I happened to walk into a large appliance store yesterday; I wasn't looking to buy anything, just filling 15 minutes before an appointment. As I strolled down one aisle, I was struck by the huge number of different counter-top plug-in water kettles for sale. There were 32 different makes and models and the display took the entire length of the aisle. I thought that was odd. As I rounded the corner, I came to the hair dryer section: 42 models. Right next to them were the bathroom scales: 16 models. Nearly every item was Made in China.
By now I was baffled as well as bemused: who needs to choose amongst so many nearly identical items? My first reaction was to chuckle and blame our consumerist society; but that sentiment was immediately replaced by my curiosity for all things economic. Here was a major manifestation of the Chinese economy, on display as Kettles, Dryers & Scales. My conclusion, after some thought, is that its manufacturing-export economy has now reached a level that can best be described as absurd. Let me explain.
The sheer number of makes and models means that there must be dozens of different Chinese companies that make small appliances. There is apparently nothing to distinguish one from the other - there are no name brands that we would recognize as such - so the price competition must be incredibly fierce. Furthermore, the fact that the store is stocking and displaying so many of them must mean that the marginal cost of doing so is nil. Let me put it this way: a few days or weeks ago the store carried 41 dryers - what induced it to accept number 42? The answer is even lower prices and better payment terms - and this pressure is then immediately transmitted back to the makers of the other 41 dryers.
If you are China Kettle, Dryer and Scale, Inc. - one of the dozens of similar companies - what can be your sole business strategy for profitability under these conditions? Make it up on volume, of course. So you keep expanding your manufacturing capacity in the hope that, when the bubble bursts, you will be one of the lucky few that survives. Because it is quite clear that the system is now forcing the creation of a bubble - no way out, except perhaps to take advantage of another bubble and sell out by listing your shares on the Shanghai Exchange.
Can the manufacturing bubble continue? Given the intensely marginal nature of the business, the only way it can continue is by achieving constantly higher sales, i.e. by constantly enlarging the bubble. But if there is even a small slowdown in retail demand, and keeping in mind yesterday's post on the prevalence of the global Just In Time network, the negative effects on profitability are going to be instantaneous and highly destructive. The bubble will explode - not merely "pop".
What is the probability of this happening? Well, given that the largest consumer market on the planet (the US) is now definitely weakening and that the second largest (the EU) is not very far behind, I calculate that a slowdown in total consumer demand has already started. I certainly would not want to be an shareholder in CKD&S, Inc.
P.S. The "eagerly awaited" BLS employment report came out exactly as expected at +110.000 jobs for the month, though the month of August was revised at +89.000 vs. -4.000. The revision had to do almost entirely with the number of teachers going back to work, which was originally estimated too low. However, the relevant data one needs to look at in order to gauge the economy is the number of jobs added by the private sector.
Here is a chart comparing the jobs created during each of the first 9 months in 2005, 2006 and 2007. For the 9m year to date, 2007 is down 49% from 2005 and down 40% from 2006.
In other employment news, the Monster Index came out unchanged at 186 for September, while the BLS did its "birth/death" model revision and subtracted 297.000 jobs from what it had originally reported as created during the 12 months up to March 2007.