This week in SCDigest:
Rethining China Part 2
Supply Chain Graphic of the Week and Supply Chain by the Numbers
Cartoon Caption Contest Continues This Week!
SC Digest On-Target e-Magazine
Expert Contributor: How Watson Could help Supply Chain Management Operations
This Week In "Distribution Digest"
  Trivia Feedback
Become a Sponsor
SCDigest Home Page
  Newsletter Archives                  Can't View In E-mail? May 26, 2011 - Supply Chain Newsletter

Featured Sponsor: CDC Software

Learn How Boston Scientific Cardiac Rhythm Management Optimized Working Capital
through Supplier Collaboration and Inventory Management

Get The Webinar and Related Aberdeen Report!


WESCO Drives Continuous Distribution Center (DC) Improvement with Hands-Free Wearable Terminals

From Traditional Handheld and Truck-Mount Radio Frequency (RF) Terminals to a New Generation of "Wearable" Mobile Wireless Devices

Featuring Larry Mosier, VP of Distribution Centers & Transportation at WESCO, Mike Rusnak, Distribution Center Manager at WESCO, Mark Wheeler, Director of Supply Chain Solutions at Motorola Solutions

Wednesday, June 15, 2011


Goya Transforms its Supply Chain to Enhance Profitable Growth and Service

Learn How Goya Grew from a Small Store-Front Business into The Largest Hispanic-Owned Food and Number-One Latin Brand Company in the United States

Featuring Peter Unanue, Executive Vice President, Goya Foods, Inc, Danny Halim, Vice President, Industry Strategy, JDA Software

Tuesday, June 28, 2011

This Week's Supply Chain News Bites
Supply Chain Graphic of the Week: Adding a Velocity Dimension to Risk Management

This Week's Supply Chain by the Numbers for May 26, 2011:

China Costs Rising; Toys R Us Planning Distribution Solar Party; More Ocean Capacity is Coming; Dust Explosion at Foxconn - but Lots Here Too


Key Strategies for Optimizing Working Capital

Learn How Boston Scientific Cardiac Rhythm Management Optimized Working Capital
through Supplier Collaboration and
Inventory Management

Get the Webinar and Related Aberdeen Report!



May 18, 2011 Contest

See The Full-Sized Cartoon and

Send In Your Entry Today!



Weekly On-Target Newsletter
May 25, 2010 Edition

DC Metrics Study, Ford's Factory Avatar, Reducing Out of Stocks and more


By Karen Butner
Global Supply Chain Management Leader

IBM Institute for Business Value

How Watson Could Help
Supply Chain Management Operations

Holste's Blog: Keep Your Next DC Project Alive Through Vendor Collaboration
Top Story: Annual WERC DC Metrics Study Finders Leaders Extending their Lead
Top Story: WERC 2011 Video Review and Comment
Top Story: Medical Device Maker DJO Global Finds Success with Mobile Robotic Picking System

Q: Right now, one US dollar is worth about how many Chinese Yuan?
A: Found at the Bottom of the Page

Rethinking China Part 2


The world moves awfully fast.

A few weeks ago, I wrote a column on Rethinking China, which basically argued this: that the US and other developed economies were basically shooting themselves in the foot with regard to their relationships with China.

Meaning, that while China is rightly seen as rising rapidly, soon to overtake the US as the largest economy in a few years by the International Monetary Fund (IMF) and others, that ascent has almost totally been paid for by the same developed economies that now seem to be in relative if not absolute decline.


"Last week, the respected consultants at Boston Consulting Group released a report predicting that by 2015 - just four years - all-in costs to produce and deliver goods from China to the US will be on par with making the goods in the US."


Send us your
feedback here

China's economic growth has simply come from the huge trade surpluses it has piled up with most of the rest of the world - more than $2 trillion in trade surplus with the US since 1999, for example. 50% or so of China's GPG growth is coming from government spending on infrastructure, which is only possible because of those trade surpluses. Pundits come back marveling at impressive Chinese ports and highway projects, while US infrastructure keeps getting C or D grades from the Civil Engineers society, but a lot could have been here with that $2 trillion too, and the same is true for many other countries.

China can also make big investments in natural resources in South America, Africa and elsewhere, to its long-term strategic advantage, because of those huge surpluses and foreign currency reserves.

Lawrence Summers, Harvard university Professor and former high level government official under Presidents Clinton and Obama, recently said that "When someone writes the history of our time 50 or 100 years from now...It will be about how the world adjusted to the movement of the theater of history towards China." But again I say, because Western nations handed it the money to make the move.

China has in just a few years dramatically changed trading relationships the world over. The chart below shows how China has rapidly moved to being the number 1 or 2 trading partner of an incredible number countries, and how its share of global exports has climbed 500% from 1990 to 2010, now enjoying over 10% world market share.



View Full Size Image


The impact is dramatic everywhere. For example, as the Brazilian economy matured, it was planning to become more of a global force in manufacturing. Now, 80% of Brazil's exports to China are agricultural or mineral/oil products, while it imports an increasing percentage of the manufactured goods it consumes from its new largest trading partner. Brazil, Australia, Canada and others mature and developing economies are sending oil, ore and other commodities to China and getting back finished goods.

So what turns out to be good for any individual company - lower costs from outsourcing to Chinese manufacturers - is in total bad for the country (I think). And supply chain is at the heart of that, since we lead the charge to find lowest total costs sources, and manage the complexity of making it happen.

So, that mostly summarizes my part 1. In part 2, I was going to ponder a bit on what to do about it, and still will, but in just the past few weeks has come some interesting news.

Many have commented that the rise of China in manufacturing has been different than say the threat Japan appeared to pose to the US in the 1980s (and much touted itself, by the way). First, it was Japanese companies directly that posed the challenge, supported by its "industrial policy" the West lacked, and Japan's network of closely linked companies.

China, on the other hand, was fueled not so much by Chinese companies directly, but by Western companies hiring the Chinese to do the work - labor arbitrage. Many compounded the situation giving up much technological know-how to their emerging Chinese competitors through carelessness, short term thinking, or government coercion, but the results were the same regardless.

Other noted that the ease of going global today made it possible for China to exploit its advantages in ways other up and comer were never able to do in the past. Chinese intense "cost engineering" was also a potential mortal threat to many Western manufacturers.

Two weeks ago, however, William Fung, CEO of Hong Kong-based trading giant Li & Fung, said we will see some dramatic changes in China over the next five years, and he is someone who really ought to know.

He predicts that Chinese wages will rise 80% over the next five years - a dramatic jump. Ironically, China's turn to a major economy with double digit GDP growth has been perhaps the key factor in rising global commodity and food prices. Inflation is running about 5% there. The Chinese government needs therefore to keep wages rising to keep up with this inflation, or risk civil unrest.

Then last week, the respected consultants at Boston Consulting Group released a report predicting that by 2015 - just four years - all-in costs to produce and deliver goods from China to the US will be on par with making the goods in the US.

BCG says that by that time, Chinese labor costs will have rising from about 9% of the US average today to about 17%. That, plus a falling value of the US dollar versus the Yuan and other factors we will soon reach "a point of indifference between producing in the U.S. and producing in China," says the company's Hal Sirkin. (We will do a more in-depth review of this report in next week's On-Target newsletter.)

Interestingly, BCG says this will not be true for European countries, where wages are higher in the developed countries and workers are less mobile. BCG sees a lot more US-made cars being exported back to Europe for this reason (note to self: be ready for more labor strife coming to Europe over next few years.)

So just when we reach the point where both right (e.g., Donald Trump, Paul Craig Roberts) and left seemed to have come to level of agreement that the current trajectory must be changed, are internal developments in China going to make it something of a moot point, just as Japan's supposed world dominance in the 1980s soon faded from view?

I say no, or at best, just partially. While the wage impact will change the dynamic to a degree, people overestimate the role of blue collar wages, missing that lower Chinese overhead is at least as big a factor in the total Chinese cost advantage. China has been intentionally giving up on low value goods anyways, which it long ago recognized were headed to Vietnam and elsewhere at some point, and has been focusing on higher value goods for several years.

Paul Craig Roberts, a well-respected former Reagan administration official, told me a few weeks ago that "Globalism is an act of national economic suicide," as it has been practiced to date. I am not sure I would go that far, but it is very hard to argue it has worked in our favor (or in Europe and Japan and frankly most countries besides China).

Roberts told me he had endorsed Ralph Gomory's solution, "which is to tax US corporations according to where value is added to their product. If they add value in China with Chinese labor, a high tax rate. If in the US with US labor, a low tax rate."

Would the cure be worse than the disease? We will explore that in a few weeks.

What is your reaction to Gilmore's Rething China Part 2? Do you agree with Fung and BCG that this situation will largely take care of itself? Or is that an overly optimistic prediction? Would a tax on value add be a smart approach - or worse than the disease? Let us know your thoughts at the Feedback button below.


Dan Gilmore


Send an Email


View Web/Printable Version of this Page



We had a lot of Feedback on our piece on Donald Trump saying China is taking the US to the cleaners- most short and sweet, some we couldn't publish, many unsigned, quite a few who asked that we do not use their compay name.

Given all that, a selection of these letters below. None rose to "Feedback of the Week" status.

Feedback on Trump on China


Imposing an import duty would eventually force US consumers to purchase locally manufactured products which "should" result in increased manufacturing jobs. But is 25% enough to make it for more expensive? Ccorporations are still outsourcing jobs to China/Vietnam/India for greater profit margins with total disregard to its social responsibility (i.e employing some locals), because the end product is no cheaper to the consumer than when it was being manufactured in the US.

Consumers need to start boycotting "imported" products, this will eventually drive corporations to return. (No Sale / No Profit). If consumers boycott there is nothing the Government or the Chinese can do (and no trade war....) we manufacture and consume everything internally and I have a feeling most countries will do the same as its not only the US with this problem.

Government can help by forcing manufactures to "show" what / where / how each product is made and let the consumer decide. If one large corporation is boycotted, it will drive prices down and force them for the interim, to reduce profit and return home, the others will follow the minute we start buying American as their profits begin to evaporate.

Max Tenk


Did the Donald think about the US Bond Debt to China? Wonder why the politicians are walking a wide circle around China in terms of momentary rates and trade imbalance? Guess what none of these things happened recently, it’s been building for years (and including the Clinton administration). In short, greed was the culprit now the US is facing some hugh issues that aren’t in favor of hard negotiation skills. Maybe he needs to start practicing his Mandarin!

Jerry E. Durant
Chairman Emeritus
The International Institute for Outsource Management


I totally agree with Mr. Trump. Tariff, why not? Why do US politicians act so surprised when asking why did our jobs go over-sea? US Business leaders make more money shipping jobs outside the US. It’s up to our American Elected Politicians stand up and say let’s take away the incentive to sends jobs over seas and outsourcing; let’s tariff. What’s the alternative, do nothing? Who would complain about our tariffs, other countries that benefit from our loss? To be respected in the world, we should take care of our family, the US, then we would have the strength to help the everyone else.

If Mr. Trump is sincere in his believes, I hope he does run for office. His sound business ideas would resonate and perpetuate for the good of our country. Trump, why not?


Eric Lahoda

This article reminds me that there are only 3 ways for a country to produce wealth - farming, mining, and manufacturing. Everything else is just moving money from one pant pocket to another. Companies talk about "strategic sourcing" too as if they've discovered something new, but it isn't strategic if everybody else is doing it.

John Traynor


The US is not so much being run by stupid people who don't know what they are doing but by stupid people who have to do what they are told by the people who have lent them so much money that the US will never be able to repay. Therefore they are puppets on strings of the ones who control them and control world finance.

Ross Naddei

Megapulse Australia

Q: Right now, one US dollar is worth about how many Chinese Yuan?
A: Around 6.5. The value of the dollar has been slowly declining against the Yuan for the last six months, though the rates are largely controlled by the Chinese government, while most major currencies trade freely.
Copyrights © SupplyChainDigestTM 2003-2010. All Rights Reserved.
PO Box 714
Springboro, Ohio 45066