Friday, June 11, 2010

The Debts of the World: Where Do We Grow From Here?

Growth is only one factor. The more important thing to examine is PROFITABLE growth. Let us examine a country that is always on the lips of pundits - China.

Much of China's growth is real but whether such growth is strengthening the economy is questionable.

Chinese growth, much like Japan in the 1970-80s, is living off the legacy of cheap, government controlled money and low prices. While the entire world was lauding the "Japanese economic miracle", the entire structure was rotten from within. The number of NPLs (non performing loans) grew steadily. Instead of writing off losses, the corporations - with the connivance of the state - covered up the losses with even more losses to keep the system alive. More alarmingly, the demographics began to shrink. All this came to a head on December 29, 1989 when the Nikkei reached an intra-day high of 38,957.44 before closing at 38,915.87.

The following 20 years were not pretty.

We are beginning to see the same things in China. Except China's 1 child policy will only make things worse.

Smarter people than me have already written volumes about this. But I'll put things in recent perspective. The spate of suicides in Chinese sweatshops is a symptom of a systemic problem - a corporate culture wedded to near term profit and nothing else.

Besides cheap labor do you know what the other Chinese competitive advantage is?

"Quality Fade."

Quality Fade is a term made by Paul Midler, an old China hand who is an importer agent stationed in southern China.

Made in China may be more expensive than you think. There are many reasons why a manufacturer would agree to make merchandise for next to nothing. One reason is that "switching costs" in manufacturing are high. It was important to many manufacturers to catch the order first. Later, once the importer was relaxed and the orders were assured, the factory could raise prices bit by bit, and then quality could be cheapened. After winning the initial order, many Chinese suppliers systematically degrade the quality of their production in order to cut costs.

I highly encourage all to read "Poorly Made in China" which covers this in more detail:

Or for those with less time:

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