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Opinions and views from expert CFOZone members.

Jun 08

Strikes in China could mean lower US profits

Posted by Ron F in workersoutsourcingoffshoreMalaysiaemerging marketseconomy, earnings, demandcostscost reductioncost cuttingconsumer spendingChinaCareers/Management

Ron F

Rising labor strife in China has potentially significant implications for US companies and financial markets. The irony is that what companies want isn't necessarily the same thing that markets do.

Yves Smith over at Naked Capitalism does a good job of explaining why.

Essentially, US and other foreign companies are producing there to take advantage of low labor costs. But with strikes and other forms of upward pressure on labor costs, the advantage for such manufacturers may not remain as large for as long as they expect.

And some companies are already shifting production to countries like Vietnam and Malaysia. That will buy them more time to engage in labor arbitrage, though how much is always a big question. The faster emerging markets develop, the faster wages climb, and the arbitrage opportunity disappears.

That brings us back to China. While foreign manufacturers may bemoan the upward pressure on wages, it is necessary to sustain global demand in the face of weakness elsewhere, especially in the US and Europe.  As goes Chinese wage growth, so goes the global economy.

In other words, the tug of war between labor and capital hasn't ended thanks to globalization. It's just been postponed through the shift in production to emerging markets. Eventually, however, companies will have to learn to profit despite rising labor costs. And as Smith observes, the question seems to have arrived in China earlier than anyone anticipated. And what happens after it does the same elsewhere in Asia?

As far as I know, no one has yet found a source of cheap labor on another planet. But neither has anyone found a strong source of consumer demand in outer space.

Get the picture? Someday labor and capital will have to come to terms here. And someday may not be as far off as CFOs or investors expect.




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