Tuesday, April 30, 2013

Digital Signage Need to Know: China Manufacturing Stumbles

- Mike Prongue

Markets are very efficient and work towards a goal of squeezing every nickel until it excretes six pennies.

I’m my own player in the international coffee market. I control vast sums of annual coffee purchases- one cup per day, times 365 days per year. When Star Bucks came along I was amused but refused to enter into long-term purchase arrangements. Oh sure, the quality was there, but the price was too high. I then sought-out the local convenience store and began a relationship at 33% the cost of Star Bucks for great coffee and a wide assortment of coffee services. But the price went up and now I buy coffee in bulk (2 lb can) and make it myself at a very low labor rate- free.

Five years ago when I entered the LED sign industry, the “Gold Rush” of opportunity was perceived as being China by many LED distributors. The good old USA will seek out what they think is the biggest “bang for the buck” as will any other country. As the Chinese Dragon matured however, conditions changed, as they always do, and these perceived efficiencies began to decline.

China was no longer El Dorado, the lost city of gold and many people were starting to look behind the proverbial curtain.

As our economic recovery slowly plods along here in the USA, perhaps at what some say is the “new normal” of 2% GDP increase, it is the rebound of the manufacturing sector that is helping to push these numbers. It has added nearly a half-million jobs since January 2010. A distinct slowdown off offshoring has occurred. For the electronics market, offshoring has slowed to a trickle.


Offshoring is broadly defined as substituting foreign factors of production for domestic goods and services then importing them. Things are produced where their opportunity costs are lower.

·        With China’s economy growing year on year, the ensuing cost of labor is increasing as it has done in the economy of every evolving country. At the turn of the century, 13 years ago, the wage rate of China was 25% that of the USA. With wage inflation at approximately 12.8% in China, it does not take many years to close that gap! This means that the difference in salaries, compared to our domestic talent, is shrinking. This drives up the cost of an LED sign made in China.

·        Labor productivity is tied closely to the labor rate. Last year when I attended LED China in Guangzhou, I saw this first hand. Upon visiting a Chinese LED manufacturing facility I was appalled to see so many people doing what would be a single job in the USA. And, at least anecdotally it seemed that while their labor rate was lower, it took a lot more of them to do the job. So just how much of a true value exists here versus trying to keep everyone employed?

·        Offshoring has become a “dirty word” as the US economy struggles. Even if the maximum efficiencies existed to deliver a superior product as a lower price, the stigma associated with offshoring translates into “lost American jobs” and “Anti-America”. Conversely, trying to bring jobs back to America is regarded as patriotic and “the right thing to do”. America lost over 1,000,000 jobs that can be attributed to the direct-effect of offshoring to low-cost China.

·        The Chinese currency, the RMB, has risen 40% in real terms against the US dollar since 2005. There are many ways to look at this and much controversy over the impact. Safe to say, simply said, price pressure is being felt on all goods purchased from China. How much exactly is up for argument- depending on your economics training and interest level. What it does for US manufacturers is make their LED signs more price competitive as the price of Chinese goods rise.

·        Producing a product thousands of miles away from the end-user creates a vast array of other costs. Transportation costs rise as the freight rates rise with the recovery of the global shipping industry. Fuel costs fluctuate with the price of oil. There is a cost associated with the language barrier and the time zone differential. Political costs of unforeseen events associated with the “Wild Wild West” reality of China. Shipping delays and dangers on the open sea; quality issues of Chinese LED signs; supporting documentation for end-users;  authentic NRTL registration related to NEC conformance; potential tariff increases; cost of shipping parts (money and time), are all detriments to the continued growth of the Chinese LED sign business.

The USA on-shoring manufacturing phenom is not a myth. Jobs are coming back to the USA, perhaps not in an avalanche but at a steady pace. Changing global conditions are beginning to erode the Chinese advantages that it has enjoyed for at least a decade now.

I think that the USA would benefit from having its factory workers employed right here at home, making a high-quality LED sign product that end-users and business customers can utilize to promote their business. They say that “nothing lasts forever” and in the case of the rise of China manufacturing this proverb can’t come true fast enough!

These comments belong to me, Mike Prongue, and do not reflect the views, opinions, hopes or dreams of anyone else, anywhere else and this includes Vantage LED. I appreciate your constructive opinion which may be sent to me at michael@vantageled.com. 

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