The international business landscape is changing, and many of the Asian emerging markets have run their course, it’s not that they are running out of steam, but they can’t hold the percentage of growth rate that they’ve had previously, and now they have to work on all the chaos they created by such rapid expansion. Meanwhile, as American companies have spent quite a bit building factories overseas, and outsourcing much of their production, there are also challenges afoot for corporate earnings.
Having low-cost labor and production in other parts of the world makes sense, as corporations can still command a fair price, albeit with increased competition, and score higher profit margins. However doing business in Asia this way is starting to come to a close, that doesn’t mean things aren’t still evolving, because they certainly are, but there seems to be more headwind, and less incentive and fewer advantages moving forward due to the increasing labor costs and labor unrest in these markets. Okay so, let’s talk about this for second shall we?
There was a rather interesting article in the Wall Street Journal on March 14, 2012 titled; “China’s Wage Hikes Ripple across Asia,” by James Hookway, Kuala Lumpur, Patrick Barta, and Dana Mattioli. The article stated; “More Asian governments are pressing businesses to hike wages as a way to prevent outbreaks of labor unrest, raising the specter of higher manufacturing costs for global companies – and the products they sell worldwide.”
Well now, that’s a rather serious issue isn’t it? It seems that with all of our outsourcing and money flow we have inadvertently created inflation in all of these markets, and as they come into their own, and their emerging economies become more developed and evolved they now have to deal with all of the chaos they’ve created, which comes with any rapid growth society and civilization. Instituting minimum wage laws is probably the next, but that also means more wage inflation, which is something they are trying to tame.
Were people better off before the Western world started building factories there, or contracting with locals to build components for all of our products? No, people are better off now with a higher standard of living, but as all good things come to an end, and as their wages increase in price, the Western world may look for opportunities in other emerging markets to build products, or build more of the products here at home using robotics, as the labor rates here are still too high to compete even with a dramatic increase in wages there.
Surely, this will also cause the increase of prices in the products we buy, and as our economy is starting to move ahead, we can expect that since we are still down slightly that there will be consumer pressure on corporations to keep the prices low. This means that corporations may not be able to show the same profit margins as they have in the past, and this changes the entire dynamics of stock price and earnings multiples. Therefore unless the analyst and Wall Street must their expectations, otherwise we could find ourselves pulling back 15 to 18% this year as the stock market readjusts itself to this new paradigm. Indeed I hope you will please consider all this and think on it.