The China Syndrome

No I am not talking about the possibility of a nuclear reactor melt down. I am instead talking about the US business rush to set up shop in China. Companies that don't set up in China are doomed for failure.

Why ?

Because labor in China costs 1/5th of that in the US. Even if Transportation of goods That leaves your original transportation costs plus 4/5ths your current labor cost before doing business in China costs as much as doing business in the US. However the cost of transportation at scale is ridiculously cheap. Think of the economy of bus renting. A bus rental for an individual is expensive. But with a butt in every seat paying an equal share it is often cheaper than a car. Well trains and ocean freight liners are probably the ultimate examples of economy of scale in transportation. So most times transportation cost increases are minimal when outsourcing manufacturing to China. The only real down side is increased lead time ( High initial numbers, massive loading operations and weeks of transit time) to market.

So the question really isn't why are companies outsourcing. The real question is why are their companies NOT trying to out source. At least in pure capitalistic terms it makes perfect sense to outsource in light of current world economic realities. However, there is a catch. That reality is tied to the current system of currency exchange. And that is what I refer to as the China Syndrome.

You see the current state of affairs for world wide economies is that of individual pools of autonomous economies connected by the system of currency exchange. The exchange is not tied to real purchasing power. By that I mean like what buys me an average meal. A logical exchange would mean that when I exchange enough money to buy me an average meal in the US it would be enough to buy me an average meal in the country I am visiting. However that is not the way it goes. For example take the UK. One pound is $1.75. A McDonald’s Big mac meal costs 5 pounds where in the US it costs 5 dollars. Yet my 5 dollars cannot purchase a Big mac meal in the UK. In fact its barely enough to order a large Fry. Why ? The prices represent very similar price points in their respective economies. They take very similar support structures to create the meal. Wages are similar. All that is different is the currency used. Yet when going from Pounds to Dollars you could buy almost two meals in the US where going from dollars to pounds you couldn't buy a single meal in the UK.

Hence the power of outsourcing to India and China where the difference in currency exchange are tremendous. India Labor cost for a company paying in dollars is 1/5th the cost in the US and often that 1/5th pays for someone with a higher degree of education than it would in the US. Why does the US not hire call center folks in the US ? Current baseline call center wages are around $10 and hour or less. Thats 20k or so a year. And it attracts the bottom of the labor pool. An indian college graduate with a technical degree (Computer Science) runs $300 a month. A MONTH. Or 3600 a year. Roughly 1/5th the cost of the US low level entry person. That 3600 buys them their pick of the top graduates. Of 100 interviewed for a position 10 will be hired and all will have similar qualifications.

This is not a case where a US company can compete by shaving some costs here and there. At current labor costs in the US a company providing a good or service which can be done somewhere with those labor costs simply cannot compete. Folks may pay a few percentage points more for an obviously superior domestic product. But they will not pay one penny more for products of equal (or worse.. LESS) quality. But they will NOT pay double or higher for a product that is equal or only marginally better. And that is the situation companies have found themselves in. And it is a function of exchange rate. Because without such absurd exchange rates then no company would willingly take on the added complexity of remote management of its labor and or manufacturing plants. It would be an added cost rather than an incidental expense needed to save money via the lower labor costs created by favorable exchange rates.

So what is the Economic China Syndrome? Simple. What happens if the Yaun or the Rupie gains significantly on the dollar? Hell what if they reach parity? What then? US cheap cost goods would vanish in a puff of smoke. Suddenly doing business 5000 miles away would look silly and foolish rather than savvy and necessary. And we would no longer be holding the cards. Of course to do so would be a suicide option for all concerned. IE Chinas life blood at the moment is exports and if the US (and other nations) could suddenly no longer afford to buy their goods they would be in a world of hurt. So as far as the current economic system goes there is an awful lot at stake in maintaining the status quo. But it can't last forever. China and India will never be content to remain the worlds cheap labor pool. Eventually they will want parity. Perhaps at that point we will see such operations move again, perhaps Pulling Africa out of its quagmire of corruption and disease. But sooner or later you have to run out of uncivilized nations with cheap labor. It just isn't a sustainable system. Sooner or later you run out of places for injuns and have room left only for chiefs. And you either re-define the game and go another round where chiefs start doing injun work for a super chief. Then Super Chiefs do... so forth and so on. If you want a concrete example of this. Remember that once upon a time in the US a High School Diploma was sufficient education to get none dead end good paying Jobs. This is no longer the case. Now it is a 2-4 year degree that you need... or even an advanced post graduate degree. Folks who once were chiefs (college grads) now do injun work (entry level grunt stuff).

This is the nature of the beast. The labor market is and always will be bottom heavy. There is no way around it. Everyone can't be 'above average'. It just doesn't work that way... and making things 5000 miles away based on an edge in currency exchange is not smart. Its stupid and its a house of cards that can come tumbling down in a damn hurry with a crazy day at the stock market just like on Black Tuesday which ushered in the depression. Only this time instead of a crushed US economy rippling through out the world. It will be a crushed world economy. It would be one thing if China and the US were on truly equal footing with a common currency and market forces had driven manufacturers to China for competitive reasons rather than the economic witchdoctor system of currency exchange. Then it would be the same thing as US automakers converging on Detroit rather than Phoenix. But this business with severe currency imbalance is a charade that can only hold up so long and I don't really want to be around when it all comes crashing down.

Bankrupt Stocks

You know I had a tempting thought today. Delta is trading at .70 cents. Yep you heard me... CENTS. Pre 9/11 Delta Stock was $50. To give you an idea of what that means. If you purchased $1000 dollars of stock at $.70 and it went to $50 your shares would be worth some $70,000. Seems like a real attractive risk. I mean you might turn 1k into more thousands but if it tanks you just loose a 1000 dollars. Not an insignificant amount for most folks. But based on a real possibility of doubling/trippling or more it isn't to bad an idea... that is except for one thing. That stock is worthless and even if the company recovers it will almost certainly remain so. How is that ? Becuase it seems to be standard that when a comapny emerges from bankruptcy it is not common practice to honor the old shares. IN fact in most cases when the company arises from the ashes of bankruptcy it seems the old stock is thrown out and new stock is issued. Often common shares are not replaced.. IE you lost your old shares and if you want new ones you have to buy them. Or you see a reverse split. IE if you had 10 stocks, after a reverse split, you would have 5.

And yet despite this fact the stock is still allowed to trade. I think that is wrong. Either the stock should HAVE to be honored upon comming out of bankruptcy or the stocks should dissolve at bankruptcy in order to be re-issued after emerging from bankruptcy. Else it is a highly misleading situation to have the stock available for trade.

If nothing else a companies intentions regarding its stock should be legally required to be determined as part of a bankruptcy filing. IE will new stock be issued and will current stock be transfered on a one to one basis or on any basis at all.

Soaring Gas Prices

So... theoretically speaking if a company took as signficant hit to its manufacturing base one would think it would be in for financial hard times. One might indeed think that but if one were to think that is the case which faced the Oil companies last year one would be gravely mistaken. In last years 4th quarter, which featured one of Mother Natures most spectacular temper tantrums (Katrina), which was responsible for impacting gulf oil production capacity by a 1/3rd. Exxon Mobile posted some 9 Billion dollars of profit. The Oil companies as a whole last year posted some 110 billion dollars in profit despite the worst Hurricane record on season.

Now something is wrong here. Profits are not a bad thing, far from it. But profits like this in the face of the current turmoil of the US is beyond wrong. It enters into the realm of profiteering. So of course lots of folks are out for blood and demanding the oil comapnies take a hit for these profits. The thing that sucks ? Who the hell do you think is going to end up paying for those penalties ? Thats right... Us! The poor schleps that have to tank up every week to go to work. Oh the irony. Folks I hate to say it but the solution here are not penalties to the oil companies. The solution is tieing the price of a gallon of gas to a reasonable level of profit. IE a Gallon costs X amount to produce there for costs X + Y at the pump. Supply and demand is all good and well but sometimes protective measures must be taken. For example in pure supply and demand it is perfectly reasonable to jack the price of plywood up into the stratosphere when a hurricane threatens a coastal area. Yet the practice is rightfully limited by law to make sure that folks can purchase a necessity at a fair price in a time of need.

Oil is a necessity of modern life. If demand outstrips supply then a better solution than supply and demand market forces would be to ration. Pure market forces in the face of a shortage of a necessity cannot be left to simple supply and demand else you will wind up wtih oil companies gouging oil prices because folks have to buy it.

The really dumb thing about all this? Current oil supplies are not short. The market has pushed the price up based on POSSIBLE shortages due to POTENTIAL military actions. Prices of a necessity should not rise at the pump because something may or may not happen. Prices should rise for tangible reasons. You notice that nobody really bitched about the rise in oil prices due to Katrina because they understood oil manufacturing took a hit. But the current increase is due to unease over a possible Iranian invasion. Nothing has affected the production levels or the cost of production or shipping or ability to refine. Instead there is the potential for such problems and because the potential exists the price has risen and we are paying through the nose just like we would if it were real.

Hence the fact people are PISSED. We are paying high prices not because something happend to cause them but because something might happen. That is something which rightfully should be curtailed.

Plane Ticket Costs

Plane ticket costs are pissing me off. There has got to be a better way.

ONE. If Government wants to funnel money at airlines. Why not funnel them fuel instead. IE give them something which cannot go up in CEO bonuses etc. But instead something which can go directly to reducing the cost of operating craft and keeping plane ticket prices stable.

Two. In this day and age of open ended flight schedules the old pratice of absurd one way ticket costs needs to be scrapped. There is no other industry of travel in which one way tickets are more expensive than round trip travel. The time has come for Airlines to give up this absurdity. Round trip tickets most certainly represent a profitable seat cost for a trip. Thus there is NO reason a one way ticket should be more than half the cost of a Round Trip.

Three. Ticket prices need to be clearly stated. A ticket should not be listed at one price and the price you pay be another. Fuel/security/misc surcharges should be banned from sales practices of air fares. The Ticket price is the ticket price.

Four. Last minute plane tickets should not be highway robbery. Advanced ticket purchases should be due to needing to be sure you have a seat available. Tickets purchased last minute should cost the same as advance booking.


I am sure there are more. but that is what came to mind after todays frustrations buying a plane ticket. Today I faced a real absurdity. What was it ? I could purchase two international round trip tickets for the cost of one, one way ticket.

Let me state that another way. It was cheaper to buy tickets enabling ~16,000 miles or so worth of traveling (~8000 round trip for two people) than to buy a ticket enabling ~4000 miles (one leg for one person). 16,000 miles of travel cheaper than 4,000.

That is WRONG.

State of Fear

So what is all the fuss over Michale Crichton's 'State of Fear' book? In short, it seems he had the audacity to question the single most agreed on scientific theory of modern times. Global Warming.

What I find strange about all this is that he did not question global warming. He admits scientific fact shows that it has been warming for 6000 years. The debate he says is not that things are warming but over how much influence man has had in that warming. He doesn't even say that man isn't causing an increase in global warming. He is questioning man's knowledge of the climate. He questions whether we know enough to make the claims that we are. He questions if that knowledge is solid enough to make decisions on. He questions that warming is a bad thing. In short he presents the fact that while every one seems to believe it, the science surrounding it is perhaps not so well known as we think. That there is a gross misunderstanding in the public at large about what exactly the evidence is for global warming about what exactly our level of understanding is.

He dares suggest the Emperor may have no clothes. Or perhaps even worse. He suggests that there is no problem with the Emperors lack of clothes.

I really don't get it. Its not like Crichton vilified global warming other than as a plot device. It isn't like he said it wasn't happening. He didn't even really set up a particularly appealing character set with which to champion his contrary argument. His 'hero' Kenner is a very unsympathetic fellow. He is a know it all, he uses the protagonist without his knowledge, he is an abrupt and a very two dimensional character with about as much going for him as the punching bag actors thinly disguised from their real world counterparts.

His protagonist doesn't go from believer to denouncer, instead he undergoes a transition from an ill informed acolyte of global warming to a skeptic who questions his former unwavering faith based on nothing more than headlines and news reports and limited scientific understanding. His growth as a character is based around learning that there are questions to this widely held belief that may not have been adequately answered. Yet in the end he still believes. He still knows that man is having an impact and that some things need to change and sets off to work in an endeavor to better understand how our world works and what exactly our role is in its ongoing history.

I for one loved his treatment of celebrity proponents of environmental causes and his unmerciful depiction of much of the hypocrisy in which they live. Of people who live in multiple houses that are thousands of square feet in dimension, take highly inefficient charter jet flights and yet drive a 'prius' to be seen as environmentally conscious. The true irony to me is that Crichton's last sermon thinly disguised as dialog is that he isn't saying we need do nothing. He is saying we don't know as much about what is happening as we think. He says that we need to do more to understand. That to question elements of current scientific understanding is not to reject the issue entirely. He seeks to apply more rigorous scientific scrutiny to the issue. To follow solid basic scientific experimentation principles to solidly verify claims to date. If the theory is sound it should stand up to any scrutiny. He is vilified and dismissed by a whole lot of folks and I have read numerous denouncements of his work and yet.... nobody is attacking his claims. They attack him. His credibility. His ability to critically evaluate and present scientific information. They don't show how he is wrong. They gainsay his conclusions. They don't provide references. They say he is dismissing global warming which simply isn't true. The closest thing Crichton comes to saying in conclusion is that the Earth is a Dynamic system and that any expectation that it is should remain in stasis is absurd and it is. Scientific studies of past climate have shown time and time again is that the earths climate has varied through the ages it has done everything except stay the same.... So why is it that change is bad? In the 70's we were worried about global cooling. Now we are worried about global warming. Yet in the past the earth has cooled and warmed many thousands of times. What should we expect? What should be our goal? Stasis? To maintain a ground hogs day climate? One which never changes? The one thing the record shows no indication of is of things staying the same. So in other words the most Unnatural thing would be for us to somehow manage to maintain an equilibrium state in which the earth's climate experienced no significant change.

So lets say we eliminate any sign of Man having an impact on climate change. And yet the earth goes through a natural warming phase which greatly raises the level of the oceans which has happened in the past and by all indications will happen again in the future. Will the catastrophe of sunken coastal centers of civilization be any better if it happens that way? How about if we descend into another ice age? Will it make it all right for lots of folks to die due to climate shifts if it is all 'natural' and not man made? If you ask me climate change isn't a bad thing. It isn't a good thing. Its a fact of our existence whether we are a cause of the change or not and we had best get on with figuring out how to safely control it. Why ? Because either we are going to have to learn how to control the earths climate or we are going to have to figure out how to survive the extremes of earths climate of which mankind has little experience with.