Industry Week: China’s Different Cost Perspective
Industry Week, a leading print and online magazine which targets manufacturing, operations, and purchasing executives in all manufacturing industry sectors, asked me to write a book-related article for their publication. With trade, currency and the economy being hot topics in this election year, the IW editors provided an ideal forum for me to discuss one of my own favorite topics: China’s different, and lower, cost perspective.
The fact that Chinese look at money differently, in my opinion, has more to do with China’s cost competitiveness than any simple explanation relating to exchange rates. When Americans look at an RMB 100 bill, they automatically divide by 8 (the amount of Chinese yuan to the dollar that has been in effect for most of my time in China ) and see $12.50. When Chinese, on the other hand, look at that same 100 RMB bill, they see more like what Americans see when they look at a $100 bill. I devote an entire chapter in my book to this phenomenon and how it impacts manufacturing and purchasing decisions at both Chinese and foreign invested factories in China. Apart from its impact on cost structures, it also begins to explain why there are two markets for any product in China, a subject which I also discuss at some length in a follow on chapter.
Large economies like those of the U.S. and China are complicated with many interdependent variables. When one variable changes, everything else changes, sometimes in ways that aren’t so predictable. When the Japanese yen appreciated by 50 percent against the U.S. dollar from 1985 to 1988, exports to the United States did not decline as one might have expected. Instead, they increased from $69 billion in 1985 to $90 billion in 1988. Similarily, China’s exports to the United States have increased by 40 percent, from $163 billion in 2005 to $233 billion in 2007, despite a 15 percent increase in the yuan against the dollar over that period.
I’m not saying that exchange rates don’t have some impact, but merely moving exchange rates in one direction or another is not the silver bullet that most politicians believe it to be. Something more fundamental is at work. The entire Industry Week article can be read here.
