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  • A New Primer on China From McKinsey

    Do you have an hour for China? That is, do you have an hour you can spare to understand the leading economic story of the century? McKinsey's Jeffrey Towson and Jonathan Woetzel have written The One Hour China Book in an effort to bring us all up to speed on the key pieces to understanding what is happening in the world's most populous country and the impact of activity there on life everywhere. If you can't spare an hour just yet, here are the "six big trends" from the book, as shared at McKinsey Insights : Here's a little more on trend number 3: The American middle class was the world economy’s growth engine throughout the 20th century. Now, the engine is the Asia–Pacific region, which will account for two-thirds of the world’s middle class by 2030. While Chinese consumers’ focus on “value for money” has driven the rise of companies such as apartment builder China Vanke and Tingyi Holding Company—the business behind China’s dominant instant-noodle brand—buying habits are changing. As urbanization accelerates, consumer spending is becoming more like that of the West’s middle class. Urban Chinese are shopping to meet emotional needs, driving a skyrocketing demand for middle-class goods, food, and entertainment. As an example, China consumed more than 13 million tons of chicken in 2012—more than the United States. Tyson Foods’s China operations has facilities able to process more than three million chickens per week, and Chinese chicken consumption, which grew by 54 percent from 2005 to 2010, is expected to grow an additional 18 percent annually during the next five years. For additional evidence, look no further than the fact that the largest Chinese acquisition of a US company had nothing to do with technology, cars, or energy. In 2013, Chinese Shuanghui International spent $7.1 billion to buy American Smithfield, the world’s largest pork producer and processor. It’s not surprising, then, that agribusiness is one of China’s hottest new industries. Almost every aspect needs to be improved, from land and water use to logistics and retail. Legend Holdings, the parent company of Lenovo, now lists modern agriculture as one of its five core areas, with a portfolio that includes kiwi and blueberry farming. Read All you need to know about business in China here .
  • Russia's Market Volatility and Economic Diversity Problem

    The Winter Olympics are beginning their second week in Russia, and most people want to talk about the figure skating, the hockey, the medal count, maybe even the pageantry. But some economists have other thoughts on their minds. At Vox , World Bank economists Alvaro González , Leonardo Iacovone , and Hari Subhash are focusing on a major Russian weakness, and it isn't a lack of strong two-way forwards on the ice hockey team. No, they are concerned about Russia's "limited economic diversification." The nation's policy leaders have struggled to help limit market volatility, the authors note. Russia is susceptible to economic bad times that are really bad and last longer than for other large economies, and that makes it hard for new sectors to grow: Volatility in Russia is a nearly all-encompassing event. When things are booming, the boom is shared by nearly all manufacturing sectors. When things go bust, practically all sectors go bust. The relatively high level of concentration of output across firms and sectors exacerbates the problem. Further, when analysing slumps and surges across time and comparing these to other economies, we find that although surges in Russia have similar looking peaks and last about as long as those in comparator countries, the slumps are deeper (Figure 2) and longer (Figure 3). For slumps of less than 6 years (the horizontal axis), the probability (the vertical axis) of a slump persisting for another period is higher in Russia (the step-like line is above that of the other economies). The survival of new, relatively efficient firms (particularly during longer and deeper slumps) is a central weakness and likely key issue limiting economic diversification in Russia. Our analysis shows that during slumps, more productive firms tend to have lower odds of surviving relative to less productive ones than during surges. During long and deep slumps, older firms and firms facing less intense competition are more likely to survive. Unfortunately these firms are often not the champions of change and innovation that form the basis of diversification. In Russia the slumps do in fact wipe away some of the hard fought gains made by new, emerging entrants. So much for the new blood needed for the economy to diversify. Read Russian volatility: Obstacle to firm survival and diversification here .
  • McKinsey Quarterly: The Next Trend in Manufacturing

    There was massive growth in "offshoring" in the years before the global economic crisis. Then some manufacturing jobs returned to the U.S. and we called it "reshoring." Are you ready for "next-shoring"? In the McKinsey Quarterly , Katy George , Sree Ramaswamy , and Lou Rassey take stock of the economics of manufacturing for today and the coming years, and they make the case for that new technologies are making labor costs less of a factor in choosing where to set up factories. More than two-thirds of global manufacturing activity takes place in industries that tend to locate close to demand. This simple fact helps explain why manufacturing output and employment have recently risen—not only in Europe and North America, but also in emerging markets, such as China—since demand bottomed out during the recession following the financial crisis of 2008. Regional demand looms large in sectors such as automobiles, machinery, food and beverages, and fabricated metals. In the United States, about 85 percent of the industrial rebound (half a million jobs since 2010) can be explained just by output growth in automobiles, machinery, and oil and gas—along with the linkages between these sectors and locally oriented suppliers of fabricated metals, rubber, and plastics (Exhibit 1).2 The automotive, machinery, and oil and gas industries consume nearly 80 percent of US metals output, for example. In China too, locally oriented manufacturers have contributed significantly to rising regional investment and employment. The country has, for example, emerged as the world’s largest market and producer for the automotive industry, and many rapidly growing manufacturing sectors there have deep ties to it. As automotive OEMs expand their capacity in emerging markets to serve regional demand, their suppliers have followed; the number of automotive-supplier plants in Asia has tripled in just the past decade. Read Next-shoring: A CEO’s guide here .
  • Planet Money: Rise of the Service Sector

    It looks like the U.S. economy gained another 200,000 or so jobs in December ( Labor Department numbers come out Friday). Moody's chief economist Mark Zandi told USA Today that "job gains are broad-based across industries, most notably in construction and manufacturing." Any gains in the manufacturing sector are surely welcome, but those jobs make up a smaller and smaller percentage of overall U.S. jobs each month. As Planet Money 's Quoctrung Bui points out: The United States has a cultural obsession with manufacturing. When policymakers stump about job growth and job creation, they often focus on manufacturing jobs. But for more than 60 years, the number of manufacturing jobs has been stagnant, while the number of service jobs has exploded. Service jobs now account for over 80 percent of all private sector jobs. Read Where the Jobs Are, In 2 Graphs , and see the second graph, here .
  • Lessons for China's Policymakers in Detroit's Economic Decline

    The bankruptcy of Detroit has Sanjeev Sanyal looking east, far east, to China and India. Sanyal, Global Strategist for Deutsche Bank, points to Detroit as a prime example of a city built largely around one sector. The good news for Western economies is that the urban revival of the last few decades has been driven by cities where innovators across sectors are coming together. The same can not be said for the rapid urban growth elsewhere. From Project Syndicate : Until the nineteenth century, innovation was carried out mostly by generalists and tinkerers, which meant that the accumulation of new knowledge was slow, but that its diffusion across different fields was rapid. In the twentieth century, knowledge creation became the job of specialists, which accelerated knowledge creation but retarded inter-disciplinary application. But recent studies have shown that this source of innovation is rapidly decelerating (the productivity of an American research worker may now be less than 15% of a similar researcher in 1950). Instead, innovation is increasingly based on mixing and matching knowledge from different specializations. Certain cities are ideally suited for this, because they concentrate different kinds of human capital and encourage random interactions between people with different knowledge and skills. The problem with this post-industrial urban model is that it strongly favors generalist cities that can cluster different kinds of soft and hard amenities and human capital. Indeed, the growth dynamic can be so strong for some successful cities that they can hollow out smaller rivals (for example, London vis-à-vis the cities of northern England). Some specialist cities could also do well in this world. But, as Detroit, with its long dependence on the automotive industry, demonstrates, cities that are dependent on a single industry or on a temporary location advantage may fare extremely poorly. All of this has important implications for emerging economies. As it transformed itself into the “factory of the world,” the share of China’s urban population jumped from 26.4% in 1990 to around 53% today. The big, cosmopolitan cities of Beijing and Shanghai have grown dramatically, but the bulk of the urban migration has been to cookie-cutter small and medium-size industrial towns that have mushroomed over the last decade. By clustering industrial infrastructure and using the hukou system of city-specific residency permits, the authorities have been able to control the process surprisingly well. This process of urban growth, however, is about to unravel. As China shifts its economic model away from heavy infrastructure investment and bulk manufacturing, many of these small industrial cities will lose their core industry. This will happen at a time when the country’s skewed demographics causes the workforce to shrink and the flow of migration from rural areas to cities to slow (the rural population now disproportionately comprises the elderly). Read The Detroit Syndrome here .
  • Key Factors Behind 'Reshoring Phenomenon'

    We are hearing more and more talk of reshoring --multinational companies moving jobs closer to home. Knowledge@Wharton 's Mukul Pandya spoke with Morris Cohen--professor of manufacturing and logistics at Wharton--and Scott Staples --President of Americas at Mindtree--about the key factors driving "the reshoring phenomenon." Cohen outlined four important drivers: Costs, risks, technology, and innovation. Staples points to another big driver: "talent availability."
  • Barclays' Chang on China's Disappointing Slowdown

    China's policy leaders are facing the reality of slow growth--this week brought the news of a significant decline in exports. So while China will surely seek measures to reverse the momentum, don't expect to see a stimulus plan to be effective, according to Barclays chief China economist, Jian Chang . She discussed the disappointing economic figures with the Wall Street Journal 's Michael Arnold:
  • Lost Momentum in Manufacturing Multifactor Productivity

    The Bureau of Labor Statistics has released some interesting data on the manufacturing sector today--specifically on multifactor productivity during the great recession and the ongoing recovery. Multifactor productivity--"the change in output per unit of combined inputs"--rose 0.8% (annual rate) in 2011. That rate of increase was a big dropoff from 2010, when multifactor productivity rose an unprecedented 4.5%. From the release: Multifactor productivity in manufacturing grew 1.3 percent annually from 1987 to 2011 with sectoral output increasing at an annual rate of 1.7 percent, faster than the 0.3 percent annual increase in combined inputs. During the same period, output per hour (labor productivity) increased 3.3 percent annually. (See table A.) Of the 3.3 percent growth rate in labor productivity, multifactor productivity added 1.3 percent, capital intensity contributed 0.6 percent, materials intensity added 0.9 percent, and purchased business services intensity added a 0.4 percent increase. The contribution of energy intensity was unchanged. For the 2007-2011 period, multifactor productivity rose at a 0.6 percent annual rate compared to a larger 2.0 percent annual growth rate in the 2000-2007 period. Sectoral output declined 2.3 percent and combined inputs declined 2.9 percent over the 2007-2011 period. In 2011, fewer NAICS three-digit manufacturing industries exhibited an increase in multifactor productivity growth and sectoral output growth compared to the previous year. The number of industries exhibiting an increase in combined inputs remained steady at 13, the same number as in 2010. Eleven out of 18 manufacturing industries exhibited an increase in multifactor productivity. Thirteen industries showed increasing output. Seven industries experienced a decline in multifactor productivity growth. Of these seven industries, two were durable manufacturing industries: primary metals and miscellaneous manufacturing. The remaining five industries were in the nondurable manufacturing sector: food, beverage, and tobacco products; textile mills and textile product mills; apparel, leather, and allied products; petroleum and coal products; and plastics and rubber products. Read the full release here .
  • McKinsey: Three Steps to Successful Product Development for Emerging Markets

    Multinational companies need to grow sales in emerging markets. That may mean tailoring the product development process that matches the market. In the McKinsey Quarterly , Sauri Gudlavalleti , Shivanshu Gupta , and Ananth Narayanan note that this requires companies to step out of their comfort zone: Traditional approaches to product development are coming under strain as emerging markets start to dominate the global economy. Companies that learn to shake up their thinking and effectively challenge the assumptions about how they design, develop, and manufacture products are more likely to master the extremes of this new competitive landscape. The authors outline three key steps in the product development process. Here they are, illustrated: Read the article here .
  • Understanding Increased Efficiency Through One Potato Chip Factory

    Don't confuse the below video as being about a potato chip factory. It is better to view it as a short history of manufacturing in America. The video is from Planet Money , and it provides an interesting lesson in how technology has changed business. We hear so much about manufacturing getting so much more efficient over the last half-century, it is helpful to have a clear example of how exactly that takes place for one company: Secrets From The Potato Chip Factory from Planet Money on Vimeo .
  • Brookings Paper Calls on Regional Firms to Increase Exports

    Researchers in the Brooking Institution 's Metropolitan Policy Program have put out a new paper calling on the federal government to "initiate a short-term competitive Regional Export Accelerator Challenge (REACH) grant program." They argue that too many U.S. cities are too slow to engage in the global marketplace. From the paper: Despite the size and growth of foreign consumer demand, too many firms and too many parts of the United States remain domestically-oriented, thereby missing out on opportunities to innovate and expand. In addition, the national export service delivery system is too Washington-centric and does not embrace federalism’s opportunities to work directly with leaders in regions, and their state partners, to globalize traditional economic development strategies. The key problem is that both individual firms and entire regions under-export. -Too few firms are exporting and exporting regularly. As of 2010, less than 1 percent of U.S. firms sell a product abroad, a much lower share than in other countries, including major trading partners such as Canada, Germany, and Korea. While the number of new exporting firms continues to grow (with 16,500 firms beginning to export between 2009 and 2010), that pace is slower than the creation of all new firms, keeping the overall percentage of exporting firms low. As of 2010, the United States has 293,000 exporters. However, only 188,000 firms exported in both 2009 and 2010, suggesting that approximately one-third of exporters may be “accidental exporters” that react to one-time demand from international buyers rather than integrating exports into their long-term sales and marketing strategy. -The nation itself remains a patchwork of exporting activity. The share of the U.S. economy that is driven by exports is relatively small, at 14 percent. But even at that level, 74 percent of metro areas—and 86 of the 100 largest metro economies—underperform the national rate. Metro areas as large and diverse as Atlanta, Baltimore, Denver, Miami, New York, and San Antonio all generate less than 8 percent of their economic output through exports, placing them in the bottom quarter of performers among the largest 100 metro economies. Read the paper here . Amy Liu , co-director of the Metropolitan Policy Program, discusses the need for domestic firms to expand exports in this interview:
  • BLS: Productivity Decreased in Fourth Quarter

    Productivity dropped 2.0 percent (annual rate) in the fourth quarter of 2012, according to new figures released by the Bureau of Labor Statistics . Output rose just 0.1 percent while hours worked rose 2.2percent. From the report: Unit labor costs in nonfarm businesses increased 4.5 percent in the fourth quarter of 2012, the combined effect of the 2.0 percent decrease in productivity and a 2.4 percent increase in hourly compensation. Unit labor costs rose 1.9 percent over the last four quarters. BLS defines unit labor costs as the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them. Manufacturing sector productivity increased 0.5 percent in the fourth quarter of 2012, as output increased 0.7 percent and hours increased 0.1 percent. Productivity increased 1.6 percent in the durable goods sector and decreased 0.5 percent in the nondurable goods sector. Over the last four quarters, manufacturing productivity increased 1.3 percent, as output increased 2.8 percent and hours worked rose 1.5 percent. Unit labor costs in manufacturing increased 0.4 percent in the fourth quarter of 2012 and increased 3.4 percent from the same quarter a year ago. Read the full release here .
  • Testing Okun's Law--Are Jobs and Growth Still Linked?

    In 1962, Arthur Okun wrote that "changes in the level of economic activity are associated with shifts in the composition of employment and output by industry." But the nature of the economic recovery in the U.S. (as slow as it may seem) has made reconsidering Okun's Law popular (if not necessary). In a post for VoxEU , Laurence Ball , Daniel Leigh , and Prakash Loungani examine whether jobs and output can now be decoupled: Figure 1 shows peak-to-trough declines in output for a group of OECD countries during the Great Recession against the change in unemployment over the same period. The correlation is essentially zero. In the language of economics textbooks, Figure 1 suggests a breakdown of Okun’s Law, the short-run negative relationship between output and unemployment reported by Arthur Okun in 1962. Figure 1. The Great Recession: Peak-to-trough output and unemployment changes (simple scatter plot) We believe the casual impression that "Okun’s broken" is misleading (Ball, Leigh and Loungani 2013). Two adjustments are needed to restore Okun’s Law (as shown in Figure 2): The first adjustment is to account for differences in the duration of the recessions; For the set of recessions shown in these charts, the period from peak to trough ranges from two quarters to seven quarters. As we show in our paper, Okun’s Law implies a relationship between the changes in unemployment and output only if we control for this factor. The second adjustment accounts for the fact that, historically, the coefficient in Okun’s Law varies across countries. Figure 2. The Great Recession: Peak-to-trough output and unemployment changes (with adjustments for duration of recessions and country-specific Okun coefficients) Read the full post here .
  • Big Shift in Outsourcing and Offshoring as Wage Gap Narrows

    With the current bleak employment picture in most developed economies, few topics become more emotionally charged than outsourcing and offshoring. But following a half decade of recession and slow growth, the outsourcing may be less appealing to some major multinationals. And that makes now a key moment to explore the benefits and challenges with the practice. The Economist features a special report on outsourcing and offshoring in the latest issue of the magazine. Here's a helpful look at some of the key takeaways from the report: The Economist's Europe Business Editor Tamzin Booth explains that it is indeed the narrowing of the gap between costs in developed and emerging economies--the US and China being the most important comparison--that has turned some companies off of outsourcing. "Global labor arbitrage," is the term Booth uses. Other key reasons are advancing industrial automation, and the reality check that outsourcing didn't work out quite as well as some companies expected. Listen to Tamzin Booth discuss the special report here . Access the special report here .
  • Signs of Recovery in American Manufacturing

    Earlier this week, Brookings gathered business leaders and policy makers to discuss "fiscal challenges, U.S. manufacturing and government performance." Bruce Katz , VP of the Brookings Metropolitan Policy Program , addressed the good and the bad of American manufacturing. Katz pointed out the manufacturing sector lost the most jobs during the great recession. When you lose manufacturing jobs, other jobs, like design and engineering jobs, leave the country as well. But some manufacturing jobs have come back (see Katz's handout on jobs recovered, by sector, here ). And Katz sees some trends that suggest continuing recovery in American manufacturing is possible. The key to continued growth, Katz says, is collaboration: You can watch other excerpts from the Brookings panel discussion on American manufacturing here .
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