Sunday, May 30, 2010

Pay Rates, Here and There

An AP report on the front page of the San Diego Tribunes business section Saturday boggled my mind. A $26 a month pay raise for 300,000 workers in China making our cell phones, IPods and computers.

TAIPEI, Taiwan (AP) — The Taiwanese electronics company buffeted by a spate of suicides at its China factories said Friday it will raise the pay of workers by an average of 20 percent.

The pay raises at Foxconn Technology Group have been in the works for months to cope with a labor shortage following China's recovery from the global recession, said a company official speaking on condition of anonymity because he was not authorized to talk to the press.
. . . . The basic salary at the China plants of Foxconn Technology Group — which makes iPhones and other popular gadgets — is currently about 900 yuan ($130) per month.

. . . . The company, part of Taiwan's Hon Hai Precision Industry Co., is the world's largest contract maker of electronics. Its long list of big-name customers include Apple Inc., Sony Corp., Dell Inc., Nokia Corp. and Hewlett-Packard Co.

Cheap labor runs the industrial world. A manufacturer that can sell it cheaper and better will make money. You have to marvel on how these workers can survive on the present $130 a month. Just imagine if they took out for Health care and Social Security. It does explain how electronics in this country are so cheap. Of course if that’s all you are being paid, you can’t consume very much either.

Here is a link to a CNBC video with Steve Wynn. He is a big resort owner in Las Vegas who needs inexpensive labor to keep his hotels running.

CNBC Video

In essence, Obama’s new health care plan adds 2 dollars to the minimum wage (the employer’s share). Of course the employee gets to kick in a matching 2 dollars. If we figure the minimum wage right now at $8, add $2 for employee SSI and unemployment benefits then add $2 from the new health insurance costs, and calculate employee cost per month; $12 X 40 hours X 4 weeks, $1,920.

Let’s see if I have this right. The monthly wage of Chinese laborers is being raised to $156 dollars per month, and stateside the minimum wage will soon be $1,920 a month. If a manufacturer wants to produce a retail product for consumption, they’d be an idiot to produce it in this country. On the other hand, if the business deals in servicing customers, the employer is caught paying the going rate unless it can be accomplished by phone support based in some third world country.

Steve Wynn from the link above is taking advantage of this dichotomy in the world economy; gambling is a service business. His move to Asia allows him to offer 10 times more in service and still pay less on the bottom line.

A lot of medical procedures are going offshore also. India offers open heart surgery at one third the price in the US and that includes airfare.

The question arises, how do we recapture our industrial base that has moved offshore? I guess the real question is; “Why bother?” China is still advancing us credit, by buying our Treasury’s on the “Fog a Mirror” plan. It worked great for us for a while, in real estate. I guess this is where I keep quiet; we’ll let China figure this out the hard way.


Bob Barker said...

What's amazing is that with all of this outsourcing, these companies have sown the seeds of their top-line destruction since their customers are now all broke. But to your point, why wouldn't they do it when it's 10 times as expensive here. I guess this is where wage deflation in the US will begin to play out. There is no other option.

Tyrone said...

There is no other option.

While I'm not a fan of it, tariffs could very well be an option. However, I don't believe the powers that be want them, but it could certainly level the playing field.

Jim in San Marcos said...

Hi Bob

Wage deflation could occur as it did in the 1930's. Trade workers undercut each other for work, but I don't see a 90% drop in paid wages.

I do see the wages of a garbage truck driver dropping from 32 dollars an hour to 8 dollars and maybe firemen would get a 75% pay cut as well. All government workers without a college degree could also see big hits. Let's face it government jobs used to be where you got trained for the higher paying private employer jobs. Now its the final destination, that will have to change.

I see inflation hitting the United States as an economic unit. Wages will stay the same, food, taxes, and gas prices will rise, meaning we get to consume less.

Then if that isn't bad enough, the dollar could fall in value in relation to other world currencies. A 50% drop would be considered deflation at its worst. Cash from around the world could cherry pick our assets. In the end, the investors will have paid too much and will end up selling it back, a little like the Japanese and the Pebble Beach Golf Course.

That is how I see it panning out.

Thank you for your comments.

Jim in San Marcos said...

Hi Tyrone

After the health care package, I wouldn't put it past Congress to pass a tariff plan to level the playing field as you suggest.

The trouble is,what happens to a businessman starting up a steel company under a tariff? Later, the tariff could get dropped because Congress perceives that the steel maker is charging too much for steel.

Congress is not looking at the fairness aspect, they are just trying to raise new revenue.

I wouldn't be surprised if they went the tariff route, they did it before in the 1930's and it may of helped them get re-elected.

frakrak said...

Hi Jim, interesting point I picked up is that Chinese manufacturing operates on margins of about 2% profit. I guess on volume you can do that and still have a fairly healthy balance sheet. But these figures are for larger manufacturers in China. Their exports are facing resistance from Europe and the U.S. at the moment, I can see things going horribly wrong there!

Yes wages maybe too high for most in the West, but if they drop say 20% over the next year or so what will be the net result of that? The U.S. doesn't export consumables as it did (too much competition from China) so you are forced to produce either for the domestic market or some close neighbours!

The U.S. now has impoverished consumers, no markets it can compete in, one alternative would be a natural evoltution into trading blocks. It is going to be a 1930's rewind, where's the alternative for your Congress?

AIM said...

The USA will never be big on industrial and manufacturing again. The skilled and intelligent portion of us will be a service and information economy. The unskilled and uneducated portion will be serfs/laborers for China, India, etc.

Anyone having kids better ensure that they learn Mandarin and are worldly so they can they can live and work in China as business owners and entrepreneurs.

Welcome to the new world!

Justin said...

Part of it is definitely our social net. Our pay rate supports our entire social neta and way of life.

Clearly, gov't policy should be to protect our jobs. With global capital flows and international communication as the basis of the information economy, we need a new concept: a "labor labor tarriff".

Meaning, a company's percentage of foreign workers would determine its tax treatment.

It is no longer enough to worry about imported goods. We also have to combat outsourincing in "knowledge work" service field, such as medicine, accounting, and education.

Until our gov't forumates an economic policy that is based on preserving our quality of life, we will continue to get poorer and poorer.

To me this is common sense. Who exactly is distributing the crazy pills? It is a basic economic law: you have to be a producer before you can enter the market as a consumer. I.E. JOBS HAVE TO COME FIRST.

frakrak said...

It started in the 70's with our country (reducing trade tariffs), and over the next forty years every industry in this country has been decimated, for the sake of the 'level playing field.'

I am presuming the same for you? The most disappointing aspect of this being that we produced higher quality items than what we are currently buying from these countries (except cars).

So one way you can look at this is that the West has vicariously sacrificed its own wealth and industries to get a whole range of countries out of poverty:)

Huge U.S. German, British, French,...etc, companies have have huge slices of their countries wealth invested in these countries (China, India, Thailand, Phillipines ......) and I am so absolutely positive these countries will show us all so much gratitude for this in the future:)
nothing like havng your family jewels in the hands of a tusted business associate in countries that have never heard of the word ethics

Anonymous said...

"how do we recapture our industrial base that has moved offshore?"

Automation. I fully automated plant will only need a few high quality workers, and should be able to operator anywhere in the world (including the USA).

Anonymous said...

Automation. A fully automated plant will only need a few high quality workers, and should be able to operate anywhere in the world (including the USA).

Jim in San Marcos said...

Hi Frakrak

Your mentioning of the investments that the rich countries have in the third world countries like China, India and Southern Asia, made me wince.

I have suggested in the past, that these countries will be the first to experience massive unemployment. A lot of laborer's quit farming for the good life in the city. This raised their standard of living somewhat and they started families. Now they are laid off with mouths to feed.

Famines often times are a result of the mis-allocation of resources. Our ability to pay for the good life has ended. Our demand for product is gone, the third world pays the price for it, unemployment and starvation.

So given a billion people starving and in a weakened physical state, you end up with a very fertile place to incubate plague like diseases that have yet to grace our planet.

We will pay for this mess one way or another.

Jim in San Marcos said...

Hi Anon 4:42

The automation part works for me. But how do you handle the unemployment and the inability of the unemployed to be able to buy the product?

We need the jobs that were sent to third world countries because of a profit motive. What if it were to costs $7 dollars an hour to sew shirts WORLD WIDE? Then why not make them here? Of course, we know why, Social Security and Health Care. We have Obamasized (rhymes with sodomized) our employers with a business tax that limits their ability to compete in world markets.

Jim in San Marcos said...

Hi Justin

I agree jobs have to come first. With the present administration, they feel that more government jobs are a solution.

The trouble is, government produces nothing, they just consume, they are an expense. I can't quite figure out where this will go for now.

Thank you for your comments.

frakrak said...

Well exactly Jim, no matter how you may regard what is happening at the moment there is more than the potential for conflict, hardship, famine, disease .....

And of course the third(?) world would have a respectable point of view about how the West has taken advantage of their particular economic circumstances, no one has a particular moral high ground here.

I have noted in a few of your Presidents speeches the potential for the U.S. to renew through technology .... perhaps he may be on to something??

Anonymous said...

I say get rid of welfare. Replace it with soup kitchens so people don't starve. The system as it currently works is broken and only makes the problems generational. It's the only way these people are going to work. I know everyone will say but there are no jobs. Well that isn't true as every year farmers in my province have to import workers from Jamaica and Mexico to work because people on welfare here view this type of work as demeaning. Eventually I see wages for everyone deflating back to a lower level but I don't think it will be end of world. North America has an abundance of resources that is the envy of rest of world.

AIM said...

Yes, down with welfare. A society that rewards the lazy and the consumer and punishes the producer and the saver is doomed to a slow death.

Jim in San Marcos said...

Hi AIM and Anon 10:03

My thoughts exactly.

But if you think about it, the purpose of welfare, is to preserve the status quo. The rich get to keep their wealth but are taxed accordingly. Welfare keeps the poor in line. The state gets most of it back when they buy cigarettes, booze and lotto tickets.

The thing I don't like, is that welfare is a hidden tax (inflation) on the rich (anybody with a savings account), the government is printing this money.