Paradoxically, the U.S.' Ongoing Exporting of Inflation Would Restore Its Labor Force?

The regular readers would know what this article is about. Again, cycles seem to turn relentlessly.

From Reuters:

For years, low prices on China-sourced goods helped dampen inflation in the United States. Now China's efforts to boost domestic consumer spending, reducing reliance on exports, are leading to higher costs for multinationals that manufacture goods there.

Eventually, China could export its inflation.

Conglomerates ranging from Emerson Electric (EMR.N) to Honeywell International (HON.N) feel pressure on margins from double-digit wage increases in China. So have toymaker Mattel (MAT.O), fast-food chain Yum! Brands (YUM.N) and computer maker Dell (DELL.O), analysts and investors say.

They have plenty of options besides raising prices, such as embracing automation or moving to China's less-developed interior. Some companies relegate China costs to the category of minor headache; others point to long-term benefits from richer Chinese consumers. But the topic has became a talking point during the earnings season now winding down.

"Input cost increases have been a steady headwind to margins for some time now," Fairchild Semiconductor International (FCS.N) Chief Financial Officer Mark Frey said last month.

"Metals and energy pricing, forex and China wage inflation are more difficult to forecast.
China this year adopted a five-year plan that calls for 7 percent growth in per-capita income, ahead of earlier targets, and fresh investment in research and development, to boost domestic consumption and modernize its economy.

Manufacturing wages are a fraction of those in the United States but are narrowing the gap, both fueling and responding to China's inflation, now at three-year highs. Between 1978 and 2009, wages jumped almost 13 percent a year, six times the pace of U.S. wage rises, according to BernsteinResearch.

Since 2006, that growth has accelerated.

By 2015, wages around Shanghai, adjusted for productivity, will be 61 percent of those in low-cost U.S. states like Alabama, according to the Boston Consulting Group (BCG). Transport and other considerations further shrink that gap.

"Wages are getting large enough that you start to feel the difference," said Hal Sirkin, a BCG senior partner, who said U.S. companies are looking at alternative manufacturing sites. "One of the answers is to start moving back to the U.S."

The next few years will bring a wave of reinvestment by U.S. multinational manufacturers in their home base, as rising wages and a strong yuan currency make China a less attractive production center, BCG predicts. Its July BCG paper names 14 companies rethinking where they produce goods, including NCR (NCR.N), Ford (F.N), Flextronics (FLEX.O), Ashland (ASH.N), and Jarden's (JAH.N) Coleman unit.

Where China once had ample labor, and supply was well balanced with demand, that equilibrium has broken down, BCG argues. The change does not mean shutting Chinese factories and firing workers; it means selectively scaling back future expansion or investment. China's size will ensure it remains a major global player.

China's well-developed infrastructure is an advantage over other countries such as the Philippines, Indonesia and Vietnam. And any short-term hit to margins has to be balanced against the long-term opportunity in a richer China. For many producers, costs such as oil and metals are a bigger headache than the soaring cost of labor.

Ultimately, the success of that drive to shore up China's consumer base may determine how U.S. companies perceive the risks and rewards of operating in China.

http://www.reuters.com/article/2011/08/12/us-usa-manufacturing-china-idUSTRE77B2IV20110812