China + 1 Manufacturing

from www.nytimes.com

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

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.

McCain on Climate Change

From nytimes.com

May 13, 2008
McCain Differs With Bush on Climate Change
By ELISABETH BUMILLER and JOHN M. BRODER

PORTLAND, Ore. — Senator John McCain sought to distance himself from President Bush on Monday as he called for a mandatory limit on greenhouse gas emissions in the United States.
Mr. McCain, the presumptive Republican presidential nominee, also pledged to work with the European Union to diplomatically engage China and India, two of the world’s biggest polluters, if those nations refused to participate in an international agreement to slow global warming.
In what his campaign promoted as a major speech on climate change, the Arizona senator renewed his support for a “cap-and-trade” system in which power plants and other polluters could meet limits on greenhouse gases by either reducing emissions on their own or buying credits from more efficient producers.
“Instead of idly debating the precise extent of global warming or the precise timeline of global warming, we need to deal with the central facts of rising temperatures, rising waters and all the endless troubles that global warming will bring,” Mr. McCain said at a wind power plant in Oregon, a state that is expected to be a political battleground in the general election and where the environment is a central issue for voters. “We stand warned by serious and credible scientists across the world that time is short and the dangers are great.”
Mr. McCain added pointedly: “I will not shirk the mantle of leadership that the United States bears. I will not permit eight long years to pass without serious action on serious challenges.”
The senator’s remarks were a direct criticism of Mr. Bush, who in his first term questioned the scientific basis for global warming and has remained adamantly opposed to mandatory caps on emissions as bad for the American economy.
The speech, a compilation and sharpening of many of Mr. McCain’s existing proposals, was most notable as a political address that sought to appeal to the independents the senator is wooing for the November election. It put Mr. McCain slightly to the right of center in the environmental debate.
Mr. McCain is the only Republican presidential candidate this year to call for mandatory limits on greenhouse gas emissions, but his target for reducing those emissions over time is lower than that of his Democratic competitors, Senators Hillary Rodham Clinton and Barack Obama, and even lower than that in a bill proposed by Senator Joseph I. Lieberman, independent of Connecticut, and Senator John W. Warner, Republican of Virginia.
In his speech, Mr. McCain advocated cutting emissions 60 percent below 1990 levels by 2050; Mrs. Clinton and Mr. Obama propose cutting them by 80 percent over the same period, while the Lieberman-Warner bill calls for a 70 percent reduction.
In another contrast with Mr. Bush, Mr. McCain also sought to persuade voters that he has a personal concern and first-hand experience with the climate change that has emerged as a major issue in the 2008 presidential race.
“A few years ago I traveled to the area of Svalbard, Norway, a group of islands in the Arctic Ocean,” Mr. McCain said. “I was shown the southernmost point where a glacier had reached 20 years earlier. From there, we had to venture northward up the fjord to see where that same glacier ends today because all the rest has melted.”
He added: “On a trip to Alaska, I heard about a national park visitor’s center that was built to offer a picture-perfect view of a large glacier. Problem is, the glacier is gone. A work of nature that took ages to form had melted away in a matter of decades.”


Mr. McCain welcome to the real world. This issue is too important for partisanship or nationalism. Your positions are not yet aggressive enough but they are a start. Energy Efficiency is a not just good for the environment but is directly proportional to growth. Noble