1. What are the China issues which will
impact the global supply chain?
What should you be thinking about?
A presentation by Michael Lee
Serwetz, President, Prophet Business
Services

2. 1.Currency Revaluation and Its
Impact on Costs

3. a. What We Know
• RMB-USD exchange rate 2006=8.15; RMB-USD exchange rate
10/25/2010=6.659; Difference=18.3% (since June
2010=1.7%)
• Approximate monthly labor cost 2006 (Zhejiang) RMB 750-
1000; Approximate monthly labor cost to retain workers
2010= RMB 2000; Difference 100%+
• Monthly labor cost translated to USD 2006=$92-$123;
Monthly labor cost translated to USD 2010=$300;
Difference=143-226%
• China is a market with labor shortage so labor rates are not
solely determined by government mandated levels. The
undeniable fact is that labor, which has been a nearly
inconsequential factor for China, will become very dear for
manufactured product, especially those of low FOB value
such as textiles.

4. b. What we don’t know (but can
guess-ask me)
• Where will RMB-USD exchange rate land 2010-beyond.
6? 5? IF RMB appreciates to 6.5/USD and labor rate for
2011 increases only by the China Labor Contract Law of
2008 mandated 8.3%, monthly wage translated to USD
will increase to $333, an increase of 13%.
• This will also affect labor-intensive services such as
trucking and transportation.
• What will effect be on materials? In dollar terms,
exchange rate appreciation will affect every part of the
production process.
• UPDATE: Latest inflation numbers have created an
upward push on exchange rates.

5. The answer
• My prediction on China currency rate 2011:
Will pause at this level until CNY (3/2/2011)
and after or during holiday period will move
gradually to 6.5. This will be combined effort
by PBoC with interest rates and reserve ratio
to cool prices and inflation.
THIS WILL IMPACT PRICES-WHAT TO DO?

6. 2. What are options for alternative
sourcing?

7. What are your sourcing options
outside China?
– In a word-small. There has been a lot of talk in the press about
companies finding alternative sources for their products in other
Asian countries. Most of these articles are written by reporters
who have never been inside a factory or at least never tried to
source a product.
– FACT: THERE IS NOT ENOUGH CAPACITY (NOT LABOR) IN ALL
THE OTHER COUNTRIES IN ASIA (THAT COULD POSSIBLY
COMPETE WITH CHINA ON PRICE) COMBINED TO MOVE A
SIGNIFICANT AMOUNT OF PRODUCT AT THIS TIME.
– Also- Depreciation of USD has created appreciation of exchange
rates of emerging nations such as Indonesia and Brazil. This plus
labor/capacity issues will create upward push on prices from
those countries, making them a less attractive alternative.

8. Here’s an exercise-
Let’s compare 2009 exports of China to other countries (source: CIA World Factbook) All in
USD:
• China= 1.2 trillion
• Vietnam= 56.98 billion
• Bangladesh= 15.91 billion
• Thailand= 154.2 billion
• Indonesia= 119.5 billion
• India= 164.3 billion
• Malaysia= 157.6 billion
• Philippines= 37.51 billion
The export number is a true indicator of capacity-a country that exports $50 billion
CANNOT absorb too much from a country that exports 1.2 trillion.
OK, did you add it up? ALL THE OTHERS COMBINED=$706 billion.
The point should now be clear.

9. 3. Labor Shortage in China

10. China Labor Issues Leading to Labor
Shortage
– Population aging-Median age 35.2 compared with
27.4 Vietnam, 25.9 India, 27.9 Indonesia (36.8 USA)
– Low birth rate=14/1000 compared with 17.73
Vietnam, 21.72 India, 18.81 Indonesia (13.83 US)
– Younger population does not want to work in factory
jobs.
– Moving production to other provinces not a viable
solution-Chinese workers are migratory, so they will
move to where the production is taking place. Longer
term the same shortages will appear everywhere in
China.
– Result- Higher costs=Higher prices

11. 4. Political Developments and the
Threat of Trade/Currency War

12. Political Issues
– US, European politicians making political fodder out of exchange
rates. US is pushing to label China a currency manipulator and
impose punitive tariffs.
– China has already restricted exports of rare earths, and it is an
important export market for US and Europe. China also owns
more foreign currency reserves than anyone. They have
weapons.
– ALL countries are manipulating currencies in one way or another
now, including the US. UPDATE: QE2 has polarized the key
economies, and negatively affected G20 conference.
– G20=0. There is little chance G20 will agree on a viable solution
as it would require coordination of currency and interest rates.
– Result: December 2010 will be a very interesting month.

13. 5. What Should China Do To Cope with
these Issues and Preserve Growth?

14. What do you hope China will do?
– Grow the RMB gradually, over several years. Same calendar for
marketizing it.
– Stay the course. Continue to develop the internal infrastructure
and economy. Focus on higher tech industries.
– Extend road and rail to Middle and Western provinces so these
economies can develop.
– Manage energy consumption to minimize shortages. Make
maximum use of solar, wind, hydroelectric, nuclear power.
– Adopt a new business paradigm where labor is an issue.
Minimize labor cost and waste, maximize use of technology.
– Pay attention to process flow and control.
– Pay attention to Quality control to reduce waste of labor and
materials.
– Result: Continued development of China as viable source

15. Questions?