Note: the China issues I'm about to discuss are tied directly to U.S. economic policy and politics. One issue I find interesting is the size ($586b) and effect of China's stimulus package.
Although I'm not generally a critic of the NYT's reporting apparatus, today's article "Supply Chain for iPhone Highlights Costs in China" obscures important truths about China's labor market and the China/US trade relationship. To put it more bluntly, there was a total lack of context.
Although there are a number of material omissions in the NYT's article, I'll focus on two specific issues: the undervaluation of the Chinese currency and the Chinese (stimulus induced) labor shortage. Today's article in the NYT misleads on the first point and thoroughly obscures the other.
(Follow me...)
There is nothing more frustrating to me than China coverage that doesn't mention their undervalued currency. Everyone knows that China's currency is devalued relative to the dollar (the conventional wisdom is 40%, or 20% for people with financial interest in China who want to maintain the veneer of credibility). I could point you to Krugman, or even the (ugh) Washington Post "Commerce Secretary: China Currency Undervalued" (Jun 2010).
If you want, we can get into the terrible consequences of this imbalance. China has a huge built-in wage advantage based on their exchange rate. Such a big wage advantage that manufacturers can afford to ship Chinese made stuff all the way across the Pacific ocean to sell it to Americans on credit. Obviously, this has artificially depressed American manufacturing.
This export advantage has also led to a large trade imbalance and capital flow imbalance. It worked out great for Bush at the beginning, because the Chinese kept U.S. interest rates low by lending our money back to us. BUT, they also invested that money all over Wall Street, and artificially inflated U.S. asset prices. This (at the very least) enhanced the speculative housing bubble and its fallout. Interestingly, Germany had/has a similar relationship with Greece and Spain (they had huge trade imbalances and housing bubbles as well, and are no longer wage competitivewith Germany).
China's obviously, notoriously, indisputably undervalued currency is presented in this article as if there were two sides to the issue.
China’s currency has also appreciated sharply against the United States dollar since 2005, and after a two-year pause by Beijing, economists expect the renminbi to rise about 3 to 5 percent a year for the next several years.
It hasn't appreciated sharply. That is a misleading and incomplete claim. Some very, very basic facts that I can find using the google tell me that it is actually being kept artificially low. Can something be kept artificially low and rise sharply? I suppose. But you'd have to stop keeping it artificially low first. Although the Chinese have made noises, lots and lots of noises, the currency is still being kept artificially low. Rises of 3-5 percent per year for the next several years would still leave China with a currency that is substantially undervalued. Oh, also, no guarantee on those rises. Taking that 'projection' as a given is naive and misleads readers. The last time there was a crisis (08), the Chinese hitched their currency right back to the dollar. Oh, and it's up to the Chinese leadership. BAD ASSUMPTION NY TIMES.
Where is the context??
Even from a business perspective (i.e., a reader whose interest is piqued by the words "Supply Chain for iPhone Highlights Costs"), wouldn't you want to know that the Chinese currency was going to remain artificially undervalued for the foreseeable future? This article suggests that it won't. But it will!
Of course, since China's undervalued currency is the dirty little secret of the business world, this article gives it practically no analysis.
Instead, it focuses on all of the other rising costs in China, including labor costs:
Soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and inflation and rising housing costs are all threatening to sharply increase the cost of making devices like notebook computers, digital cameras and smartphones.
All of these big picture statements are generally true, although the claim that housing costs are "rising" is a bit misleading. They have already risen and the government's apparent policy is to keep them frozen, or to at least ensure a softer landing than in the US (Some Background on China Housing Bubble).
However, after sketching out a relatively fair big picture analysis of Chinese economic pressure, the author then proceeds to ignore the real issue of labor shortages, and focuses instead on the more ambiguous problem of "labor costs." In fact, the author uses the word "shortage" only once (where I quoted above).
But that's the issue. And there's a good bit of very mainstream recognition of present conditions and long term demographic trends.
Instead of recognizing the changing power relationship between labor and management (again, based on a a labor shortage), the NYT tries to frame it as some sort of cultural shift or value choice:
[T]here is growing skepticism about China’s manufacturing model after years of pressing workers to toil six or seven days a week, 10 to 12 hours a day.
"We’ve concluded Hon Hai’s labor-intensive model is not sustainable," says Mr. Wang at iSuppli Research. "Though it can keep hiring 800,000 to one million workers, the problem is these workers can’t keep working like screws in an inhuman system."
Last time I checked, most American lawyers worked 6 days a week, 10-12 hours per day. I'm absolutely positive that Ford, GM and Chrysler would have no problem getting employees to work that kind of overtime. Because here, in America, people are desperate for jobs. Probably not something America's managerial class wants to think about, but it's true.
Also, NYT, if you're going to go for the cultural zeitgeist psychobabble explanation, then wouldn't the ten heavily covered FoxConn (Apple) Factory Worker Suicides be just a tad bit relevant?
No? Really? But it was kind of a big deal over there in China where the Chinese are... You don't care?
NO CONTEXT.
Since there was no real focus on the labor shortage, there was no real focus on how GOOD THE JOB MARKET IN CHINA WAS.
Part of the answer (as we've discussed) results from China's competitive advantage due to its undervalued currency.
But, world markets have been dealing with severe panic during the past couple of years, while China kept on growing.
There was absolutely no mention of China's policy response to the massive global financial panic that occurred at the end of the Bush administration. But that policy must have worked, because there are labor shortages! Labor shortages... Could you imagine??
Unlike the Nelson-Bayh-Lieberman-Snowe-Collins vanguard in the United States, China's leaders had the courage and foresight to implement a truly massive $586 billion dollar stimulus package (something like 7 times greater than the U.S. stimulus, as a percentage of GDP). This included huge investments in inland infrastructure projects. (Wiki on China Stimulus).
Why is this relevant?
Well, first, the problem is really a labor shortage so stop kidding yourself. Second, if the problem is a labor shortage, what caused it?
Also, where can I get me one of them labor shortages? Last time I checked there was no such thing as a 30% raise outside of Wall Street and Fortune 500.
Turns out that a big fat stimulus worked quite well. China invested a big chunk of this massive stimulus in rural infrastructure. This created lots and lots of inland jobs, and had obviously positive economic consequences. (China GDP growth is near 10% during a massive western market failure hangover).
So if you're trying to explain to Mr. Businessman WHY he now has to pay 30% higher wages for the small fingered young women who glue together his plastic Wal-Mart toys, part of the answer is the China stimulus package. He can now hate socialism even more.
It's also a good answer to someone who wants to know how to kick start job growth in the U.S.
Fiscal Expansion is the ONLY WAY BACK TO GROWTH.
CHINA SPENT SEVEN TIMES MORE THAN WE DID ON STIMULUS AND NOW THEY HAVE LABOR SHORTAGES.
(Misspell a few of those words, put them on a sign, go to a tea party rally and really freak people out.)
I'm not looking for some kind of overarching or nefarious reasons for the NYT's decision to report these China issues this way. They provided reasonable coverage of the FoxConn suicides, and have written at length about the Chinese government's censorship and propaganda efforts.
But, I do think that the author of this article was more interested in appealing to popular prejudices of Finance MBAs than providing meaningful context and analysis. This piece screams for attention (IPHONE!!) and then gives you an empty and tired recitation of conventional wisdom and psycho babble.
THERE IS AN EXPLANATION FOR THIS ONE.
You can't sugar coat the currency imbalance. You can't ignore the impact of the Chinese stimulus package, especially in the rural context. You can't ignore the labor shortage and pawn it off as something cultural. You can't ignore the foxconn suicides. At the very least, the suicide stories (and attendant factory town / exploitation narratives) have a negative impact on brand image, and therefore, should be seen as relevant in any business oriented article on China. That is a supply chain cost mi amigo.
If you think Steve Jobs was happy to have to talk to the Foxconn CEO about worker suicides in his factory, you are sadly mistaken. Even people who benefit from exploitation labor don't like getting called on it. Even the most craven, profit-driven oligarch can recognize that BAD PR would certainly add to the iPhone's supply chain costs.