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The HK Aussies outsourcing to the USA

The HK Aussies outsourcing to the USA Comment & Analysis Date November 21, 2013 (1) Comments 13 Read later Michael Pascoe View more articles from Michael Pascoe

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timberland Comment

timberland boot sale The face of global manufacturing is changing. Photo: Erin Jonasson

timberland outlet This is the one about the company listed in Australia, incorporated in Bermuda, headquartered in Hong Kong, manufacturing in China but now about to make footwear in the USA – one about the always-changing nature of globalisation and manufacturing.

timberland boot sale The Merchant House International story is a fine symbol of China’s evolution as the Middle Kingdom continues to move up the value chain. It also says something about the nature of the United States these days and of manufacturing itself as it becomes ever more high-tech and less labour intensive. Manufacturing lobbyists here will take from it what they will.

timberland shoes outlet Footwear was one of the more obvious industries to move holus bolus to cheap labour nations – a trend MHI capitalised on with factories in China, establishing its footwear division in 1980 and exporting work shoes to the US for three decades.

timberland shoes outlet As the annual report details, the main MHI products are casual and industrial men’s leather boots and shoes, diversifying into “American-style western boots” in 2003. The company has increased its annual manufacturing capacity in China to more than five million pairs of shoes. While the US is by far MHI’s main market, its footwear is turns up in other places as well. If you’re into hard Yakka boots, you’re wearing a Merchant House product.

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And now MHI is opening a footwear factory in Tennessee – “reshoring”, as it’s called. Chinese labour isn’t so cheap any more, American labour is readily available and not as comparatively expensive as it used to be, there is generous state government “support” on offer and there are benefits in being closer to the end customer.

Founder and chairperson Loretta Lee spelt out the changing realities in the annual report:

“Manufacturing in China is becoming increasingly difficult. We face continuing cost pressures on raw materials, labour and currency appreciation whilst at the same time our customers will not accept price increases on their products.

“The Chinese government is committed to raising the standard of living of their people and new minimum wage mandates went into effect on 1 st May 2013. Wages in Tianjin increased 14 per cent and in Guangzhou an additional 19 per cent. These increments are designed to stimulate domestic consumption and reduce the previous emphasis on an export driven economy.

“At the same time, the government is encouraging labour intensive manufacturers to move inland where land and labour costs are lower. This goes hand in hand with China’s ‘urbanisation’ objectives, where smaller townships are being pushed toward expansion and industrialisation to become regional cities.

“Increasingly, China is no longer the low cost producer in Asia. Production is moving south to Pakistan, Vietnam, Indonesia and Cambodia. This cycle has repeated itself for years beginning in Japan, then South Korea and now China. It means we need to continue to upgrade our products to survive and we have had some success in this regard. Our shoe orders now include a much greater percentage of branded goods as well as textiles.”

The upgrade comes at a price. The company informed the ASX on November 14 that profit would be lower this half than previously expected:

“The last 6 months has been a period of transition for both shoes and textiles as the Company seeks to upgrade to higher margin products with a more branded focus in the Company’s merchandise assortment. Both shoes and textiles suffered some temporary loss of business as a result of this transition. This loss of business is a “one off” event and is not expected to affect the long term business of the Company.”

And there’s the cost of staffing, equipping and opening that new factory in Jefferson City, Tennessee. A Wall Street Journal story observed that with about 110 employees making 200,000 pairs of boots in its first year, the factory is small, but any footwear plant in the US now is notable as imports have more than 99 per cent of the market.

Ms Lee told the Journal MHI wants to avoid US import duties and cut shipping costs and time by producing closer to its American customers. Even with the shipping and duty savings, US production costs will be 15 to 20 per cent higher than current Chinese output, but she hopes larger volumes and greater efficiencies can reduce the difference.

Besides, “using cheap labour” isn’t a strategy that will work in the long run, she says, with sophisticated machinery from Germany minimising labour requirements. And there’s US$1.5 million in various incentives from the Tennessee government, including tax breaks and subsidies for training workers.

The German equipment will be installed by the end of next month with worker training starting in January with production targeted for March.

The usual bears regularly highlight China’s rising labour costs and the trend to outsource low-value production to cheaper countries, but they tend to miss the point that that is what Beijing wants and requires. They also underestimate the ability of entrepreneurs like Ms Lee to read the wind and adapt. The major reforms coming out of the Central Committee’s third plenum promise to continue the long march towards a wealthier, more sophisticated country.

Besides, manufacturing in China certainly isn’t in retreat. It’s growing and evolving. Beyond the more basic, low-value activities that are moving elsewhere, China has developed the supply chains and skills that allow more sophisticated manufacturing than merely “cheap labour” nations can offer.

And the labour component continues to shrink in higher value-added manufacturing anyway. Certainly there’s not much in a truly modern factory that can be categorised as “low skill” – automation is automation whether the robots are working in Jefferson City, Tianjin or even Melbourne. There’s much more to a manufacturer’s viability than the hourly cost of the cheapest available worker.

At the heavier end of industry, the United States is pinning big hopes its abundant cheap gas driving reshoring – gas so cheap in some places it’s not worth piping. Debasing the currency by printing $US85 billion a month keeps the exchange rate favourable as well. It’s the nature of successful businesses to adapt to whatever opportunities come along.

There are manufacturers failing in China, those that don’t or can’t adapt and move up the value chain, just as there are manufacturers failing in the US and here. The ones in trouble are those that you’re most likely to hear about in any country.

As the Reserve Bank keeps pointing out, our unreasonably high currency is a particular problem. It’s causing casualties. It also forces us to be smarter and more efficient. Necessity remains the mother of productivity growth.

Merchant House isn’t entirely alone in reversing American footwear manufacturing history. There’s a former Timberland executive using crowdsourcing to try to raise the money to open a factory in New Hampshire with the goal of bringing half of his Chinese production back to the US by 2017. He’s working on the basis of paying workers $US30,000 a year – still substantially more than $US4,500 for a Chinese worker, but a lot less than the average Australian employee.

That sort of wage might sound like music to the ears of some Australian employers. They should remember that domestic consumption is marching in lockstep with income growth – shrink incomes and you’ll also shrink consumption. That way recession lies.

For economies with stubbornly high unemployment, lower wages can be a market mechanism for clearing an oversupply of labour, but it’s not a desirable longer-term goal for a rational society. It’s not the basis of the future Beijing’s cadres are aiming for, not the basis of what continues to make Australia one of the most desirable places on earth to live.

Michael Pascoe is a BusinessDay contributing editor

13 comments so far

that cheap american labour is about to get a sheetload of work via the TPP. and then it will come our way. $7.50 an hour sounds about right. if your lucky. you could spend a few years working for nothing as an intern or work for tips - y'all have a good day now!
its a great plan. with the worlds highest prison population per capita ( far exceeding anyone else ) all nicely dna'd you have a huge workforce on tap.
hhmmm caught smoking pot 3 times. Im afraid thats life in prison for you son. hope you know how to sew.

Commenter smilingjack Location Date and time November 21, 2013, 4:54PM

A good example that highlights that Productivity is a factor of both Capital (new investment) AND Labour. Unfortunately the Abbott government and so called industry associations have trouble spelling the word and believe the only answer to productivity is working harder, longer and for less.

Commenter Joey Location Northern Shore Date and time November 21, 2013, 4:57PM

"Free Trade" and "TPP's are wrecking sovereign countries, in my opinion.
Why should huge mult-nationals be allowed to move around the world wrecking local small businesses in countries?
They get deals where they can sue countries for unfair sovereign laws?
Why do we have to continually have 'foreign investors" shoved down our neck when our gov can according to our constitution print as much money as it likes to support our own local businesses and communtiies.
So our dodgy pollies tell us we must sell all our public assets off to so-called 'foreign investors" who set up monoplies and push our small businesses out of business?
Because we NEED "foreign investment"?
This is disgusting....personally I don't know how these dodgie people who push this stuff live with themselves......
Especially when some of these huge multi-nat orgs seem to have their own private printing press.

Commenter Abraham Location Date and time November 21, 2013, 6:38PM

I don't think US labour will be as cost competitive when the obamaccare surcharges are passed on to employers and the increase in costs trickles down.

Commenter Fred Location Date and time November 21, 2013, 10:22PM

And how much extra cost will it add, Fred?
Probably not enough per hour, to call someone that cares.

Commenter Peter Date and time November 22, 2013, 1:47PM

"China wants to be a wealthy sophisticated country".

Oh really? Try some civilised behaviour first.

I live in Shanghai, supposedly the most modern city in China. In terms of civilised behaviour, it is much worse than Seoul, Taipei, Kualalumpur, and Bangkok. The primitive uncivilised behaviour that one encounters in Shanghai makes it a very undesirable place to live in.

Commenter Shanghai-expat Location Shanghai Date and time November 21, 2013, 11:28PM

"not the basis of what continues to make Australia one of the most desirable places on earth to live" hilarious statement.

I left Australia because its a rather undesirable place to live in. I get taxed less than 1/2 of what I used to pay in Australia here in the states and everything I purchase here is 3 x cheaper than it was in Australia.

So what exactly makes Australia such a great place? - the health system you will likely say. Well, let me tell you that with the amount of money I'm saving, I am able to purchase the best health insurance available here with full coverage and still with money left over for buying a small new car every year.

Yes, Australia its a great country if you like socialism. But as a capitalist and an employer, I got rid of everybody that was working for me in Australia and then employed better / more focused talent here for less than 1/2 the price. What else could one want? If you're a business person, you should leave Australia immediately, don't procrastinate if you're thinking about it..

Commenter John Location San Diego Date and time November 22, 2013, 12:26AM

I'm glad to hear you're doing so well in the US John, but I do wonder can the employees you pay half of what you paid Australian employees also afford the premium health care you enjoy?

Also, if you think Australia is socialist then you do not know what the definition of socialism is.

Commenter kg2095 Location Sydney Date and time November 22, 2013, 11:42AM

I would be happy earning $30,000 pa if I wasn't being charged

1) $500 a quarter for electricity. Thats 15 times higher than whats charged in SE Asia.
2) $660 rego
3) $1250 for check up and minor 3.5 hrs dental work
4) Telstra $150 month mobile landline & internet ripoffs
5) Insurances $2500 car house etc
6) $1450 council rates
7) $$1370 SE water
8) $100s for bank fees charges etc for giving me MY money back

Wake up Australia we are being ripped off.

Commenter alan Location Date and time November 22, 2013, 8:01AM

Alan, the $30,000 pa figure is for the US not China. Most consumer goods are cheaper in the US but you would be paying far more over there for your dental work and a similar price to Australia for telecomms and insurance. So you may or may not be better off over there earning $30,000 - it depends on where exactly in the US you are talking about as rents in some cities like NYC and San Francisco are as bad as Sydney.

On the other hand if you are a white collar worker like a computer programmer for example you will be earning a similar amount as in Australia and doing quite well.

Commenter kg2095 Location Sydney Date and time November 22, 2013, 11:46AM More comments

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