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A manufacturing perspective of recovery

China, the world manufacturing plant, is undergoing a severe shortage of workers so that many businesses are difficulties to meet their newly signed orders. This problem is not only happening in the coastal provinces but also a nationwide. Thinking deep what causes of this problem, we think we should be cautious about the recovery down the road, especially after a 70% rebound in the equity market.
 
First, workers in China are cautious about the openings because most of factories only hire short term workers even though the pay is higher. Employers look for short term workers because most of the orders are short term, refill type of orders. Usually long term projects would require manufacturing at the end of last end but this shortage doesn't come in that time frame. Such employers are in double squeeze: on one hand, they need to hire workers. On the other, workers, if available, are asking more. So the final outcome is less profit. They are also uncertain if there are longer-term order down the road.
 
Second, most workers in China are from poorer provinces in the West and Central. As China tries to balance off resource, many of farmers-turn-workers just want to stay at home. The transportation at during the Chinese New Year just isn't an easy problem to handle. In addition to that, many separated families aren't looking for more as money brought is dwindling when inflation is rising quickly. So availability of low cost workers becomes a past tense.
 
Third, pay for experienced workers has reached to a high level. For workers with 7-8 years experiences, they most likely ask $10,000/yr. It is costly compared to a couple years ago. But factories have not, or do not have resource to, upgraded their equipment to synchronize increase of workers' skill set and salary requirement.
 
Finally, the currency argument will likely bring a handful of razor-margin manufacturers into bankruptcy. China has to change the rate when they are ready after their stress tests. No matter what tactics and procedures to be used, it is going to get some or many out of the game.
 
Therefore, we should be cautious on what nature of this recovery is. Regardless of the demand side, i.e., long stable versus short spike, the supply side will have problem. There are just too opaque to conclude that the recovery is sustainable. At the same time, considering many multinational companies' profit in the last few quarters were strongly driven by the Chinese market, we should be further cautious about the strength and duration.
 


Disclosure: No positions