Why you should care
Because even China isn’t immune to the laws of economics.
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Convincing foreign manufacturers to set up shop in Mexico, where chaos in some parts can rule, used to be a drag. Just ask David McQueen, director of consulting at The Offshore Group, whose entire business involved just that. As he puts it, “People had to be persuaded to look at Mexico.” But all of a sudden — OK, in the past few years — companies have been so eager to move south of the border that Offshore Group had to boost its workforce by a third to nearly 17,000 people. Phones are ringing off the hook (assuming their phones still have hooks).
And guess who they have to thank? A country an ocean away: China.
Welcome to the latest wrinkle in the post-Great Recession global economy, where one country’s boom-and-bust is another country’s opportunity. Until about a month ago, China’s rise looked unstoppable to most; then its markets went south, creating panic among investors and wiping out more than $3 trillion in national wealth until the government hit the emergency brake. But there’s a silver lining to the country’s underlying economic woes — it’s just not in China. It’s in countries like Mexico, India and others, which are poised to follow China’s original model of cheap labor and a welcoming business environment.
Indeed, this shift has been underway for a while. “A lot of things that were made in China have come to Mexico: dishwashers, appliances, TVs, automobiles,” says Hal Sirkin, senior partner at Boston Consulting Group. In fact, nearly every automobile company you’ve ever heard of — from General Motors and Ford to German luxury brands Audi and BMW — is expanding production or building plants in Mexico. Cars and small trucks are vrooming out of Mexico; from January to May, the country’s vehicle exports jumped 12 percent to a record 1.16 million, according to the Mexican Automotive Industry Association.
Manufacturing costs — even in the U.S. — are now roughly on par with China’s.
Mexico’s proximity to the U.S. market helps; so do free-trade agreements that let it ship cars to Europe duty-free. But there’s another huge, and largely unappreciated, factor: shifting labor costs. A decade ago, Mexican workers cost roughly twice what equivalent Chinese labor did. But Chinese wages have been shooting upward along with overall growth, and now Mexican factory workers are at least 20 percent cheaper than their Chinese counterparts. Even U.S. manufacturing costs are now roughly on par with China’s, Sirkin figures. Sure, a U.S. factory worker costs three times as much as a Chinese worker by the hour, he notes, but that’s offset by much lower energy and logistical costs.
Higher labor costs are just one thread in a broad tapestry of changes in China, where double-digit growth in the past decade is expected to slip to below 7 percent this year. In a sense, the country is suffering a hangover from its investment blitz following the 2008 global financial crisis. That spending kept the country — and maybe the world — afloat, but at the cost of quadrupling China’s total debt, according to data from McKinsey & Company. A lot of that money built ghost cities filled with eerily empty apartments.
“No large country has ever so been distorted,” says Michael Pettis, a Beijing-based economist. The inevitable slowdown rippled through the construction, steel and building-materials sectors, sending global prices for raw materials — including oil — tumbling as demand for building products weakened. “The Chinese economy is soft and getting softer,” says Geoffrey Barker, who manages the Counterpoint Asian Macro Fund in Hong Kong.
All of which turns out to be a sweet deal for consumers in Europe, the U.S., Mexico and even Colombia, which Sirkin taps as another winner in the reshuffling of the world’s economic deck. India, too, is selling less stuff to China, but its economy has revved into a higher gear thanks to the market-oriented reforms of Prime Minister Narendra Modi — the World Bank forecasts it’ll hit 8 percent growth by 2017, faster than what the bank expects from China. India also could make a play for China’s low-cost manufacturing title — assuming, of course, it can address issues such as poor transportation and electrical infrastructure, key items on Modi’s agenda.
Asian neighbors such as the Philippines, Vietnam and Taiwan so far seem unlikely to take a direct hit from China’s slowdown; their primary exports to China are electronic components that eventually get re-exported in computers, phones and other gadgets, so they don’t depend on fickle Chinese consumers. The world as a whole, in fact, may also benefit. Case in point: Greenpeace reports that Chinese coal consumption dropped by 8 percent in the first four months of the year, leading to a 5 percent decline in carbon emissions — roughly equivalent to all the CO2 produced in the U.K. during the same period.
That’s cause for celebration, although China’s woes aren’t good for everyone. Economists Tao Wang and Donna Kwok at UBS, the Swiss financial services company, warn that equipment exports from Europe and Japan could suffer this year; similar U.S. and Korean exports cooled last year. At the same time, much of the misery could turn out to be short term if China successfully reshapes its economy. Indeed, Pettis argues that China’s potential to be an engine of world growth depends in part on Chinese spending habits. If its consumers would just open their wallets and stop saving so darned much — typically 30 percent of their household income, compared with 5 percent in the U.S. — that would fuel demand around the world, giving everyone a ticket to ride.