Daily Archives: June 22, 2010

Maintaining Perspective on China’s Rising Labor Costs, Currency Moves

I don’t disagree with the basic facts presented in John Boudreau’s article at the San Jose Mercury News’ SiliconValley.com website, but I think the piece overstates the degree and significance of recent developments in China.

Boudreau correctly notes that labor costs are rising in the coastal region where most of China’s electronics and technology products are manufactured. At some point, those rising costs will result in decreased margins for product vendors or in higher prices for consumers and businesses that buy products from those vendors.

It’s also true that contract manufacturers operating in China’s main manufacturing hub will begin or have begun exploring alternative arrangements. Options include setting up factories further inland, in China’s less-developed interior, or shifting some types of manufacturing to automated facilities in Taiwan or to other low-wage countries, such as Thailand or Vietnam.

But those moves will not happen overnight. We should recognize that, even though the cost of Chinese labor is increasing, it’s still low. What’s more, China offers other advantages — such as a ready supply chain and access to plentiful raw materials (such as rare-earth metals essential to the manufacture of many kinds of technology hardware). Additionally, China still has that low-cost interior mentioned above, where there’s more than enough labor available to provide a helping hand.

Let’s also consider the appreciation of the Chinese yuan, also known as the renminbi. China’s authorities are allowing the currency to appreciate relative to the dollar, but the yuan won’t be allowed to skyrocket. China is not a so-called “invisible hand” market-based economy; its government retains firm control over the trading range of the country’s currency. Don’t expect a dramatic rise in the near-term valuation of the renminbi to the dollar. It’s not going to happen. Instead, advances and declines will be  controlled, incremental, and measured.

Finally, there’s the question of whether, and to what degree, increased Chinese wages might result in more consumer spending on imports from the U.S. and other countries. The assumption is that Chinese workers who assemble and  build Apple iPhones and iPads — not to mention HP and Dell PCs — now will be able to buy them, too.

To a degree that might happen, but bear in mind that China wants to move up the technology industry’s value chain. China won’t be happy functioning merely as foundry and consumer market for Western brands. China’s long-term objective is to architect and develop major technology companies of its own, Lenovo and Huawei being notable examples.

Those familiar with the term “indigenous innovation” know that Chinese companies will receive government support and encouragement as they increasingly compete against major Western companies across China’s technology landscape. We in the West need to exercise caution in assuming that China’s consumer market will function similarly to its counterparts in market-based economies. Not only does China’s government actively assist domestic companies — often through direct or indirect state control — but many Chinese consumers will actively and purposefully purchase goods and services from Chinese companies instead of those offered by Western companies.

What we’re seeing in these developments — the rising labor costs, the gradually unpegging of the yuan to the dollar, the country’s desire to ascend the technology value chain — are signs of a growing, maturing economic and industrial powerhouse. I don’t think they should be construed as symptoms of Chinese volatility or weakness.

Microsoft Past Its Prime, but Even Blodget Wouldn’t Bet on Its Imminent Demise

Henry Blodget’s Business Insider is a guilty pleasure. From the tabloid headlines to the flashpoint content, carefully contrived to generate criticism and heated debate, Blodget gives you plenty of sizzle even when he forgets to put a steak on the grill.

Occasionally, though, he’ll provide some food for thought alongside the crowd-seeking sensationalism. In one of his latest pieces — portentously titled, “The Odds Are Increasing That Microsoft’s Business Will Collapse” — Blodget injects enough plausibility into his argument to evoke the image of an erstwhile software giant staggering incontinently toward an open grave.

To summarize, Blodget contends that Microsoft draws the vast majority of its profits from its Windows and Office franchises. He provides colorful charts to illustrate the point, which is indisputable. He then posits Microsoft’s predicament: the Internet, the rise of mobility (in which it has been abject), the ascent of cloud computing, and the determined competitive incursions of Apple and Google have put Microsoft’s cash cows in mortal peril.

As Blodget phrases it:

The desktop PC isn’t the center of anyone’s universe anymore. The Internet is. And the Internet doesn’t require Windows.

As for Office, he points to the rise of Google Apps, which Blodget perceives as a “classic disruptive technology” that is “cheaper, easier, and more convenient to use than Microsoft Office.”

At the end of the piece, Blodget presents three scenarios for Microsoft:

Right now, the investors are concluding that Microsoft will gradually become the equivalent of a technology utility–a boring but necessary provider of the software that runs the world’s business community.  A smaller, more optimistic crowd is still arguing that, one day, Microsoft will be able to turn its fortunes around, and fight its way back into an industry leadership position.

What almost no one is talking about is a third possibility, one that becomes more likely by the day: The possibility that, a couple of years down the road, Microsoft’s business may just completely collapse.

Given enough time, anything is possible. Still, is there a strong likelihood that Microsoft’s business will “completely collapse” in two years? I doubt it. The primary reason for such doubt is that customers aren’t moving to the cloud fast enough to bring about Microsoft’s immediate demise.

Startup companies, free of established processes and prior IT investments, increasingly are adopting cloud models that tend to leave Microsoft out of the action (or with only a small piece of it). Even so, Microsoft has a Windows installed base of SME and enterprise customers that will think at least twice before abandoning the devil they know. That’s human nature, especially during a period of great and persistent economic uncertainty.

The situation is similar, though perhaps more tenuous, for Office. Google will win defections, starting in vertical markets where Microsoft’s Office pricing is most onerous and its high-end features less necessary. There’s no question that Microsoft will see erosion in its licensed and shrink-wrapped Office business, but that erosion is not likely to become a catastrophic landslide within two years.

Are Microsoft’s best days behind it? Yes, I think so. The company is extremely unlikely to reach anything approaching market leadership in mobile platforms and smartphones, its former hold on PC and mobile-device OEMs has slackened, and it’s at a perennial loss in areas such as web search and  in most consumer markets. It needs to invest more in its SME and enterprise offerings, including its business-oriented cloud services, and less in consumerist boondoggles.

But the collapse of Microsoft in two years? All things considered, I’d bet against that outcome. I tend to think Blodget would, too. Then again, he’s drawn traffic with his provocatively headlined post, so he probably won’t mind the hedging strategy.