The Bureau of Labor Statistics provides data on the unit labour cost for the manufacturing sector in major countries calculated in local currency as well as on a US dollar basis (i.e. after accounting for exchange rate movement). The data showed that unit labour cost in US manufacturing in 2009 was 14% lower than in 2000 and 20% lower than in 1991. Indeed, it is now below the level in 1980!
The trends for German manufacturing are strongly affected by the exchange rate. The unit labour cost in dollar terms jumped 57% between 2002 and 2009 but by only 6% in local currency terms. German unit labour cost in local currency terms had, in fact, declined by 8% between 2002 and 2008, but jumped up in 2009 as the recession caused output to decline. Thus, the performance gap between USD and local currency terms is actually even larger than suggested by the 2009 data. Fortunately, the gap is partly tempered by the fact that Germany enjoys a fixed exchange rate with many trading partners thanks to the Euro. No such buffer cushions the Japanese who have also suffered from swings in the exchange rate. Unit labour costs had jumped sharply despite efficiency gains in the late 1980s and early 1990s due to sharp Yen appreciation. It has suffered the same problem in recent years as the Yen has risen towards JPY80/USD.
The data from US Bureau of Labour Statistics (BLS) shows that the Americans clearly benefit from dollar weakness but they also need to be commended for improving labour productivity on sustained basis. This has been achieved through improvements in automation, design, supply management and so on. However, this was not achieved merely by bulking up capital investment since the contribution of capital intensity of manufacturing has only gone up by 13% since 1987 and has been roughly stable since 2005. Instead, multifactor productivity has gone up more than 40% over the last two decades.
Eoin Treacy's view The
manufacture of textiles is enormously cost sensitive, especially at the low
end of the pricing scale. Therefore it is one of the first sectors to migrate
to new sites, lured by low labour costs. As the above report points out, it
is unlikely that such industries will ever return en masse to Europe or North
America even as Chinese labour costs rise. They are much more likely to seek
out new low cost environments. Vietnam and other ASEAN countries have benefitted
at least partially from this migration over the last few years. A subscriber
at recent Chart Seminar, who is involved in the cotton sector, shared his observation
that some textile manufacturers have moved to North and East Africa in order
to avail of even lower costs and abundant labour.
Chinese Average Wages in the Manufacturing sector rose from CNY753 per annum in 1980 to CNY26,599 at the end of 2009. Following double digit increases last year it is probably safe to assume a figure in excess of CNY30,000 is more accurate today. Low end manufacturing, dependent on cheap labour and focused on export has begun the move to other regions where wage pressures are not as acute. China has enticed some to move to the less developed interior but the need to move up the value chain in terms of manufacturing is essential if the country is to remain on a secular growth trajectory.
China has made significant gains on this front. The policy of forcing every foreign company seeking to do business in China into joint venture/technology sharing agreements is beginning to bear fruit. Chinese cars manufacturers are beginning to sell their products globally. Chinese passenger airliners are soon likely to follow. China's restriction of rare earth element exports was initiated at least in part to protect its domestic industries which make intensive use of these metals in manufacturing wind turbines, solar panels and technological widgets in the telecommunications and computer sectors.
Much has been written about Germany's outperformance during the current crisis and there is little doubt that its manufacturers are well exposed to the growth of the global middle class. They are also benefitting from the weakness of the Euro. The outperformance of the USA's global franchise companies is no less noteworthy. They have also benefitted from the relative weakness of the US Dollar.
Companies from both China and India have demonstrated that they are capable of competing internationally and with global brands in their own domestic markets. The relative attractiveness of a weak currency has long been a feature of both Chinese and Indian economics. However, with rising costs, inflationary pressures and more favourable terms of trade both countries have begun to allow their respective currencies to appreciate.
The Chinese are gradually allowing the Renminbi to appreciate; 21% in six years against the US Dollar. The Indian's Rupee's devaluation has also ended and it has stabilised below R50 versus the US Dollar. The US Dollar Index has been trending downwards since 2001. It has lost momentum since 2008 but has yet to conclusively signal that it a bottom has been reached. Asian currencies, generally, remain in consistent medium-term uptrends relative to the Dollar. The Euro has been trending lower in a volatile manner against the Renminbi and remains in a relative uptrend against Rupee.
Efficiency gains in the USA have also helped to bolster the country's competitiveness. That does not dismiss the significant challenges which remain for the USA to overcome. However, cost competitiveness is not likely to be one of those hurdles outside of the low end manufacturing sector.
From an investment standpoint, the relative performance of Asian stock markets coupled with the outperformance of their currencies, particularly against the US Dollar makes for an attractive long-term proposition.