Now is a great time to invest in your company

We live in interesting times. Man and nature are in turmoil; revolutions, terrorism, economic and nuclear meltdowns are mirrored by earthquakes, hurricanes, tornados and volcanoes.

Such a conjunction of natural and manmade havoc is generally reserved for plays and fiction. Do you feel like an unwitting Macbeth or Lear, or just a poor soul waiting for the ending which will cast you as a tragic hero, farcical clown or comic dunce? Weighty question to ask as you contemplate the weekend.

Oh yes, getting back to China. In another example of how the world has turned upside down, China’s economy seems to breaking the laws of financial gravity by continuing its robust growth, while the United States and our European neighbors burn slowly in Dante’s inferno for our economic sins.

This phenomenon we are experiencing is referred to as “decoupling.” The question is what effects will decoupling have on U.S. and Chinese businesses? Unfortunately, if I knew precisely, I would be pitching you on buying into my hedge fund.

The obvious meaning is that we, the United States, have lost our position at the center of the economic universe. Our efforts to spread globalization have succeeded in ways we probably did not anticipate. Despite these rather dismal observations, there is a bit of hope on the horizon, assuming, and there is no reason to doubt it, that the U.S. economy recovers.

An important component of this will be our ability to use our resources – natural and human – to develop new, efficient and saleable technology as we increase our productivity. In the meantime, we must endure.

You know it is an arbitrary and irrational world when the BRIC’s (Brazil, Russia, India and China) prosper while we suffer. Putting aside faith, science and indifference, it is clear, horrifying as it may seem, we no longer rule the consumption equation.

It seems that during the night little Chinese ladies with large shopping bags full of RMB supplanted us at the luxury watering holes that define conspicuous consumption. While there is a humorous side to this idea, when combined with a report from IHS Global Insight indicating that China had overtaken the U.S. in manufacturing (the first time any country had done so in the last 100 years), it tends to give one pause.

You may be asking yourself, “Am I dead? Do I have time to pick out a nice coffin?”

Here are some factors to consider as you price out the deluxe two-for-one cremation special:

  • According to an IHS Global Insight report, 11.5 million Americans put out $1.95 trillion in total dollar value in 2010. In China, it took 100 million workers to put out $2 trillion in total dollar value.
  • According to Jack McDougle, senior vice president of the Council on Competitiveness, a non-partisan group of business and labor leaders, and Frank Varago, vice president of international economic affairs at the NAM (National Association of Manufacturers), the “total dollar value” report, indicating China had overtaken us in manufacturing, put out by IHS Global Insight is not a good equation, as it includes price and exchange changes and does not accurately measure “real output” (This may miss the point a bit, which is, no one has been close enough by any measure to threaten our lead for over 100 years).
  • In terms of GDP, the U.S. economy is still far and away No. 1. In 2010, we produced $15 trillion, compared with China’s $6, trillion in GDP. It’s worth noting that 33 percent of China’s GDP was related to manufacturing, while only 13 percent of ours was. This could spell trouble for China in the event there is a hiccup in domestic or international demand. Falling demand would result in layoffs which could have a critical toilet bowl effect on the domestic market.
  • The RMB had an economic tailwind thanks to a weak dollar. Unfortunately, the weaker dollar is a self-inflicted wound which actually makes U.S. exports cheaper. Continued inflation in China will probably cause the RMB to strengthen.
  • In another part of the same IHS Global Insight report, it indicated that U.S. manufacturing rebounded in 2010 and grew 12.6 percent. Unfortunately, the Chinese manufacturing sector grew by 18 percent. Increased exports, delayed demand and a horrible 2009 seemed to be the main factors behind the U.S. expansion. China seems to have been fueled by the “Wal-Mart factor,” our demand for cheaper goods during the economic downturn, growth in the Chinese domestic market and exports to an expanding Asian economy.

On the other hand, the average cost of a U.S. manufacturing employee, including benefits, is $70,000 per year, in China it is about $5,400 per year which includes a 50-percent employer payroll tax contribution. It means we spent about 50 percent more on wages than the Chinese did and got $5 billion less.

The moral of this article is that while things are always a bit of a muddle, moments of darkness and uncertainty are the best times to invest in your business.

For U.S. companies, whether at home or abroad, the main path to success looks like it will depend on innovation and efficiency. Recruit the best and the brightest and buy efficient capacity now. This is the nest time for both.

China is just one part of a huge world market, and its inefficiencies could be your opportunity. Or, in other words, when things look bleak and you’re wondering how this play ends, rather than waiting, write your own lines. Carpe Diem.

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