Tuesday, June 17, 2008

China + 1 Manufacturing

from www.nytimes.com

June 18, 2008
Labor Costs Rise, and Manufacturers Look Beyond China

HANOI — Canon is no longer building or expanding factories in China, but the company is doubling its workforce at a printer factory outside Hanoi to 8,000.
Nearby, Nissan is expanding a vehicle engineering center. Hanesbrands, the underwear company based in Winston-Salem, N.C., is building two new factories here, as is the Texhong Textile Group from Shanghai.
China remains the most popular destination for foreign industrial investment in the world, attracting almost $83 billion last year. But a growing number of multinational corporations are pursuing a strategy that companies and analysts call “China plus one,” establishing or expanding Asian bases outside China, particularly in Vietnam.

A long list of concerns about China is feeding the trend: inflation, shortages of workers and energy, a strengthening currency, changing government policies, even the possibility of civil unrest someday. But most important, wages in China are rising close to 25 percent a year in many industries, in dollar terms, and China is no longer such a bargain.
More than corporate profit margins are at stake. When the cost of making goods in Asia rises, American consumers inevitably feel pain. The Labor Department said Thursday that import prices were 4.6 percent higher in May than a year earlier for goods from China and 6.4 percent higher for goods from southeast Asia.

Companies are using the China-plus-one strategy to mitigate the risks of overdependence on factories in one country.

Multinational corporations are “thinking about all the world and keeping a balance” between China and other countries, said Edward Kang, the chief executive of Ever-Glory International, a sportswear manufacturer in Nanjing, China. Ever-Glory, which sells to Wal-Mart and Kohl’s, is building a factory in Vietnam to supplement its three factories in China.
Companies remaining in China are desperately seeking to control costs.
“We will maintain our capacity in China, but we will make it more automatic and reduce the number of employees,” said Laurence Shu, the chief financial officer of Shanghai-based Texhong, one of the world’s largest manufacturers of cotton and spandex fabric.
To limit labor costs, Hanesbrands is building a largely automated factory in Nanjing. But the company is also building a factory in Vietnam, in addition to a factory it bought here, and two more in Thailand.
Gerald Evans, the president of global supply chain at Hanesbrands, said that compared to China, “we found more ready availability of both land and labor in both Vietnam and Thailand.” Hanesbrands will be shifting some manufacturing from Mexico and Central America to Asia.

In China, where rural villages are running low on able-bodied young workers to send to factories, wages are rising more than 10 percent a year for many assembly-line workers. And pay is rising even faster for skilled workers, like machinery repair technicians, company executives said.
In coastal provinces with ready access to ports for exports, even unskilled workers now earn $120 a month for a 40-hour work week, and often considerably more. Factory workers in Vietnam still earn as little as $50 a month for a 48-hour work week that includes a full day on Saturdays.

Texhong estimates that average labor costs per textile industry worker in China will rise 16 percent this year, including increases in benefits costs — on top of a 12 percent increase last year. New regulations are making it harder for companies to avoid paying for benefits, like pensions, further increasing labor costs.
When those increases are combined with a currency rising against the dollar at an annual pace of up to 10 percent, labor costs in China are now climbing at 25 percent a year or more in dollar terms.
Inflation in China — more than 8 percent in February, March and April and 7.7 percent in May — raises the prospect that labor costs will soar even faster soon. That could push up prices for a wide range of goods exported to the United States.
China is also phasing out its practice of charging lower corporate tax rates for foreign-owned companies. By contrast, Vietnam still offers foreign investors a corporate tax rate of zero for the first four years, and half the usual rate of 10 percent for the next four years.
Foreign direct investment in China has grown by a third over the last three years. By contrast, foreign direct investment has more than doubled in this period in the Philippines, quintupled in India, and soared more than eight-fold in Vietnam.
Faster rates of increase in other Asian countries partly reflect lower starting points. but investment is still growing quickly, and now it’s growing from high levels. For example, foreign investment in Vietnam reached nearly $18 billion last year.
A popular saying among Western investors these days is that Vietnam is the next China. Cambodia, with even lower wages attracting garment manufacturers, is called the next Vietnam.
But how long those analogies will hold — in a world where economies evolve from agriculture to manufacturing to services in a couple of decades — is unclear.
As foreign investors leap into each new country, they drive up the cost of workers and goods, a dynamic that makes it less likely that a shift in investment patterns will hold down inflation in American imports.
A recent survey by Grant Thornton, the global accounting and consulting firm, found that companies were more worried about attracting and retaining key staff in Vietnam than anywhere else in the world. (China was a close second.)
“We trained them, we educated them and then they quit,” said Akira Akashi, the chairman of Nissan Techno, a division of Nissan that designs vehicles.
The company plans to expand to 1,400 engineers in Vietnam by 2010. Beginning engineers here still earn just $200 a month, less than half the salary in China and less than a tenth of American and Japanese salaries.
Even blue-collar labor is becoming harder to find. In addition to the size of the labor force, infrastructure is also likely to be a brake on how fast China plus one can expand. Most countries in Asia, including Vietnam, have not improved transportation links as quickly as China has. Lengthy traffic jams slow down shipments and drive up costs.
Vietnam’s biggest selling point for many companies is its political stability. Like China, it has a nominally Communist, one-party system that crushes dissent, keeps the military under tight control and changes government policies and leaders slowly.
“Communism means more stability,” Mr. Shu, the chief financial officer of Texhong, said, voicing a common view among Asian executives who make investment decisions. At least a few American executives agree, although they never say so on the record.
Democracies like those in Thailand and the Philippines have proved more vulnerable to military coups and instability. A military coup in Thailand in September 2006 was briefly followed by an attempt, never completed, to impose nationalistic legislation penalizing foreign companies.
“That sent the wrong signal that we would not welcome foreign investment — this has ruined the confidence of investors locally and internationally,” finance minister Surapong Suebwonglee said in an interview in Bangkok.
Yet, like China, Vietnam does not offer complete tranquillity either. For instance, workers are becoming more vocal and staging more strikes, despite a government ban on independent unions.
Nearly 20,000 workers walked out this spring at a Nike shoe factory run by a Taiwanese contractor. The workers only went back to work when given a 10 percent raise, to $55 a month, and a larger meal subsidy.
That restive pattern is evident in the only country with enough workers to accommodate more than a fraction of the investment China sees: India, which demographers expect to surpass China in population in the next two decades.
But many companies are leery of poor roads and congested ports in India, as well as long sailing times for components that must be shipped from existing factories in China.
And even in India, workers with industrial skills or the ability to speak English are increasingly scarce — and their wages have been rising by 10 to 20 percent a year.
That has led to worries about India’s long-term competitiveness, even at companies investing heavily there, like Ford, which is planning to spend $500 million on factory expansion.
“I keep saying to our people, ‘How long will it be until we’re priced out of the market?’ ” said John Parker, Ford’s executive vice president for Asia, Pacific and Africa. “The impact of that some day is you’re no longer low-cost.”

As a long term investor, it would be worth keeping a Vietnam ETF in your portfolio at some point. I have not researched it yet or determined a good entry point.

Mental Focus

From www.nytimes.com

June 17, 2008
Op-Ed Columnist
The Frozen Gaze

Rocco Mediate’s head swiveled about as he walked up the fairway of the sudden-death hole of the U.S. Open on Monday. Somebody would catch his attention, and his eyes would dart over and he’d wave or make a crack. Tiger Woods’s gaze, on the other hand, remained fixed on the ground, a few feet ahead of his steps. He was, as always, locked in, focused and self-contained.

The fans greeted Mediate with fraternal affection and Woods with reverence. Most were probably rooting for Rocco, but only because Woods, the inevitable victor, has risen above mere human status and become an embodiment of immortal excellence. That frozen gaze of his looks out from airport billboards, TV commercials and the ad pages. And its ubiquity is proof that every age finds the heroes it needs.

In a period that has brought us instant messaging, multitasking, wireless distractions and attention deficit disorder, Woods has become the exemplar of mental discipline. After watching Woods walk stone-faced through a roaring crowd, the science writer Steven Johnson, in a typical comment, wrote: “I have never in my life seen a wider chasm between the look in someone’s eye and the surrounding environment.”

The coverage of him often centers upon this question: How did this creature come about? The articles inevitably mention his precocity (at age 3, he shot a 48 on the front nine of a regulation course) and provide examples of his athletic prowess: Once Woods tried out four drivers that Nike was experimenting with and told the lab guys that he preferred the heavier one. The researchers thought the clubs were the same weight, but they measured and Woods was right. The club he’d selected was heavier by the equivalent of two cotton balls.

But inevitably, it is his ability to enter the cocoon of concentration that is written about and admired most. Writers describe the way Earl Woods, his lieutenant colonel father, dropped his golf bag while Tiger was swinging to toughen his mind. They describe his mother’s iron discipline at home. “Old man is soft,” Kultida Woods once said of her husband. “He cry. He forgive people. Not me. I don’t forgive anybody.”

Tiger was the one dragging them out on the course to practice. At age 6 months, he was put in a baby chair and had the ability, his father claimed, to watch golf for two hours without losing focus.

As an adult, he is famously self-controlled. His press conferences are a string of carefully modulated banalities. His lifestyle is meticulously tidy. His style of play is actuarial. He calculates odds and avoids unnecessary risks like the accounting major he once planned on being. “I am, by nature, a control freak,” he once told John Garrity of Sports Illustrated, as Garrity resisted the temptation to reply, “You think?”

And for that, in this day and age, he stands out. As I’ve been trying to write this column, I’ve toggled over to check my e-mail a few times. I’ve looked out the window. I’ve jotted down random thoughts for the paragraphs ahead. But Woods seems able to mute the chatter that normal people have in their heads and build a tunnel of focused attention.

Writers get rhapsodic over this facility. “Woods’s concentration often seems to be made of the same stuff as the liquid-metal cyborg in Terminator 2: If you break it, it reforms,” David Owen wrote in Men’s Vogue.

Then they get spiritual. In Slate, Robert Wright only semi-facetiously compared Woods to Gandhi, for his ability to live in the present and achieve transcendent awareness. Analysts inevitably bring up his mother’s Buddhism, his experiments in meditation. They describe his match-mentality in the phrases one might use to describe a guru achieving nirvana. He achieves, they say, perfect clarity, tranquility and flow. We’re talking about somebody who is the primary spokesman for Buick, and much of the commentary about him is on the subject of his elevated spiritual capacities.

And here we’re getting to the nub of what’s so remarkable about the “Be A Tiger” phenomenon: He’s become the beau ideal for golf-loving corporate America, the personification of mental fortitude.

The ancients were familiar with physical courage and the priests with moral courage, but in this over-communicated age when mortals feel perpetually addled, Woods is the symbol of mental willpower. He is, in addition, competitive, ruthless, unsatisfied by success and honest about his own failings. (Twice, he risked his career to retool his swing.)

During the broadcast of Monday’s playoff round, Nike ran an ad that had Earl Woods’s voice running over images of his son: “I’d say, ‘Tiger, I promise you that you’ll never meet another person as mentally tough as you in your entire life.’ And he hasn’t. And he never will.”

You can like this model or not. Either way, the legend grows.

Tiger is undoubtedly one of the most unique people in the world. I have always admired and tried to have a keen mental ability to focus on the problem at hand and drown out the world. One of the sacred ancient Indian texts Mahabharata refers to the archer Arjun's ability to focus on his target inspite of significant distractions and a very unsettling context.