the big logistics company particularly active in shipping auto parts, said American companies were still expanding in China and were becoming more focused on the market here even as Chinese exports slow.

“People have made huge investments in the infrastructure, and it’s not just the physical infrastructure,” he said. “It’s all the training and people development.”

Monday, August 4, 2008

Applying the 'energy brakes' to Globalization

Obviously this affects the heaviest items much more than the lighter, cheaper products.

Everything from cars to earth-moving machinery to air conditioners to furniture , etc . These items have a much greater weight and take up larger space on tankers, so their energy costs per unit item goes up dramatically.

Clothing takes up much less space and weighs little, so the energy unit cost increase may be pennies or a dollar or two, nothing that would cause Americans to not buy them or that would induce their manufacture here.

The big-ticket items are critical to the developing countries and their reduction in production would have a significant effect on many countries.

Note that high-energy costs = more American jobs. A strange equation !

If oil stays relatively high it will cause a massive search for a new lower-cost energy supply. Chances are, lower cost alternatives will come into production within 10 years, perhaps a bit longer.

There are two positive consequences of this:
- World dependence on oil will come to an end. Oil is not the cleanest energy source (nor the dirtiest) and the countries that have it are many times the most belligerent and backward in the world. Replacing it solves a dangerous current political dynamic.
- It give the US (and the rest of the world) time to adjust to the social and political changes that have overwhelmed many societies in the world and have created a lot of social instability along with positive economic changes.


August 3, 2008

Shipping Costs Start to Crimp Globalization

When Tesla Motors, a pioneer in electric-powered cars, set out to make a luxury roadster for the American market, it had the global supply chain in mind. Tesla planned to manufacture 1,000-pound battery packs in Thailand, ship them to Britain for installation, then bring the mostly assembled cars back to the United States.

But when it began production this spring, the company decided to make the batteries and assemble the cars near its home base in California, cutting more than 5,000 miles from the shipping bill for each vehicle.

“It was kind of a no-brain decision for us,” said Darryl Siry, the company’s senior vice president of global sales, marketing and service. “A major reason was to avoid the transportation costs, which are terrible.”

The world economy has become so integrated that shoppers find relatively few T-shirts and sneakers in Wal-Mart and Target carrying a “Made in the U.S.A.” label. But globalization may be losing some of the inexorable economic power it had for much of the past quarter-century, even as it faces fresh challenges as a political ideology.

Cheap oil, the lubricant of quick, inexpensive transportation links across the world, may not return anytime soon, upsetting the logic of diffuse global supply chains that treat geography as a footnote in the pursuit of lower wages. Rising concern about global warming, the reaction against lost jobs in rich countries, worries about food safety and security, and the collapse of world trade talks in Geneva last week also signal that political and environmental concerns may make the calculus of globalization far more complex.

“If we think about the Wal-Mart model, it is incredibly fuel-intensive at every stage, and at every one of those stages we are now seeing an inflation of the costs for boats, trucks, cars,” said Naomi Klein, the author of “The Shock Doctrine: The Rise of Disaster Capitalism.”

“That is necessarily leading to a rethinking of this emissions-intensive model, whether the increased interest in growing foods locally, producing locally or shopping locally, and I think that’s great.”

Many economists argue that globalization will not shift into reverse even if oil prices continue their rising trend. But many see evidence that companies looking to keep prices low will have to move some production closer to consumers. Globe-spanning supply chains — Brazilian iron ore turned into Chinese steel used to make washing machines shipped to Long Beach, Calif., and then trucked to appliance stores in Chicago — make less sense today than they did a few years ago.

To avoid having to ship all its products from abroad, the Swedish furniture manufacturer Ikea opened its first factory in the United States in May. Some electronics companies that left Mexico in recent years for the lower wages in China are now returning to Mexico, because they can lower costs by trucking their output overland to American consumers.

Neighborhood Effect

Decisions like those suggest that what some economists call a neighborhood effect — putting factories closer to components suppliers and to consumers, to reduce transportation costs — could grow in importance if oil remains expensive. A barrel sold for $125 on Friday, compared with lows of $10 a decade ago.

“If prices stay at these levels, that could lead to some significant rearrangement of production, among sectors and countries,” said C. Fred Bergsten, author of “The United States and the World Economy” and director of the Peter G. Peterson Institute for International Economics, in Washington. “You could have a very significant shock to traditional consumption patterns and also some important growth effects.”

The cost of shipping a 40-foot container from Shanghai to the United States has risen to $8,000, compared with $3,000 early in the decade, according to a recent study of transportation costs. Big container ships, the pack mules of the 21st-century economy, have shaved their top speed by nearly 20 percent to save on fuel costs, substantially slowing shipping times.

The study, published in May by the Canadian investment bank CIBC World Markets, calculates that the recent surge in shipping costs is on average the equivalent of a 9 percent tariff on trade. “The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today,” the report concluded, and as a result “has effectively offset all the trade liberalization efforts of the last three decades.”

The spike in shipping costs comes at a moment when concern about the environmental impact of globalization is also growing. Many companies have in recent years shifted production from countries with greater energy efficiency and more rigorous standards on carbon emissions, especially in Europe, to those that are more lax, like China and India.

But if the international community fulfills its pledge to negotiate a successor to the Kyoto Protocol to combat climate change, even China and India would have to reduce the growth of their emissions, and the relative costs of production in countries that use energy inefficiently could grow.

The political landscape may also be changing. Dissatisfaction with globalization has led to the election of governments in Latin America hostile to the process. A somewhat similar reaction can be seen in the United States, where both Senators Barack Obama and Hillary Rodham Clinton promised during the Democratic primary season to “re-evaluate” the nation’s existing free trade agreements.

Last week, efforts to complete what is known as the Doha round of trade talks collapsed in acrimony, dealing a serious blow to tariff reduction. The negotiations, begun in 2001, failed after China and India battled the United States over agricultural tariffs, with the two developing countries insisting on broad rights to protect themselves against surges of food imports that could hurt their farmers.

Some critics of globalization are encouraged by those developments, which they see as a welcome check on the process. On environmentalist blogs, some are even gleefully promoting a “globalization death watch.”

Many leading economists say such predictions are probably overblown. “It would be a mistake, a misinterpretation, to think that a huge rollback or reversal of fundamental trends is under way,” said Jeffrey D. Sachs, director of the Earth Institute at Columbia University. “Distance and trade costs do matter, but we are still in a globalized era.”

As economists and business executives well know, shipping costs are only one factor in determining the flow of international trade. When companies decide where to invest in a new factory or from whom to buy a product, they also take into account exchange rates, consumer confidence, labor costs, government regulations and the availability of skilled managers.

‘People Were Profligate’

What may be coming to an end are price-driven oddities like chicken and fish crossing the ocean from the Western Hemisphere to be filleted and packaged in Asia not to be consumed there, but to be shipped back across the Pacific again. “Because of low costs, people were profligate,” said Nayan Chanda, author of “Bound Together,” a history of globalization.

The industries most likely to be affected by the sharp rise in transportation costs are those producing heavy or bulky goods that are particularly expensive to ship relative to their sale price. Steel is an example. China’s steel exports to the United States are now tumbling by more than 20 percent on a year-over-year basis, their worst performance in a decade, while American steel production has been rising after years of decline. Motors and machinery of all types, car parts, industrial presses, refrigerators, television sets and other home appliances could also be affected.

Plants in industries that require relatively less investment in infrastructure, like furniture, footwear and toys, are already showing signs of mobility as shipping costs rise.

Until recently, standard practice in the furniture industry was to ship American timber from ports like Norfolk, Baltimore and Charleston to China, where oak and cherry would be milled into sofas, beds, tables, cabinets and chairs, which were then shipped back to the United States.

But with transportation costs rising, more wood is now going to traditional domestic furniture-making centers in North Carolina and Virginia, where the industry had all but been wiped out. While the opening of the American Ikea plant, in Danville, Va., a traditional furniture-producing center hit hard by the outsourcing of production to Asia, is perhaps most emblematic of such changes, other manufacturers are also shifting some production back to the United States.

Among them is Craftmaster Furniture, a company founded in North Carolina but now Chinese-owned. And at an industry fair in April, La-Z-Boy announced a new line that will begin production in North Carolina this month.

“There’s just a handful of us left, but it has become easier for us domestic folks to compete,” said Steven Kincaid of Kincaid Furniture in Hudson, N.C., a division of La-Z-Boy.

Avocado Salad in January

Soaring transportation costs also have an impact on food, from bananas to salmon. Higher shipping rates could eventually transform some items now found in the typical middle-class pantry into luxuries and further promote the so-called local food movement popular in many American and European cities.

“This is not just about steel, but also maple syrup and avocados and blueberries at the grocery store,” shipped from places like Chile and South Africa, said Jeff Rubin, chief economist at CIBC World Markets and co-author of its recent study on transport costs and globalization. “Avocado salad in Minneapolis in January is just not going to work in this new world, because flying it in is going to make it cost as much as a rib eye.”

Global companies like General Electric, DuPont, Alcoa and Procter & Gamble are beginning to respond to the simultaneous increases in shipping and environmental costs with green policies meant to reduce both fuel consumption and carbon emissions. That pressure is likely to increase as both manufacturers and retailers seek ways to tighten the global supply chain.

“Being green is in their best interests not so much in making money as saving money,” said Gary Yohe, an environmental economist at Wesleyan University. “Green companies are likely to be a permanent trend, as these vulnerabilities continue, but it’s going to take a long time for all this to settle down.”

In addition, the sharp increase in transportation costs has implications for the “just-in-time” system pioneered in Japan and later adopted the world over. It is a highly profitable business strategy aimed at reducing warehousing and inventory costs by arranging for raw materials and other supplies to arrive only when needed, and not before.

Jeffrey E. Garten, the author of “World View: Global Strategies for the New Economy” and a former dean of the Yale School of Management, said that companies “cannot take a risk that the just-in-time system won’t function, because the whole global trading system is based on that notion.” As a result, he said, “they are going to have to have redundancies in the supply chain, like more warehousing and multiple sources of supply and even production.”

One likely outcome if transportation rates stay high, economists said, would be a strengthening of the neighborhood effect. Instead of seeking supplies wherever they can be bought most cheaply, regardless of location, and outsourcing the assembly of products all over the world, manufacturers would instead concentrate on performing those activities as close to home as possible.

In a more regionalized trading world, economists say, China would probably end up buying more of the iron ore it needs from Australia and less from Brazil, and farming out an even greater proportion of its manufacturing work to places like Vietnam and Thailand. Similarly, Mexico’s maquiladora sector, the assembly plants concentrated near its border with the United States, would become more attractive to manufacturers with an eye on the American market.

But a trend toward regionalization would not necessarily benefit the United States, economists caution. Not only has it lost some of its manufacturing base and skills over the past quarter-century, and experienced a decline in consumer confidence as part of the current slowdown, but it is also far from the economies that have become the most dynamic in the world, those of Asia.

“Despite everything, the American economy is still the biggest Rottweiler on the block,” said Jagdish N. Bhagwati, the author of “In Defense of Globalization” and a professor of economics at Columbia. “But if it’s expensive to get products from there to here, it’s also expensive to get them from here to there.”

Friday, August 1, 2008

New Chinese strategic plan?

Actually not.

No where in this article does it mention that the Chinese have demanded, as entrance into their low-cost manufacturing world, that Western companies were required to bring their highest-tech design and development work there also.

So when Boeing went there to set up a plant to take advantage of cheap wages, it also put in place a technology center for exploring wing design in aircraft.

Short term this perhaps made sense. Long term it may mean that Boeing will be out of business within a decade.

Same for all the other business areas mentioned here, from telecommunications to PCs.

Then again, while this is the path the Communist Chinese leaders are pursuing successfully now, the standard historical unknowns of war , pestilence, natural disasters, and the like may make this a bumpy road and one that doesn't come to fruition.


August 1, 2008

China’s Industrial Ambition Soars to High-Tech

SHENZHEN, China — Few people have heard of the BYD Corporation — BYD for Build Your Dream — but this little-known company has grown into the world’s second-largest battery producer in less than a decade of existence. Now it plans to make a great leap forward: “We’d like to make a green energy car, a plug-in,” said Paul Lin, a BYD marketing executive. “We think we can do that.”

Even in go-go China, such lofty aspirations may sound far-fetched. But BYD has built a 16-million-square-foot auto assembly plant here and hired a team of Italian-trained car designers; it plans to build a green hybrid by the end of the year.

No longer content to be the home of low-skilled, low-cost, low-margin manufacturing for toys, pens, clothes and other goods, Chinese companies are trying to move up the value chain, hoping eventually to challenge the world’s biggest corporations for business, customers, power and recognition.

The government is backing the drive with a two-pronged approach: using incentives to encourage companies to innovate, but also moving to discourage low-end manufacturers from operating in southern China. That step would reverse one of the crucial engines of this country’s spectacular economic rise.

But by introducing tougher labor and environmental standards and ending tax breaks for thousands of factories here, the government has sent a powerful signal about its global ambitions, and helped encourage an exodus of factories from an area long considered the world’s shop floor.

President Hu Jintao hinted at China’s vaulting ambitions during a meeting of China’s scientific elite last June at the Chinese Academy of Sciences, where he called on scientists to challenge other countries in high technology. “We are ready for a fight,” he said, “to control the scientific high ground and earn a seat on the world’s high technology board. We will make some serious efforts to strengthen our nation’s competence.”

Government policies now favor high-tech economic zones, research and development centers and companies that promise higher salaries and more skills. A computer chip plant being built by Intel in the northern city of Dalian is welcomed; a textile mill churning out $1 pairs of socks is not.

“When a country is in its early stages of development, as China was 20 years ago, having an export processing center is good for growth,” said Andy Rothman, a longtime China analyst at CLSA, the investment bank. “But there’s a point when that’s no longer appropriate. Now, China’s saying, ‘We don’t want to be the world’s sweatshop for junk any more.’ ”

Chinese firms are expanding into (or buying companies that work in) software and biotechnology, automobiles, medical devices and supercomputers. This year, a government-backed corporation even introduced its first commercial passenger jet, a move Beijing hopes will allow it to some day compete with Boeing and Airbus.

In some ways, the government is only riding the economic currents that come with development and high growth. For instance, many manufacturers in southern China — the country’s biggest export zone — are moving to the interior because land and labor costs are cheaper, or expanding operations to include in lower-cost countries, like India, Vietnam or Bangladesh.

World-class brands that have grown dependent on outsourcing labor-intensive production to China are now searching for alternatives. Even the retail behemoth Wal-Mart, which moved its global procurement center here to Shenzhen in 2002, is going to be forced to find new sourcing channels to fill its 5,000 stores worldwide.

For millions of consumers around the world, experts say the policy shift could also mean higher prices for a broad array of goods, from pens and hammers to Barbie dolls and running shoes.

“Basically the cost of things China produces for Home Depot and Wal-Mart are going up,” said Dong Tao, an economist at Credit Suisse. “But there is another side. In some areas that China’s going to grab, like telecom equipment, they’ll push prices lower.”

Economists say China’s development is following in the footsteps of Japan and South Korea, which successfully evolved from low-skilled manufacturing to high technology, services and the creation of global brands.

There are still plenty of obstacles here, including weak intellectual property rights enforcement and a culture of copying or stealing technology from foreign companies or joint venture partners. But experts point to positives like a rising aggressive entrepreneurial class, legions of newly minted science and engineering graduates and a fiercely competitive domestic marketplace.

Peter J. Williamson, a professor of management at Cambridge University, challenges the notion that China does not have technological know-how.

“They are some of the biggest in launching satellites. They have a lot of technology locked up in the military, and now the government is reducing budgets and pressing agencies to privatize,” he said. “So suddenly, a lot of technology people thought didn’t exist has come out from behind the curtain.”

This is what China is betting on.

At BYD, executives are ramping up research and development spending, and studying global marketing strategies. Founded in 1995 by a scientist who studied metallurgy, the company has made lithium batteries, cellphones, camera equipment, auto parts and other components for Nokia, Motorola and Sony, among others, gaining experience in producing high-quality goods.

“The technology for a car is not that sophisticated,” Mr. Lin said. “It’s big, but a lot of low technology.” Five years ago BYD bought a state-owned carmaker to help make the transition.

Another company hoping to make the leap is Hasee, a fast-growing computer maker also based in Shenzhen.

Founded just six years ago, Hasee is already selling 100,000 laptops a month and is the second biggest Chinese computer maker behind Lenovo, with revenue forecast to reach $800 million this year.

Hasee executives say the company is spending heavily on research and development, and that by focusing on innovative computers and laptops that now sell for just $370, it is on track to become the world’s biggest computer maker within a decade.

“Our strategy in China is to always focus on innovation,” said Zhang Xianyong, a Hasee vice president and sales manager for greater China. “We’re now in the domestic market, but we’ll spare no effort to grab overseas expansion.”

The government is pressing companies to move up the value chain for economic, but also political reasons, analysts say. Promoting innovation and brand-name companies would probably bolster the economy and create better jobs.

In April, Credit Suisse forecast that one-third of all export-oriented manufacturers could close within three years. And a study released in March by the American Chamber of Commerce Shanghai and Booz & Company, the consulting firm, says foreign investors are growing bearish on China and that rising costs are driving American manufacturing out of the country.

For many Chinese economists, that is just fine. “The low-end industries used to make a great contribution to Guangdong,” said Liang Guiquan, an economist at the Guangdong Academy of Social Sciences, a government think tank. “But an enterprise is like a creation. They must get used to changes in the environment. If the environment changes, they must die out.”