Broad Oak: your emotional support animal

Sunday, July 13, 2008

Bear market: Steiff comes home

Chasing lower costs, Steiff outsourced around a fifth of its production to China in 2003 but has now decided to come back because of concerns about quality and staff turnover.

Steiff is one of a small number of German firms which are swimming against the tide and leaving China, despite its cheaper workforce and a burgeoning consumer population. With fuel at record highs, some cite mounting transport costs.

Production of Steiff toys, which include a distinctive long-limbed bear with a melancholy growl, will come back to Germany and other countries in Europe by the end of 2009.

(Reuters)

That's sort of heartening, except that as it continues to develop, China will deal with quality issues. Japan listened to W. Edwards Deming in the 1950s and soon "Made in Japan" meant, not cheap, tinny and shoddy, but innovative, reliable and affordable.

In any case, this is clutching at straws. Tiny companies making high-value toys won't sustain Western Europe. We need major changes if we're going to become globally competitive. For example, health and welfare provision will have to be reassessed as the budgets shrink.

And here's a big debate to come: how much education? How much benefits the economy, how much is positional (Swiss finishing school for your daughter, etc), and how much is luxury consumption, like foreign holidays and Lagerfeld dresses?

How much education is simply an illogical, implicit pretence that the government is doing something to give all children relative advantage, particularly yours? How much is to disguise unemployment? How much is to keep potential young criminals penned-in during the daytime on weekdays? How much is to baby-mind children so that women can be driven out of their homes to do low-paid work?

As the money dries up, there will be an education debate, and it will be messy.

17 comments:

CherryPie said...

I think there will be a lot of things need reassessing as the money dries up.

Nick Drew said...

The point about China losing out in the short-term is surely right: much of the vast quantities they ship in our direction, however cheap, represents discretionary expenditure for us

when we stop buying this stuff for a bit - at Xmas, if not sooner - they will suffer a (relatively) brief correction until they get the value-added game together

BUT the immediate impact on marginal demand for commodities / raw materials will be VERY significant (as well as not buying any new Chinese garden chairs, we won't be buying ANY new garden chairs this year, period)

& that's when the oil bubble bursts

dearieme said...

I used to say that our sons read Engineering degrees so that our daughters could read Eng Lit degrees: one was essentially production, the other consumption. Now, of course, it's the sons and daughters of China who read Engineering degrees.

SACKERSON said...

DM:

Man to the plough;
Wife to the cow;
Girl to the yarn;
Boy to the barn;
And your rent will be netted.

Man tally-ho;
Miss piano;
Wife silk and satin;
Boy Greek and Latin;
And you'll all be Gazetted.

William Hone (1827)

TBRRob said...

Agree with you totally on education. I think we need to move away from our current set up.

Too many people are going to Uni. And I'm sure plenty of kids would be better out of school at 14 and earning a wage.

Andrew Allison said...

Go to any department store and you will notice the quality of goods manufactured in China is substandard. I am not surprised Steiff has decided it is not in their long term interests to continue manufacturing there.

nomad said...

Agree with Andrew. Anywhere you go in the world now, everything seems to carry a Made in China label. Nobody else seems to be making anything. The decline in quality is also regrettably prevalent worldwide, but as the man said: You get what you pay for.

This is fine, but it would be nice to sometimes have an alternative choice.

Lord James Bigglesworth said...

Think Nick has it right that when they get adjusted, we'll be down the gurgler.

Ryan said...

"Now, of course, it's the sons and daughters of China who read Engineering degrees."

China's idea of an Engineering Degree is your idea of a City and Guilds.

dearieme said...

No, ryan, I'm thinking of the ones who come to Cambridge and MIT to read Engineering degrees.

Ryan said...

Don't believe everything you see on the commie-loving BBC. If the Chinese are so sharp why is it they have so much trouble actually DOING engineering without copying everyone else and asking for help from people like me?

There aren't that many Chinese from mainland China studying in western universities, those that are might very well stay in the West and those that go home may be carrying a first class honours degree in electronics but still not know one end of a transistor from the other. I'm quite sure UK universities are still selling degrees to foreign students that are prepared to pay just as they were during the 80s when I was going through university. In fact there was a story about this in the Times I think just a couple of weeks ago.

I wish the Chinese WERE better at engineering. It would make my life much easier.

SACKERSON said...

Ryan, DM: I think you're both right. There's obviously a top end, and I suspect below them a big swathe that's trying to learn as fast as possible.

I've noted here before how when the Chinese bought some of the Rover line at Longbridge, teams went round the offices grabbing all the paperwork they could, to the extent that Rover management stationed men outside the office doors to stop them. And when the Chinese shipped home the Phoenix plant from Dortmund, James Kynge notes that they took all the paperwork, many tons of it.

The Chinese are obviously absolutely desperate to catch us up while the wage disparities still confer massive advantage. It's kind of Great Leap Forward-cum-Klondike. If I were in their position, I'd be touring Europe and the USA, offering over-the-odds pay to older engineers, to come to China and help with skills transfer and training programs.

Ryan said...

Sackers, I think you have hit the nail on the head. It is a Great Leap Forward II. Thing is, the first Great Leap Forward didn't end happily did it? And so far the Hang Seng is down 30% from its peak.

The Chinese are indulging in all kinds of industrial espionage right now. They are actually very good at spying on others and copying them. Not much evidence of them doing anything truly innovative at all. That leaves them that fateful one step behind the West, unable to compete with the leaders. The big money is all in the leading edge - where competition is limited. Look how much people are prepared to pay for an iPhone. 55% margin on that phone and its not cheap.

My guess is that Steiff went to China during the German recession because they were given the impression that if they manufactured there it was the only way to gain access to the growing Chinese market. Problem is that teddy bears are a western pecadillo, you don't see them so much in the Far East. Maybe there wasn't such a big market. Steiff (in common with most big manufacturers) probably have some vast computer controlled machine that pops these teddy bears out with minimum human involvement, so any cost saving from moving to China was probably small and more related to China's determination to keep the Yuan cheap relative to the dollar. Here's the rub - China is often making stuff cheaper than you can buy the raw materials? Why would they do that? I can only imagine that they want to get their hands on the foreign currency. I can see good reason why they need to do that, because they are running out of food as their population continues to expand. That, presumably, is the underlying reason why food prices here are rising, but the increase in food prices also encourages speculation.

They are dangerous, the Chinese, no doubt about it. Giving them access to Western technology was almost certainly a bad idea.

SACKERSON said...

Hi, Ryan, and thanks for the extended comment.

Steiff bears are handmade, their website says, and it takes a year of training to make them just right, so presumably Steiff were indeed looking to save on wages. James Kynge's book has a chapter on what China's done to the Italian textile and fashion industries, so it was a reasonable bet for Steiff.

The first Great leap Forward was centrally directed, this one is semi-capitalistic, even though (according to Kynge) the controlling boards of many companies are stuffed with crooked local officials, where not at least partially directed by the Party.

But Kynge agrees with you on the point that China is under major pressure to develop fast - he thinks their ageing population will soak up the improvement in GDP.

It takes time to raise standards in edcuation, but I'm sure the Chinese will get there; and in my view, we've been unintentionally helping narrow the gap by dropping ours.

So my worst-case scenario is they eventually nearly ruin us, without much benefiting themselves.

Ryan said...

Ah, I hadn't realised that Steiff bears were really hand-made (although that is something of a rather nebulous concept these days - how exactly do you define "hand-made"? Are they really sewn by needle and thread? I very much doubt it...). But the fact that it takes a year just to learn how to do it exposes the likely real problem. In my experience you can't get the Chinese to stay at your company for a whole year. Staff turnover is huge. We literally employ three times as many engineers in China to do the same job. We can do that because the wages are so low - BUT it dramatically increases the cost of computers software licences and so on. We have found the cost of doing design work in China is more or less the same as doing the work in Europe - but the quality of output is far better from Europeans. The problem is that outside of Europe, Japan and the US there isn't much experience of doing complicated things that need a lot of co-operation between people of different functions.

I don't agree that China will catch up. Not whilst it is communist certainly. They can only ever be second place. They can only ever copy what we have already done. Which means they won't ever make the big profits. To catch up they would have to give their people more freedom to be individuals - and that is the one thing they refuse to give their people. There is a good reason why free-market economies are ahead of the game - because the people have the greatest freedom to create things for their fellows.

I don't agree that China's development was not cetnrally directed. I know from personal experience that it was. China's problem started with Hong-Kong. At first the Chinese thought it was going to be handed back as "asset stripped" - just an empty shell of impoverished people. When they realised it was going to be handed back to them as a glittering symbol of what could be achieved by capitalism, the CCP started to panic. They hadn't a clue how to match the promise of capitalism symobolised by hong Kong, but they knew that all they had to do was copy it somehow. They didn't even know how to copy it, but by paying Hong Kong businessmen to start operations in mainland China they were able to start building new cities that were facsimiles of Hong Kong. These HongKong businessmen encouraged Western businesses to start co-operative ventures in China. This was encouraged by Western governments who presumably saw this as the fatal injection of capitalism that would eventually bring down the Chinese Communist Party, following the pattern in Gorbochev's Russia. By 2001 with the rest of the world heading for recession, growth in China encouraged yet more Western businesses to shift to China in the hope of getting into the Chinese domestic market - this was a waste of time as there is only a limited Chinese domestic market. Domestic suppliers serve the Chinese market and the foreign currnecy built up by foreign trade has simply been saved by the Chinese government to by US and European debt. Currently those debts are being written off, of course, so the Chinese are likely to regret that.

I don't agree with your comments about education. British schools are very good at encouraging creative thought. Maybe they do this by accident because they are too lazy to teach by rote, but nevertheless it works pretty well. Creative thought is the key to fat profits. Kids today are great - far more self-confident, mature and able than when I was a child. I have a lot of faith in them. I have two primary school age children myself and they regularly astonish me with their ability.

The next big thing is the internet. We are just at the beginning of the revolution in people's lives it will bring. But with British schoolchildren regularly exposed to computers and the internet we can be assured that they will be at the forefront.

SACKERSON said...

That's really enlightening, Ryan, especially the bit about knowing how to work co-operatively. Shame you're (apparently) not running your own blog.

The bit about being less centrally directed came out what I read in Kynge, where essentially he says that when Mao died, the leadership started to turn a blind eye to the growth of enterprises, although of course those businesses have been to some extent colonised by Party officials who know how to wield influence. So there is this problem of corruption and interference.

There is also a debt burden on the average Chinese business, but the government may decide never to call in its loans; and there are some, like the billionaire Shen Wenrong, who have anticipated an economic downturn and formulated their business plans accordingly. Stupidity and ignorance are not traditional Chinese traits, and given time, surely they will close much of the gap. Economic reform there is still in its early stages, isn't it?

I think the threats to China come more from the consequences of their success - can their ecology sustain the improvement in their people's longevity? Can the one-child policy be sustained as the demographics change? I think they may have to bust out somehow - lebensraum.

Perhaps our creativity will keep us ahead, though it may be that the sort of person you are means that your children, and the school they attend, are not entirely typical. And even if it is, is the same type of education best for all? I do puzzle about what we have to offer in the way of work for those who formerly were the hewers of wood and drawers of water.

Also I wonder how well intellectual property rights will be respected by an increasingly powerful Far Eastern bloc.

But maybe we can infinitely defer the day of reckoning; perhaps I should worry less.

Ryan said...

"Stupidity and ignorance are not traditional Chinese traits"

True. But I have quite a few Chinese friends and they are surprisingly good at daft. Even better than the English.

My kids go to the local bog-standard primary school in Swindon, by the way.