The Alchemist: China Syndrome

Posted in Money Matters on February 17, 2003

The following is this week’s installment of The Alchemist, a column by Mensan Al Thomas, author of If It Doesn’t Go Up, Don’t Buy It. Click ‘Read More’ below for this week’s article, “China Syndrome.”

The Alchemist: China Syndrome

by Al Thomas


There has been great condemnation recently because China
has been selling its goods on the world market at prices below what
other countries, especially the U.S., can produce. It has been called
exporting deflation.


The major reason for these extremely low prices has been
their labor costs which I am told are about $100 per month for ordinary
factory workers. Even factories in Mexico are being closed and shipped
to China because of the labor differential. These extremes in production
costs are literally putting many, many companies out of business. When
you look at the labels in almost any store you will note the product is
made in some Asian country. As far as you, the consumer, is concerned
you are buying a product at a good value. Political considerations aside
there is no question this has been beneficial to retail buyers.

Is there any reason China should act otherwise? No, they
are acting like any businessman. Yes, I realize it is a country, but
countries do the same as businesses just on a larger scale.

Suppose you and I each own a hamburger franchise. I have a
McDonalds and you have a Berger King across the street. We each sell our
hamburgers for 99 cents. The competition is equal. You also own a huge
cattle ranch and slaughter house/packing plant as well as a large bakery
and you want to increase your retail food business so you pass along the
savings you make from the meat production and bakery to the burger
stand. You reduce the price to 75 cents and now make a profit of 20
cents per burger whereas I only make 10 cents and must sell it for 99
cents. When someone wants a hamburger where do you think they will go?

I can scream all I want about how unfair this is, but so
what. He is not selling at a loss and even if I lower my price I can’t
go low enough to make a profit. I eventually will lose all my customers
to him and will go out of business. Is that fair? Sorry, but fair
doesn’t count. That’s business.

China is selling hamburgers (whatever) cheap, but they are
of equal quality. Consumers want both quality and price (value) and
don’t care where it comes from. Countries are complaining that they are
selling “too cheap”. No they are not because they are making a
reasonable profit. One of their production tools (cheap labor) is so
good that businesses from all over the world are moving there to take
advantage of it. If they don’t they will be out of business. You can’t
blame them.

Over the next 10 to 20 years China can become the world’s
leading country because of their economic development. They don’t have
the overhead (translation - central government, entitlement programs,
lawyers, labor unions, etc.) we do so they will be able to keep costs
down. Eventually (many years) their central government will slowly
evolve toward giving more to their people, but it is going to be
decades. In the meantime, learn to speak Chinese.


Copyright Albert W. Thomas. All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” www.mutualfundmagic.com. Comments to al@mutualfundmagic.com.