East Asia

Economically and culturally speaking, East Asia might be the most fascinating of all of our realms.

China is a giant in terms of population, economics and commerce, and global influence. Having a population of about 1.4 billion people, and a workforce of 600 million (twice as large as the population of the United States), China is THE manufacturing center of the world. China represents a huge market for consumer goods, a pool of people larger than all of Europe and Russia. The Chinese love technology as much as anyone else, travel abroad, value education and hard work, and save money at rates that would amaze most Americans.

China appears to understand capitalism better than most Western countries, the United States included. Now, why would I say that? China has the distinction of having essentially a communist government. The Chinese government implements what is known as a “command economy.” In a command economy, the government establishes economic policy, sets economic goals, establish the focus for economic development – basically decides what should be made, where it should be made, who should make it, how much the workers will get paid, and how much the resulting product will cost. What China’s communist government has decided to implement, “commanded” in other words, is to put into practice a “free, capitalist market-driven” system, more or less. They encourage foreign investment, not only from the United States, but countries from around the world. China supplies the labor force, may be an investor, and may be a part or full owner of the manufacturing plant.

China is able to implement their version of a free market enterprise system with relative ease. Compared to the United States, which must debate, haggle, and negotiate over economic policy, China does not face these “checks-and-balances.” The Chinese government decides a course of action, and then can put that plan into action nearly immediately. A number of factors also affect the Chinese labor force. The size of the labor force, over 600 million people, makes competition for jobs high, keeping wages low. If someone won’t work for $1.50 a day, I can find someone who will, goes the thinking. Now, not all workers in China make a dollar per day. There is a vast range of salaries available in China; China does have a few billionaires, and has a stock market. However, there are millions of workers that do work for pay that is very low by Western standards. And, they do not get insurance or retirement entitlements. Therefore, companies do not have to worry about that form of compensation which reduces their overall cost of production considerably.

One can break manufacturing down into three basic cost categories: raw materials, wages, and transportation. These three categories represent the most significant costs to production. Of these three costs, two of the three are nearly fixed costs. Raw materials are purchased on the open market, and while there is a little fluidity in the prices, most everyone pays the same price. Fixed. Getting the iPhone or the laptop or the toy to market involves transportation. Everyone pretty much pays the same transportation costs. Fixed. That leaves wages. Wages are determined by the market, scarcity, education, type of job, proximity to other similar jobs, and so forth. Wages are very fluid, and controllable, to some extent. If everyone pays nearly the same for raw materials, plastic, aluminum, whatever; and, if everyone pays the same transportation costs, then the only way to lower costs is to find a way to manage wages.

Manufacturing in the United States has the same raw material and transportation cost constraints as China, for the most part. The United State has wage constraints that China does not have. First, we have a minimum wage requirement. In the United States, most states impose a minimum wage of $7.25 per hour, which works out to be about $800/month. A manufacturing worker in China makes about $140/month (U.S. Department of Labor). Now, that $7.25/hr paid in the United States is not the true cost to the employer of the employee. Depending on benefits, unemployment insurance, and the like, the true cost of the employee is more than $7.25/hr. Put yourself in the position of a manufacturing CEO. Now, imagine your employees belong to a union. Unions negotiates wages, benefits, and protects the jobs of employees, some who may not be efficient. For example, an automobile worker may make $45/hr in take-home pay, but entitlements raise the cost of that employee to $75/hr. These are real world numbers, by the way.

In order to remain competitive globally, and match the prices of competing products, you, as the CEO must reduce costs. Some options may be open to you. First, you could find a cheaper alternative raw material. Cheaper usually also means inferior, not all the time, and you could risk losing customers by producing a lower-quality product. Transportation costs are pretty much fixed and finding a cheaper solution here is not really an option. Or, you could try to find a way to reduce costs by changing the wage structure of the company. As a result, you decide that a manufacturing plant in Guangzhou, China, can produce your product with no loss of quality. Your company does not own the facility, only contracts the work. You do not have to worry about physical capital, and have fewer human capital constraints. Your wage costs has just gone from hundreds of millions of dollars, to millions of dollars. You have saved the company millions of dollars by shifting production overseas, maintained a competitive product, and augmented monies for research and development, and/or the purchase of complimentary companies.

I’ve presented a very simplified paradigm, a model, but in a nutshell, this is what happens.

In few countries is the difference (disparity) between the rich and poor so clearly marked (Brazil or the United States are other good examples). Coastal areas exhibit tremendous affluence and wealth is evident. China has a vibrant stock market, a society that includes millionaires and a few billionaires, and an economy growing at about 9% per year. In 2005, 4 out of 5 products sold at Wal-mart came from this country that is nearly the same size, in area, as the coterminous (lower 48 states) United States – with 4x’s the people. Move inland, to the agricultural areas, and one will discover farming practices as traditional as the ox and steel plow still prevalent.

Taiwan, a small island off the coast of China, is the home of the Nationalists Chinese that fled the mainland after World War 2 as the Communists took over China. Up until 1972 or so, most of the world recognized Taiwan as a sovereign country. Within the last decade or so, most countries support the “One China Policy” and eventually Taiwan will fall under control of the Communist Chinese government, much to the chagrin of the Taiwanese. They are none too happy about that, but there is not much they can do about it, either, when that event occurs.

Across the Sea of Japan lies the archipelago state of Japan, a global industrial and finance leader, as well. But times are changing for the Japanese. With an aging population, they are finding their economy slipping. Once the world’s second most powerful economy, they will soon be replaced at #2 by China, if not already. The Japanese, once some of the healthiest people on earth, have taken on Western diets, heavy in red meat and fat, and are now experiencing illnesses like their U.S. and European counterparts. The social cultures of Japan are changing, too, as their young people travel abroad, see how U.S. young people live, then refuse to abide in tiny apartments or live with mom & dad and grandparents.

On the Korean peninsula, we have a single people, a single culture, divided by the most heavily defended border in the world, the Korean DMZ. To the north, we have North Korea (NK), the last bastion of crazy military dictatorships/Cult of Personalities bent on implementing Communism. NK experiences frequent famines because the government uses most of its national income towards weapons production and military hardware, stuck in the 1950’s mentality that the United States will soon invade (there is nothing there we want, anyway).

On the southern part of the peninsula, we have South Korea (SK). South Korea, governed by a form of State Capitalism, whereby the government directs and is involved in economic development, is one of the world’s most active economies. In fact, SK is one of the Four Asian Tigers. Like the Four Motors of Europe, the Four Asian Tigers (Taiwan, SK, Hong Kong, and Singapore) are states with the strongest economies; except Hong Kong is not a true state, and never was, being a territory of Great Britain before coming under Chinese control in 1999.

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