THE ENTERPRISE
The US economic outlook is still OK in the short term (2006, mostly) but storm clouds are forming on the horizon as oil prices hit $75/bbl. and housing slows noticeably. The oil peak is mostly due to refined products driving oil prices up, because during the recent oil surges, suppliers of refined products reduced inventories to use up and profit from older, cheaper materials, and now refineries are behind and can't catch up--which ironically gives them pricing leverage! Gas prices edging back over $3 will hit consumer's discretionary spending again. Interest rate hikes and slower growth and lower prices on housing will limit cash from refinancing and thus consumers will be forced to cut back, too, even as employment is fine. Price hikes driven by commodities over the past year will slowly filter through to further erode purchasing power--although only by a little.
WARNING SIGNS ON THE HORIZON?
Leading indicators are starting to show some declines and the housing market is softening, which leads me to believe that there is a higher likelihood of a softness or a downturn in the US economy and some pull back in the stock market in 2007. Interest rates are still climbing and the speculative housing flips are dropping dramatically, which dampens the prices of housing also also dampens the psyche of the housing market. Additionally, in economies that are prosperous and see the end of a housing boom, construction jobs drop off and those people will not be able to find new jobs with the same high pay levels as construction. But they'll still need to buy $3/gal. gas.
CHINESE LABOR SHORTAGES--TEMPORARY OR NOT?
Across the pond, the Chinese have an interesting phenomenon occurring--labor shortages. These are not shortages from a gross standpoint--there are still plenty of Chinese workers. These are shortages of qualified, skilled workers, and the same thing is happening there as everywhere else when this occurs. The best workers command premium wages and jump jobs more often as competition to employ them intensifies. According to the Institute of Contemporary Observation, a Shenzhen labor research group, there are 2.5 million unfilled jobs in Guangdong Province alone, and other major industrial provinces also have similar shortages.
Emerson Climate Technologies (Suzhou) General Manager says it's all he can do to keep his 800 employees from jumping ship to Samsung, Siemens, Nokia, etc. Salaries in the southern city of Dongguan climbed to $160/mo. according to a recent Business Week story. As this continues, Chinese employers face three solutions: move further inland and train workers, move product mix to higher technical content/higher value products, or increase productivity or prices or both. With an economy steaming along at 9-10% growth rates, annual wage increases are going up by similar amounts. This is a replay of what happened 2 decades ago in Taiwan and Korea, albeit China has a much, much larger population base from which to draw new, cheaper labor, so it will proceed somewhat more slowly.
PLENTY OF PEOPLE DOESN'T EQUAL THE RIGHT SKILLS
The Chinese can "open the gates" and let millions of low skilled but ambitious, and motivated (and trainable) workers migrate from the countryside to the industrial cities. This may be a temporary issue if it does, but it is still an issue for China business. As reported (from McKinsey) in previous editions of THE ENTERPRISE, China is also graduating millions in areas such as engineering, finance, etc., but only about 10% of those graduates are qualified to work for a foreign, well developed company--but that is still a large number of ready talent.
Thus we have seen China suffer from three very real shortages in the past year, and these are shortages that will not go away easily: 1) energy, 2) commodity raw materials and now, 3) talent in the form of skilled labor. Somehow, this seems like the normal progression of a large industrializing country--even though some thought it couldn't happen to China, and certainly couldn't start to happen this soon. The faster rockets go up, the faster they burn through fuel and reach their apex. Where China is on this journey remains to be seen, but signs of its "unlimited potential" are starting to show a few issues.
NO TIME TO CELEBRATE THOUGH--BUT STUDY HISTORY
Before anyone celebrates, these jobs will mostly not return to the US, where workers make $160 in a day or two, not in a 60 hour week, so the disadvantage is still 5:1 or more, and that's before counting huge US costs like benefits and socially regulated costs. On the other hand, it is important to understand how countries like China change as they develop into world powers on the shoulders of their people. The US did it a century ago. Study your history books, because there is much to be learned about the future by studying the past.
ARE THE GENEVA CONVENTIONS OBSOLETE?
Finally, amidst the trial of Saddam Hussein and the continued debate about the treatment of captured terrorists, isn't it time to study the Geneva Conventions in light of how things have changed. These were forged decades ago when countries/armies were fighting countries/armies, not an assortment of guerillas, terrorists and dissidents fighting skirmishes in which innocents are the most common victims. Maybe we need to rethink what the humane--and practical--solutions are for this century, not the last one. Times change and so must the rules. And this is true in business as in war.
Best, John
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