Tuesday, August 9, 2005
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When capital and labor are substitutes
Keith Bradsher has an interesting piece in the New York Times on GM's recent success producing and selling cars in China. The interesting fact is the way in which China's relative abundance of labor altered GM's capital investment:
The depressing fact is that, naturally, GM is punishing the guy that came up with the process and product ideas behind the minivan in the first place:
In a world where local knowledge about consumer demand and the most efficient way to mix factor endowments are important, the GM decision to centralize its management structure seems particularly brain-dead.
Read the whole piece.
UPDATE: A 2003 McKinsey Quarterly essay by Vivek Agrawal, Diana Farrell, and Jaana K. Remes touches on this concept of reorganizing production processes to exploit local factor endowments. The auto sector in China is one example:
These examples point to a big warning sign that should be put on any news story about job creation in offshored sectors in low wage countries:
posted by Dan on 08.09.05 at 11:58 PM
All is not well in China. There were 74,000 demonstrations last year.
In a recent demonstration, about 10,000 people converged on the Huangshi city government and party offices, smashing windows and property, as reported in the Hong Kong paper Wen Wei Po. They also ransacked government offices and attacked a police station.
They don't really have everything under control as they seem to from out here.
posted by: NewsBlaze on 08.09.05 at 11:58 PM [permalink]
Note that China has much looser pollution standards than the U.S. and Europe. This could lead to some of the simplification and lower cost of building these cars. I doubt they would pass emissions tests anywhere North of Mexico.posted by: Don on 08.09.05 at 11:58 PM [permalink]
Yes, substituting labor for capital...A Great Leap Forward. Let us hope this handcrafted vehicles make their way to the US.
I'm ninety percent sure that even robotic factories hire workers -- in fact high skill high value added and thus high wage workers. Guys that program numerical controlers, maintenance electricians, and the like. Not to mention the millwrights that design and construct such factories in the first place.posted by: Mitchell Young on 08.09.05 at 11:58 PM [permalink]
This kind of centralization does not bode well for GM...are they going to insist on a standard compliment of robotics, automatic vision machines, etc in every factory in the world, regardless of the labor-to-capital cost ratios?
Sounds kind of like the policy they used to have about standardized cost constraints for stamping dies:
Also...as countries like China develop their own capital equipment industries, the tradeoff will change. Right now, it might be cheaper for a factory in China to hire 20 welders rather than buy 5 robots. But the robot may have been made at German wage rates, and incurred transport costs on its way. What happens when the robot-making factory is in the adjacent province?posted by: David Foster on 08.09.05 at 11:58 PM [permalink]
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