January 19, 2004

Why the Fed may not raise rates, part one

The excerpt below from an article here, shouldn't surprise anyone by now. By coincidence, I met a salesmen for Texas Instruments last night at an Irish bar, watching the Colts-Patriots game. When I found out his line of work I asked him a few questions about what TI's plans were. "We're gonna keep going East till we start going West. Singapore and Taiwan and Malaysia were nice. But they just didn't have the labor. In China, you wouldn't believe it. They build these dorms. Folks roll in from the country to work 12-hour days for a few weeks, and then a new group comes in. They're almost like prison camps too, some of them, with barbed wire fences." "We're already looking at the Stans in Central Asia. The governments are willing to make good deals and the labor is just as cheap. The key is skilled. China and India have tons of engineers. Skilled labor at Wal-Mart prices." "It really is Wild West capitalism though. For example, China suddenly decided Wi-Fi was illegal. You couldn't use it unless you had the 'China Standard." "What's the China Standard," I asked? "Money." So...even without the rule of law, regulatory transparency, or clear property rights...it's still worth it for American business and manufacturing to East, on labor cost alone presumably. Ironically, this could help the Fed in its cause to keep rates low. As long as this China dynamic keeps rolling, don't expect to see consumer price inflation....at least in electronic goods...or anything else coming out of the East. If consumer spending can pick up without raising inflation specters...the Fed would love it (although this doesn't exactly help improve the employment picture...and reinforces the fact that the jobs that are leaving American shores....aren't coming back...And neither are the wages that left with them.) This is the great globalization of the division of labor. And it's not going to be kind to Western manufacturers.... My new source of info, three beers into the evening, also said intellectual property was a huge concern. "We don't move our high-end stuff over cuz it gets ripped off. There's just no protecting it. Everything gets knocked off. You'll see a guy in a rickshaw with a basket full of oranges, a basket full of modems, and a basket full of hooded sweatshirts....whatever sells. They've got the fever." By the way, the lack of copyright and IP protection COULD be a barrier to more Western business in China. After all, China is a member of the WTO and is supposed to monitor this sort of thing. But if it's happening with drugs and electronics...it's hard to see what's going to stop it from happening with everything else. U.S. manufacturers will complain and maybe get some tariffs slapped on knock-off imports...but that will only raise prices here....not anywhere else, nor will it change what's happening. From today's WSJ: In a rare look at the numbers and verbal nuances a big U.S. company chews over when moving jobs abroad, internal documents from International Business Machines Corp. show that it expects to save $168 million annually starting in 2006 by shifting several thousand high-paying programming jobs overseas. Among other things, the documents indicate that for internal IBM accounting purposes, a programmer in China with three to five years experience would cost about $12.50 an hour, including salary and benefits. A person familiar with IBM's internal billing rates says that's less than one-fourth of the $56-an-hour cost of a comparable U.S. employee, which also includes salary and benefits. According to the documents, which also provide managers with detailed advice on how to talk about the moves and their effect, IBM plans to shift the jobs from various U.S. locations to China, India and Brazil, where wages for skilled programmers are substantially lower.


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