A Tale of Two Factories

Before I started this course, China was this "thing" over there that was taking American jobs and buying us out, and sending us cheap imports while "it" was getting rich off of us and we were getting poorer. This is a typical view of Americans - with lots of media scaffolding - toward China, and as a caricature, it has some degree of merit - provided it is not mistaken for anything more than a caricature. I was actually pretty good about that. I have this strong doctrinal position that one should not have an opinion about everything in the world about which one knows nothing whatever, that this in society may be seen as clever but I see it as lying. I am not perfect about practicing what I preach, but I did at least confine my attitudes to the impact here and not presume to understand what was happening over there - I knew my "thing" over there was a vacuous label. Now I'm even more messed up, because I presume to know something about that "thing" over there as well. And no sooner do I get a more "enlightened" perspective than I am hit with the realization that the situation is so fluid and dynamic that to know what I am talking about, I have to continuously update it. That point was driven home this morning - April 5, 2008 - when I looked for a news post to use on this blog post. Hot off the press in the New York Times it sat at the top of the list: an article in today's business section by Joe Nocera, with this title: "Seeing the Sights of Industrial China: 2 Factories, 2 Futures". The article was sufficiently rich to pose a dilemma of how to streamline it here... The context is the RMB against the dollar. RMB stands for "renmimbi" - also called the "yuan" - which is the Chinese currency. The yuan, as I will call it, rose 4% against the dollar since the start of the year. It would have risen higher, but it is moored to government control. US Treasury Secretary Henry Paulson praised the increase, but wants China to let the yuan be "free floating" (the US sees a rising yuan as beneficial if Paulson's view is taken as "official"). The author visited two Chinese factories, both on the outskirts of Shanghai. The first is the Shanghai Jinjue Fashion Company directed by Mr. Jin Jue. This is the stereotypical run-down one-room cavernous complex with a dirty looking river running behind it, making stereotypical cheap goods garments for mainly European markets. But it is largely vacant: 60% of the work force either quit or has been laid off. Business is bad. "The RMB is killing me," groaned Jin Jue. With the rising currency, cheap goods are not so cheap anymore. Inflation was up 8.7% in February alone, and workers cry for more money to make ends meet. Recent labor laws have passed for worker protection, but this also raises Jin Jue's costs. Some Chinese goods are actually being labeled "Made in Mexico" and routed through Mexico to take advantage of NAFTA. Mr. Jin Jue said that with a rising yuan "all these factories will go out of business." The author said that it may turn out accordingly, inflicting short-term pain, but that it would be good for the Chinese economy in the long haul. "And it won't be a lot of fun for the West to watch" he added. In China today there is much talk of "moving up the value chain." China wants business to gravitate toward more complex, higher-value goods that bring bigger profit margins and depend less on cheaper goods made on the premise of rock-bottom costs. One strategist spoke of a deliberate policy to push manufacturing up the value chain, and added that it comes at the same time as rising raw materials costs. For example, in the high tech goods market such as iPods, the Chinese are no longer content to simply assemble the components. They want to make them as well, and own the brand. The second factory the author visited is an example of a business that has already fulfilled this dream. Li Xian Shou is founder and CEO of ReneSola, that makes silicon wafers for solar panels. His first quarter 2007 earnings were up 200% from the previous year. He made $53 million in 2007, almost double his 2006 profit. In January of this year he raised $130 million in a stock offering on NYSE. His complex is spreading like a wildfire, with some buildings no more than six months old. The number of people he employs rose from twenty in 2005 to 3300 now. At first his company assembled solar panels for companies in Germany and Japan who supplied him the silicon wafers. But assembly, he notes, is a "commodity business" and attracts much competition. So in 2005 he converted to producing the wafers themselves and now competes with the foreign companies. Because he does not export directly, but sends the wafers to solar panel assembly plants in China, he can demand payment in yuan. Asked about the effect of a rising yuan, "he gave an indifferent shrug." After all the other background from Blecher, Han Dongfang and others, I was encouraged to hear about the recent worker reform laws being passed, but nothing further about them was said. Here I confine my attention to the polemic posed by these two factories. I qualifyingly presume to agree that a rising yuan is in the best long term interest of China, but I am also inclined to the impertinence of suggesting that the same is true for us. In other words, the pain it may inflict here with rising prices and adjustments of competition will likewise prove a check on unrestrained myopic growth unattached to resources and long-term vision. For one thing, as a geologist I know there is only so much oil in the ground, and the implications of that fact are not being seriously faced. My wish for China is not that it cease to "get rich" at the expense of the United States, but that this "thing" over there ostensibly "getting rich" should include all the people of China and not just a few. I wish China good economic health. I wish all of us good economic health. We all need to start thinking more holistically global about that, or all of us may find ourselves missing out.