The Urgency for Efficiency

http://xieguozhong.blog.sohu.com/117471449.html

Here is the next news article from Andy Xie talking about liquidity, debt, demand, inflation and the economy in China.

Manufacturing growth away from China

I am seeing more companies looking outside of China for manufacturing, or repair services, due to other countries being less regulated. Does anyone have any comments on this statement?

Economic Recovery in China

Does anyone have any comments to add about any economic recovery they see in China, or Asia in general? Let's discuss here.

The true meaning of a lead time

It's been my experience in dealing with factories that when you're quoted a lead time, one needs to be careful about what that means. It needs to be made very clear that the lead time is relevant to the Incoterms you've negotiated. For instance, if your price is $1 FOB Shanghai, China with a 4 week lead time, that means, in 4 weeks, you can expect your goods to be available for your forwarder. You still need to ship it !!! If your terms are CIF Sydney, Australia with a 6 week lead time, then your goods should be delivered to Sydney, 6 weeks after your order has been confirmed.

This all sounds very simple and straightforward, but these things can lead to misinterpretation of when your goods will actually be delivered. So the lesson here is, be clear on what your quoted lead times mean to you.

Monthly Asia Tradeshow Schedule - June

Shanghai

China International Exhibition on Mould & Die, Equipment and related Industry Jun 2 - Jun 5
The 14th International Essen Welding & Cutting Fair 2009 Jun 2 - Jun 5
Shanghai Tex 2009 Jun 12 - Jun 15
Shanghai International Textiles Fabrics & Accessories & Symposium Jun 23 - Jun 25
CPhI China 2009 Jun 23 - Jun 25
Fi-Asia China Jun 23 - Jun 25
2009 International Bath China Jun 29 - Jul 1
The 103rd China Culture Products Exhibition Jun 29 - Jul 1
2009 China Stationary and Gifting Exhibition Jun 29 - Jul 1 2009
China Aluminium Industry Exhibition Jun 29 - Jul 1
The 1st International Visual System Equipment and Technology Exhibition Jun 2 - Jun 4
The 13th International Automation Technology Exhibition Jun 2 - Jun 4
2nd China Auto & Bike Spare Part New Product Exhibition Jun 6 - June 7
2009 Shanghai Textile Exhibition Jun 12 - June 14 EXPOLAB Jun 17 - Jun 19
The 4th Shanghai Energy Saving Exhibition Jun 8 - Jun 11

Guangzhou

The 23rd China Ceramics Industry Exhibition Jun 1 - Jun 3
The 19th China Shoes and Machinery Exhibition Jun 2 - Jun 4
PPI China Jun 10 - Jun 12 2009
International Food Package Material & Package Design Exhibition Jun 23 - Jun 25
Interwine Canton 2009 Jun 3 – Jun 5

Beijing

The 13th China International Software Exhibition Jun 11 - Jun 13
Beijing International Travelling Exhibition Jun 18 - Jun 20
2009 Beijing International Energy Saving Materials Exhibition Jun 18 - Jun 20
The 9th China Battery Product Exhibition Jun 25 - Jun 27
The 7th China Food and Beverage Product Exhibition Jun 13 - Jun 15

Taipei

Computex 2009 Jun 2 - Jun 6

Singapore

Event dedicated to Medical Tourism in Asia Jun 9 - Jun 11

Japan

Heimtextil Japan Jun 3 - Jun 9
Ambiente Japan Jun 3 - Jun 5
Interior Lifestyle - Japan Jun 3 - Jun 5
Fukuoka Gift Show Jun 4 - Jun 6
TradeTech Japan Jun 6 - Jun 7
Interop - Tokyo Jun 8 - Jun 12
FOOMA Japan Jun 9 - Jun 12
PV Japan Jun 24 - Jun26
Mechanical Components & Materials Technology Expo (M-tech) Jun 24 - Jun 26
Design Engineering & Manufacturing Solutions Expo (DMS 2009) Jun 24 - Jun 26
Industrial Virtual Reality Expo & Conference (IVR Expo 2009) Jun 24 - Jun 26
Renewable Energy Tokyo Fair Jun 24 - Jun 26

Korea

Korea Railway Fair Jun 3 - Jun 6
Korea Boat Show Jun 3 - Jun 7
Environmental Technologies Exhibition (ENVRX) Jun 9 - Jun12
IAAPA Asian Expo Jun 10 -Jun 12
Expo COMM WIRELESS KOREA Jun 17 - Jun 20
Seoul Fashion Sourcing Fair Jun 17 - Jun 19
ASSE/ analab Jun 17 - Jun 19
Asian Oil & Gas Show Jun 24 - Jun 26

Stimulating away our problems?

This is a news feed from Andy Xie I like to post on my blog as it pertains to the global economy. His reports are long, but very interesting.

Source: http://xieguozhong.blog.sohu.com/116208033.html

Momentous news continue to dominate the global economy: (1) the outbreak of the swine flu threatens tourism industry-one tenth of the global economy, (2) the Chapter 11 bankruptcy filing by Chrysler casts uncertainty on the global auto industry-4% of the global economy, and (3) the delay in releasing the results of the US’s ‘banks stress test’ is raising suspicions that many banks are insolvent. These three industries in the news are about one fifth of the global economy.

On the other hand, policymakers continue to speak of ‘signs of stabilization’ and ‘green shoots’, Japan have announced another stimulus package, and China’s bank lending is zooming. The positive rhetoric by policymakers and the anticipation of effects to come from past stimulus and the possibilities for further stimulus have boosted financial markets substantially. Global equity market (MSCI World Index) was up by 26% by May 1 from its March low, though still halved from the peak in November 2007

The flow data suggest that the global economy is bottoming. The retail sales in the US are probably stabilizing, after declining nearly 10%. Japan and the UK’s are probably picking up sequentially from the first quarter. The trade data are suggesting the precipitous drop in the last quarter of 2008 and first quarter of 2009 is coming to an end. The global trade is probably stabilizing at a level one fifth less than the peak in the first half of 2008.

As I have written in this page several times, the last quarter of 2008 and the first quarter of 2009 would see a global hard landing, stability would return in the second quarter of 2009, and the global economy would see a stimulus-inspired bounce in the second half of 2009. However, I continue to believe that the economic difficulties will last for years and the global economy may dip again in 2010.

The stability that we are seeing is mostly due to liquidity support for the corporate and household balance sheet. The bursting of the property-cum-credit bubble severely damaged the credit worthiness of businesses and households. As market refuses to roll over their debts, they have to sell assets to repay their debts. Of course, when everyone wants to sell, the price would be extremely low, potentially bankrupting everyone. Central banks and governments have replaced market to roll over their debts. Without the immediate pressure to pay back debts, businesses and households are not under pressure to change their habits. What this implies is that the current stability is based on the government support. When this support is removed, problems will return.

Many would argue that, once the economy grows, the problems that businesses and households face will vanish under a rising tide. For example, improving earnings will make businesses more credit worthy. Market will become willing to roll over their debts. Household income improves in a rising economy, which boosts property demand and property price. Rising property price will improve home loan quality and decrease borrowing. Essentially, we could grow out of the existing problems.

The ‘stimulate and grow out of our problems’ strategy that everyone seems to be pursuing will not work. It may lead to rampant inflation, currency collapse and political instability. The current economic difficulties are structural in nature. The global bubble caused severe distortions to supply, demand, and income distributions. The bursting of the bubble has exposed that all the pieces in the global economy don’t fit together. The liquidity is like the glue that holds the pieces together for now. Unfortunately, the glue will wear off overtime. It merely postpones the inevitable adjustment.

Take the auto industry as an example. At first sight it seems far away from the property-cum-credit bubble. It is actually part of the bubble. On the supply side, the auto industry has suffered overcapacity for years. Why hasn’t it adjusted? Cheap credit allowed everyone to keep excess capacity. Further, financial businesses like GMAC were being used to subsidize automakers’ operating businesses. Of course, the financial arms of the automakers were part of the credit bubble. On the demand side, cheap credit enticed buyers to change cars frequently. The zero down payment-and-zero interest rate financing vastly exaggerated auto demand. Global vehicle sales may fall below 55 million in 2009 from the peak of 62 in 2007. Even when the global economy stabilizes, the sales won’t go back to 62 millions.

The current global sales are below the 2004 level. On the other hand, the auto industry has added nearly 20 million in production capacity since. Just think the industry had massive overcapacity before. The global auto industry needs to shrink one fourth at least. But, if you listen to the industry, they are talking about growth opportunities like electric cars and are demanding government subsidies. Mark my words: electric car is a concept that will waste massive amount of taxpayer money. Every time the auto industry is in trouble, it talks about new products. That’s how it sucks in money to stay alive.

Hybrid car is a mature technology that saves one third or more of fuel and survives in market without government subsidy. This technology is good for the next five years. Why is the push for government subsidy to produce electric cars that cannot travel far without recharging and the charging infrastructure isn’t there? Electric car may become commercially viable in a decade. Market will find the right technology and the right balance. If government wants to help, it should pump R&D money into research centers, not subsidizing the production and purchase of unviable product.

Chrysler’s bankruptcy won’t solve the industry’s problem. The US government intends to use the process to force its creditors to accept 80% write-down on their debt holdings. After wiping out shareholders 100% and debt holders 80% the company seems to be able to survive. However, it survives because of the capital subsidies, which puts pressure on other producers that have the same financial burden. It starts a vicious cycle that forces other automakers down the same path.

The bottom line is that the global overcapacity is equal to the US sales time two. The demand and supply are roughly in balance if two of the three US automakers shut down for good, not restructured or revitalized. However, it doesn’t look that way. The political process seems to be wiping out shareholders and bondholders first and use taxpayers’ money next to keep an over bloated industry alive. The industry will destroy capital for years. When governments subsidize electric cars, it would waste more money. If you invest in the auto industry, you will likely lose.

In a desperate effort to boost automobile demand, Europe and the US are offering car owners incentives to junk old cars for new ones. This is just advancing future demand. It lessens the pressure on the auto industry to restructure and stretches out the problem. Auto industry is an example that the current economic difficulties couldn’t be overcome by stimulus and governments are not yet on the right path.

Transactions in secondary property market have picked up recently in China, the US, and many other economies. Many pundits interpret the data as signs of the market recovering. Property is at the center of the current crisis. If it is recovering, the global economy is surely to follow. I think this interpretation is wrong. The pickup in transaction volume is a response to price decline, which is adjustment, not recovery. When a property bubble bursts, it tends to be a protracted affair. After a significant price decline some buyers who couldn’t afford the property before but can now come in. After such buyers are exhausted, the market declines again to attract potential buyers further down the price curve. The process ends until the market drops at or below historical average ratio of price to income. I believe property market would bottom earliest in late 2010 and could do so in 2012.

Retail sales seem to be stabilizing in all major economies. This may be temporary and certainly doesn’t presage a significant recovery. After a bubble bursts people cut back and adjust downward their expenditure level. But defending lifestyle is a powerful force; the cutback may not be sufficient. When people realize how much poorer they have become, they may have to cut again. Unemployment rate is still rising around the world, which is a headwind to consumption. The wealth and income developments remain negative for consumption through 2009 and probably 2010.

My interpretation of the current situation is the same as I forecast at the beginning of the year. The global economy is stabilizing in the second quarter at about 3% below the average level in 2008 and probably 6% below the peak level in the second quarter of 2008. The economic collapse in the past three quarters is certainly the biggest since the 1930s. The second half of 2009 could see a stimulus-inspired bounce that may see the global economy up 2% or so. Neither the current stability nor the bounce in the second half would signal the return of good growth. The global economy may see a second dip in 2010 and sluggish growth for several years afterwards. The reasons are that the supply and demand of the real economy are not matched and European and the US governments are dragging their feet on recapitalizing their banks.

I discussed the sorry state of the automobile industry above. Far more serious is what’s going on in the financial system. The odds are that the losses undisclosed or to occur within European and the US’s banks are more than their equity capital. These banks are technically bankrupt but survive on government guarantee of their debts. If a bank can borrow, it doesn’t have to fold shop even if it doesn’t have any capital. However, they couldn’t function normally like lending to all credit worthy borrowers. They are likely to maximize interest spread to recapitalize themselves instead. This ‘earn your way back’ scenario is exactly what European and the US policymakers are hoping for.

However, even if this strategy works, it will take a long time. If banks earn 15% annual return on their capital, a very optimistic scenario in a poor economic environment, it would take over five years for the banks to recapitalize. If the losses are twice as much, a conceivable scenario, it would take ten years. Before then the banks won’t lend normally. And the global economy would stagnate that long.

Economic stagnation could have nasty social and political consequences. Europe, for example, seems unstable. Its unemployment rate is heading back to double-digit rate like a decade ago. Its unemployed youth are in a rebellious mood. Its aging problem is far worse now. The baby boomers who are retiring are desperate to hang onto their expected benefits. They will react violently to any cutback of their pension and other benefits. But, European governments all suffer from unsustainable fiscal deficits. They have to raise taxes or cut benefits. If they do the former, their economies will deteriorate further, and unemployment may surge to endanger social stability. If they do the later, the baby boomers may rebel. Europe is a mess for the foreseeable future.

The ratio of US household debt to income needs to drop by one third or more. Saving more is the right thing to do. But it keeps consumption down. It will take at least five years for the US household sector to bring debt level down to its historical mean, which means a sluggish US economy for five years.

Many, if not most investors, refuse to accept that scenario that the global economy will take a long time to heal. They hang their hope on government stimulus and its potential to bring on another asset bubble. The theory-‘get the stock market up and everything else will follow’-is very popular among institutional and retail investors. Such sentiment can make the stock market go up for a period of time. But, ultimately, it will fail. The hoped-for improvement in fundamentals won’t materialize.

As governments and central banks around the world try to solve structural problems with stimulus, the global economy is probably heading towards stagflation. Despite exceptional demand weakness oil price has been rising. The current price of over $50/barell cannot be justified by demand and supply balance. Rather, financial demand and supply withholding are the drivers. Money has been flooding into exchange traded funds that buy oil futures. Oil exporting countries are cutting production. They think that it is better to keep oil underground than to exchange it for paper currencies that could drop precipitously in value. Rising prices of oil and other commodities, driven by inflation expectation, could trigger inflation in 2010 despite a sluggish global economy. We could be witnessing a replay of the 1970s.

FOB, Ex-Works (EXW) CIF, and Freight Forwarders

The incoterms in international trade can be, quite honestly, overwhelming, and in negotiating with your overseas suppliers, it's critical to factor in these items. If one already has logistics support in China, for example, it can be OK to negotiate an Ex-Works price with the factory. If one is new to this type of business, lacks contacts, or simply, doesn't have the resources to manage domestic transfers/transit issues, then an FOB, or even CIF price would be more appropriate.

With EXW, one is responsible for picking up the freight at the dock of the factory. It sounds simple, but what if it's for export, what about the paperwork, what about the shipping company? Without fully understanding or planning for these processes, a cheaper EXW price will turn out to be a nightmare compared to the higher cost FOB or CIF price. With FOB, the freight can be delivered to your freight forwarder, who in turn, will manage the shipment of your products. With CIF, the freight will be delivered directly to the port in your destination country. A key factor to remember though, as you pass more and more processes directly to the factory (and their vendors), you lose more and more control (or arguably, visibility) of your costs.

Lastly, when searching for freight forwarders, one must think carefully about who that company is, their length of time in business, their main routes they handle, their costs, etc. If you're not physically located in Asia, it's best to retain the services of an Asian business partner to manage all these seemly impossible, but mission critical tasks.