If China is the next America, who is the next China?

In the 80s the US began wide scale outsourcing to Malaysia, Thailand, and the Philippians.  This outsourcing proved extremely profitable for both the US and our Asian partners, until the tax subsidies expired and the labor rates naturally increased.  At such time, the US fell quickly out of love with south Asia and in love with China; a land of plentiful low cost labor, and thanks to the free trade zone in Gongdong, virtually no taxes.

In the past few years we have witnessed increased labor costs in china and experts have begun to look for a new land of low cost manufacturing.  In the short term China is doing well to protect itself from these labor prices by moving manufacturing to more remote locations, where the cost of living is still low; but this is just a stop gap measure.  As the cost of living increases, so must the wages.  Some experts believe that Vietnam is the next China.  Others believe that Brazil is an ideal candidate. 

Personally I think that China is the next China.  Wide scale move from china is not going to be as easy as moving from the Malaysia was 10 years ago.  The reason is the supply chain.  If you move the final assembly of a product from China to Brazil for example, you will still need to manufacture most of the subassembly components in china and ship them to Brazil for assembly.  Lets not forget that China controls 95% of the rare earth metals.  As an example, lets imagine that Apple wants to move the iPhone manufacturing from Foxconn in china to Brazil.  The micro processors are made in Taiwan on a world leading 28nm fab.  This fab can’t be moved to Brazil without 10s of billions of dollars and 10 years investment.  So for now they must be shipped.  The LCDs are made in either Korea, Taiwan, or China with rare earth materials that come from only china.  The li-ion batteries also have to be made in china, because their materials are only found there.  Now rather than paying the shipping for one boat to bring a completed phone from Asia to the US markets, you need nearly a dozen boats each bringing different components to South America, then One more ship to take them to the US distribution chains.  And you need to increase your inventory management capability in Brazil, which results in longer lead times, more expensive components, and waste.

If manufacturing can't easily be moved then what will happen?  Will manufacturing just stay in China and everything be more expensive?  Terry Gou founder and chairman of Foxconn has a solution: robots.  Last week he announced that the company would begin replacing his human work force with robots.  He has plans for adding 1 million robots in the next 3 years.  When you realize that is current manufacturing workforce is comprised of 1.2 million workers, this represents almost a complete overhaul of his empire.

After a year plagued by worker suicides and falling profit margins, Foxconn has taken strong steps to controlling the labor variable in the manufacturing equation.  One has to imagine that this will not sit well with the ruling labor party of China, but the truth is, as long as first tier manufacturers can maintain their profitability, the entire support network (not run by robots) will also thrive.  Thanks to the outrageous success of first tier manufactures like Foxconn, Shenzhen China is fastest growing city in the world, home to 25 million people.  Although the first thought of robots replacing human workers may seem unpalatable, there are 25 million people in the city of Shenzhen whose only economic hope is the success of these bots to keep the city and their region in the black.

See source link :

http://www.appleinsider.com/articles/11/07/31/foxconn_to_substitute_workers_with_1_million_robots_in_3_years.html