Apr 25, 2012

The World As It Is

Years ago, I made a business trip to Israel. Since the American news media focuses so much on terrorism, I expected to find a country in chaos that was bound in fear. Instead, the people struck me as strong of character, and unafraid, in spite of the fact that they are surrounded by tens of millions of hostile neighbors. I visited several Israeli manufacturing companies, one that was near the border of Lebanon, and was struck by their entrepreneurial spirit and sense of community. The Israel I visited was nothing like the one the media portrayed.

From my trip I learned that the best way to know the truth is to be where the action is. The perspective of one who is looking in from the outside doesn’t provide a complete picture.

In the past month, ABC News, Businessweek and the Washington Post have run articles saying that the U.S. will soon be competitive with China again, perhaps as soon as the next four years. The falling dollar, they say, combined with rising labor costs in China and increases in US productivity will level the playing field.

I have a hard time believing it. I receive phone calls from prospective customers all the time who’ve received quotes from domestic sources and can’t make it work. Wanting to obtain some hard numbers on my own, I decided to get a competitive bid in the U.S. on one of my current customers’ products. Because prices from China are more competitive when more labor is required, I went after a quote for one of my current customer’s products that require a minimum of handling.

Surely, if domestic costs were on their way to becoming more competitive, I reasoned, the price difference would have to be somewhere around 30%, maybe 40%. After all, the yuan has been steadily rising against the dollar for the past year, as have Chinese labor and raw material costs. My customer had just been hit with a 10% price increase due to the above, further adding fuel to the fire.

It wasn’t even close. The domestic quote I received was three times that of the current Chinese price, 10% increase included.

Today the average wage of an employee in a Chinese factory is less than $2.00 an hour. The average wage of a U.S. worker is nearly $23.00 an hour. Add the benefits and payroll taxes that American companies are forced to pay their employees (especially the big, top heavy corporations, who provide pensions), and the spread gets worse. Even if Chinese prices were to inflate 5-10% a year in the next 5 years, the real world chance that they’ll reach anything close to parity with US manufacturing costs isn’t realistic.

Not every product is the same, but those with a higher labor to raw material ratio will more than likely continue to be far more competitive when purchased overseas. As for any possible gains in U.S. productivity, we must also remember that Chinese manufacturing companies can buy the same late model US and European made equipment that we do.

This is meant to be a focused snapshot of the world as it is, not a slam against American manufacturing companies. Our mission is to help our customers purchase quality product at competitive prices. If the U.S. were more competitive than China, I would source from American manufacturers and sell their product in the U.S. and abroad.

Our customers seek us out is because they need to compete to survive in what is now a global economy. If their competitors sell a comparable product that is priced 30–40% lower than theirs, they won’t be in business long. I’m sure that Apple has the Ipod made in China because they can sell it in large volumes at a price their core customer base can justify. But if they were to double or triple the retail price of the model they sell at $300.00, for example, (which two of my kids have), to $600.00 or $900.00, their sales landscape would alter dramatically.

It’s not uncommon for me to hear that the prices we quote are two to three times less that of domestic suppliers, even more. Last year one customer told me that he’d been quoted $27.00 from a U.S. source for a product we sourced in China for $5.00.

Absent a seismic shift in the global economy, the media reports of economic parity between the East and the West appear overly premature, if not unrealistic.

Time to Place Orders for Christmas

With the extended production times we’ve been experiencing this year, now is the time to place an order if you need product for the Christmas season.

Consider: An order is placed by June 20, with two months of production time. This means it would ship late August. Add four to five weeks of transit time by sea, and you’ll receive the shipment by early October. If the production time for your order is 90 days, you would receive the shipment early November. Please keep this in mind when planning your inventory needs.

The Exchange Rate

Yuan to the dollar, as of today: 6.47 to 1

Rate when the Yuan was depegged from the dollar on June 19, 2010: 6.82 to 1

Change: .35 (5.1%)

Words of Wisdom

Man gives advice; God gives guidance.
Leonard Ravenhill

About Us

Since 1991, Global Trade Specialists, Inc. has helped companies of all sizes get their products made in China from manufacturers of quality products. We are an American company who works with three trading groups in China with immediate access to thousands of manufacturing companies. We source most products made from metal, plastic, wood, stone, glass or textiles; from prototype to production. Many of our customers are first time importers; we walk you through the entire process.

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