Thursday, December 2, 2010

Outsourcing to Africa: Part One

From the 06 December 2010 Greater Niagara Newspapers


By Bob Confer

Remember when many Americans perceived Japan’s manufacturing economy as a threat? Just a few decades ago we worried about that nation taking all of our production jobs through their (and our) efforts to make goods cheaply to satisfy our insatiable consumers. They did take some of our jobs, mostly in the electronics department. For a while they manufactured a good number of our cars, but oddly enough, Japan-branded cars are now being manufactured in the United States.

The reason the automotive jobs came back and Japan never really destroyed our economy is that they became one of us. Manufacturing created opportunity in Japan, spawning a huge middle class that, through the same economic progression that America had in the late-1800s and early-1900’s, created higher wages and more discretionary income that allowed it to purchase – and demand more of – the very goods it produced. Japan became the second largest economy in the world behind the United States and according to the World Bank it possesses a gross domestic product per capita of $39,727, not too far behind our $46,436.

Because of that, it gradually became too expensive to further develop outsourcing in Japan, so America looked elsewhere, mainly the most-populous country in the world, China. It has become our business partner of choice. In 2000, China’s annual exports to the United States were $100 billion. By the end of 2009 that number had grown to $296.4 billion.

That can’t keep up forever. China will become another Japan relatively soon. There is a push by Chinese officials and business leaders to bring 40% of the Chinese population into the middle class by 2020; that’s about 550 million people who will have newfound access to capital to buy durable and discretionary goods, creating a substantial domestic economy out of China’s export economy.

At the same time that occurs, our temperamental trade relations with the Asian giant will become even more so. Chinese officials are vocal, and justifiably so, about the poor choices of Corporate America and our debt-averse citizens that led to the global recession. They are even more critical of what the American government is and will be doing to right the ship. You can’t blame them, they hold just under $900 billion in US debt. As our dollar continues to tank in value so does their investment.

Our elected officials insist on adding insult to injury by continuously calling-out China for manipulation of its currency, saying the value of the Yuan is tied directly to the American dollar, which keeps Chinese goods artificially low-priced. That’s the pot calling the kettle black: Through the private-public partnership that is the Federal Reserve, America has been manipulating the value of its currency since 1913. Our dollar is dying on the vine because the Reserve and Washington are so intent on addressing the latter’s problems through the issuance of fiat currency. Every time a dollar is created all other dollars in the marketplace lose their value. It’s simple economics.

We have the perfect storm brewing. China’s growing middle class will drive up the cost of doing business at the same time it will take more of our devalued dollars to buy the same basket of goods. Add to that the chance that the Chinese Yuan will have to be strengthened and you’re guaranteed that Chinese exports will become dramatically pricier over the next decade.

American consumers won’t be able to stomach the increased costs at the grocery and department stores. We always want cheaper. Based on how tenuous our economy has become (and how tenuous it will be with upcoming crises in Social Security and Medicare) we will need cheaper.

American businesses overseeing outsourcing activities will have to look elsewhere. India is certainly not at the top of the list. They, too, show very limited long-term potential as their middle class has tripled in size over the past 20 years and it is projected that half of their population will be a part of that category before 2030.

Then where does outsourcing next occur? There’s only one place left on this planet that will be able to satisfy the needs of consumers in America, Europe, and ultimately China and India….the African continent.

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