Friday, January 29, 2010

No more cheap stuff from China?

Back in the 1950s, Japan was considered a source of "cheap junk".

Everything from tin-plated metal toys to low-cost electronics began to pour out of that country as it recovered from the devastating effects of World War 2.

For a while, it looked as if the enviable Japanese work ethic, a willingness to toil long hours for low wages and a near-worthless currency would see Japan forever at the bottom of the economic heap.

However, three or four decades later, Japan was a totally different economy.

And now, the cars, electronics and other items that proudly carry the "Made in Japan" label are considered to be of the highest quality, often setting new benchmarks for performance as well.

Gone is the stigma of "cheap" formerly associated with Japanese-made goods; replaced by an aura of quality, dependability and reliability -- albeit with a much higher price tag. Japan has also moved from a war-ravaged minor nation to a very important player in the 21st century's global economy.

Now to China...

China is currently where Japan was in the 1960s. It has made a reputation for building very cheap and often shoddy products on the back of a low-wage labour force.

Our homes and businesses are filled with consumer electronics that carry the "made in China" label and, whereas we once paid over $1,000 for a DVD player manufactured in Japan by a brand-name like Sony or Pioneer, I purchased a Sino DVD player in the Warehouse for just $19 over the Christmas break.

Initially I thought we'd see China follow the same path as Japan and Taiwan -- slowly moving from a reliance on low-prices to sell their products to an investment in quality that would allow higher prices and profits to be had.

But something might just change the way that would have otherwise played out.

What's happened to change the natural progression of events is the electric-power revolution.

With ever-rising oil prices and the looming spectre of heavy carbon taxes, a very rapid and massive shift is underway towards renewable power sources and carbon-free transport technologies.

Pivotal to these emerging technologies are two key ingredients: lithium batteries and very efficient electric motors based on rare-earth magnets.

China has found itself in the enviable position of already being the world's leading supplier of both these highly sought-after products. Even better (for China) they also have the world's largest resources of the raw materials required to make those rare-earth magnets.

In fact, 97% of all the rare earth elements are mined from within China's borders, effectively giving them a virtual monopoly on this increasingly valuable raw material.

With this in mind, China no longer has to travel the slow route from low-wage economy to high unit-value manufacturing, and they know it.

In fact, China is preparing to halt the export of all rare-earth elements by 2012. They will use their entire output of these valuable materials to feed their own electric motor production lines, effectively cementing their monopoly in this area.

If the world is going to covert its vehicle fleets to electric power in any numbers then China holds all the aces. They have the largest production of lithium batteries and a strangle-hold on the raw materials for the motors.

One only has to look at what the automobile industry did for Japan's fortunes to realise that China is sitting on a goldmine, and clearly intends to capitalise on that fact.

This leaves me wondering if we're currently living in "the golden era of cheap Chinese products".

Once China's reliance on making dirt-cheap toasters, irons, kettles, DVD players, power-tools, etc is no longer essential to their economic wellbeing, we may see those low-wage resources redirected to meeting the demand for batteries and motors.

What's more, the Chinese currency will almost certainly get a huge boost, once analysts and traders realise that neodymium, lanthanum and terbium are "the new oil". The shift of manufacturing emphasis, combined with the rocketing currency may mean that all that cheap stuff we buy at The Warehouse will suddenly become far more expensive.

And as a final sobering note it's worth remembering that many wars have started over far less valuable resources than rare-earth minerals.

As the Chinese say, "may you live in interesting times".

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