Having started my career here in the United States in manufacturing upon graduating high school, I eventually found myself in the manufacturing business of printed circuit boards by the time I was 21. This company mainly manufactured printed circuit boards for the automobile industry.
The company was founded in 1951 and was a pioneer in the industry. I started there in January 1999. The business was humming, running three shifts, there was ample overtime and good profits for the owners, who were ever so eager to reinvest those profits back into the business - even if that meant taking on more debt, which was necessary to make the required capital expenditures required to grow a capital intensive business.
But by 2001, it became apparent that the rise of China was something to be reckoned with. This company once before, had to reckon with rise of Taiwan in the late 1970s, early 1980s. It did so and was still successful, but China was a different kind of problem.
While working at this company of 4,000 employees, with a great company culture of treating everyone with dignity and respect and sharing about what was going on, I was most mindful. I paid attention probably more so than most of the employees, as I was eager to work my way up.
When we sent a high-up engineer to China to check our competition in 2001, I was eager to hear about his trip. He came back and reported a story that was more or less that China was building printed circuit board manufacturing facilities that were world class and along with that, they would build dormitories to house workers, mostly migrants from the countryside, who were happy to leave that hard life to come to work in the factory for as little as $50 a month.
The key phrase here was "they were happy to come." Perhaps they were 18 years old and knew that they would work hard, perhaps as much as 80 hours a week for 2-3 years, but would save up some money and then go back home with some funds in the bank.
The company I was working for, to face this challenge, took a three-prong approach. First, beef up our sales force and concentrate on growth of small- and mid-volume products. Second, advance our industrial engineering to be more efficient and productive. Third, build a facility in the Philippines - a US-friendly country where many of the people already spoke English - which to manufacture our high volume products. (Engineers in Philippines were about $8 a day Vs. $150-$300 a day in the US in 2001)
Obviously, building a facility in the Philippines was going to cost money. So was training future Filipino workers, many of which we brought back to the States to teach. Things deteriorated so fast that this pioneering US manufacturing company slowly died. By April of 2007, it closed up. There was little hope for US manufacturing against China and we all knew it.
Today, China no longer makes just 2.33 million vehicles, just 10 year later, they make over 18 million.
The US printed circuit board industry has been decimated, and that's an understatement. Like lightening it will strike that the world's wealth has moved from the US and Europe to China, India, Brazil and other parts. Perhaps it's already striking.
Not only is China dominating in auto production and maybe soon, auto performance superiority the way things are going, they have been embarking on an envious high speed railway system that is to be completed by 2020.
Living upstate NY now and having studied the Erie Canal, I can't understate the importance of what the Erie Canal did for not just upstate NY, but for America when it was completed in 1825. Canals in general were critical for nations economic success.
Upon completion of the Erie Canal, a canal that went from Buffalo to Albany NY, a distance of 362 miles, what would have taken 6 horses and 2 men to move 3 tons of goods 32 days, could now move 30 tons of goods with 2 mules, 2 men in just 6 days. The cost of moving a ton of goods from Buffalo to Albany fell from $100 to just $5. Such a reduction in the cost of freight enhanced and enriched the process of economic growth like none other.
Peter Bernstein, in his book, Wedding of the Waters, points out on pg. 114, that in the 1580s, the Spanish Clergy was against the building of canals because they believed that if God intended for the rivers to be connected he would have done so himself and that Spain failed to develop the new efficient means of transportation and thus Spain failed to develop in step with the rest of Europe.
With China building out its automobiles production capacity, its roadways, its high speed rail network, all at a blistering pace, it would be unwise to discount the wealth that will be created due to this enhancements that will lift the wages and living standards of all the people throughout the nation. Just as the wealth that was created upon the building of the Erie Canal in the United States by reducing the cost of doing business by means of achieving higher energy flux density or how much energy required to do work, greatly helps enhance economic growth and wealth.
The Chinese people have already been seeing their wages go up higher than the rates of inflation on average. The average monthly wage of China's 158 million migrant workers in 2011 was 2,049 yuan, up 21.2% from a year prior. From 2006-2010, the average minimum wage in China increased 12.5% per year.
At an exchange rate of 6.31 RMB to $1, the average monthly wage of migrant workers was $325 per month in 2011. That's a nice increase from the $50 a month we were told they were getting in 2001. It's also worth noting that aside from higher wages in RMB, each RMB has become worth more in US$ since 2001 as further evidence of the rise of China these past 12 years.
This chart shows the exchange rate of the RMB to the US$ since 2000.
To put this rise of China via auto production in perspective, in 2000, the world produced 58.374 million motor vehicles. The US produced 12.8 million or 22% of global production. China produced only 2.07 million motor vehicles or 3.5% of global production.
In 2011, the world produced 80.06 million motor vehicles. The US produced 8.653 million motor vehicles or 10.8% which more than halved US market share of global vehicle manufacturing. China built 18.418 million motor vehicles in 2011, which gave it a whopping 23% of world market share of global auto production.
China's auto industry has come very far and stunningly fast, that it does appear that vehicle production and sales are now plateauing in China. The last 4 years of vehicle production in China looked like this:
- 2008: 9.35 million
- 2009: 13.79 million
- 2010: 18.06 million
- 2011: 18.418 million
In the first quarter of 2012, overall automotive sales in China are actually down 3.5% Vs. last year.
Foreign manufactures in China, like General Motors (GM) saw its sales rise 8.7% to 745,852 vehicles, but Ford Motor Co. (F) saw its sales fall 14% in the first quarter of 2012 to just 121,393 vehicles. Toyota (TM) of Japan saw their vehicle sales rise just 1.2% in China to 211,500 vehicles.
I have a bias and that bias is that I believe we're nearing a peak level of oil production, especially conventional, easy to get oil. Not only is that impacting the ability of the number of drivers who can afford to drive a car but having the energy itself to build cars. For example, it takes approximately 7 gallons of oil just to make 1 tire let alone the oil turned to gasoline to run the automobile.
The US is already seeing large declines in miles driven on our roads and declining overall oil consumption since 2007. I'm pointing this out because of what appears to be a plateau of auto production and sales now in China off of what was a blistering pace of growth.
It is worth noting at least that even if China were to build and sell 18 million vehicles each year for the next five years, there would still be strong growth in the overall number of vehicles on its roads, and overall economic growth in China would likely continue for some time, as having a car, in and of itself, greatly increases ones productivity. I, personally, living in a small town about 5 miles from most stores, would see a dramatic decrease in my production and consumption without having a car.
So goes GM, goes America, went the old saying. (Let's not forget GM went bankrupt.) Today, so goes China, so goes the global economy, it may be worth saying; certainly worth watching.