Winston Churchill once called the Soviet Union a “puzzle wrapped up in an enigma.” The same can be said for modern day China. How to assess this nation which has come out of nowhere to become the third or fourth largest industrial power on earth? China’s growth rate last year was 8 per cent, higher than any other industrial nation. As impressive as this growth has been in the past 12 months, it actually has declined from 12 and 14 per cent during the previous two years—almost a recession by Chinese standards. Many American manufacturers with off-shore facilities in China continue to swear by that nation as the most effective place for making their goods. Yet, most recent surveys of manufacturing intentions reveal a growing number of U.S. producers are choosing Mexico, Central America and even home-based production facilities to make their goods, instead of China.

Many economists have predicted that sooner rather than later, China no longer would be so dependent upon exports to fuel its growth. That prediction is mistaken. China still lives or dies by its export trade. As exports have slowed (exports actually decreased last year by a slight margin taking into account inflation), other areas of the Chinese economy have declined in tandem with its export picture. The Shanghai stock market has fallen by two thirds during the past year. China’s real estate market, a very sensitive economic indicator, has plunged, particularly in the big cities. And a once unknown word in the Chinese vocabulary, layoffs, have occurred in the Pearl River Delta, the heart of Chinese industry, as hundreds of companies have shuttered their doors and laid off workers.

"China still lives or dies by its
export trade. As exports have
slowed (exports actually
decreased last year by a slight
margin taking into account
inflation), other areas of the
Chinese economy have
declined in tandem with its
export picture. "

We in air freight are feeling the pinch of thinning Chinese exports. Overcapacity in lift on U.S.-China traffic lanes have risen as volume shrinks. Yields have fallen often reflecting rates barely above costs.

Airlines serving the China market no longer talk about greater number of flights but how to reduce their current ones. A number of recent Asian all-cargo airline start-ups who expected the China market to expand indefinitely either are trying to merge or face bankruptcy. Yet, air cargo is comparatively in a healthy position compared to ocean shipping. The great steamship lines like Maersk, APL, Hapag- Lloyd are facing a sharply reduced China market. Huge container ships, ordered three and four years ago when times were flush, now are coming on line in a declining market propelled by reduced consumer demand in the U.S. and Europe. A few shipping people even are entertaining the idea of converting container vessels into cruise ships! Unless and until the industrialized world snaps out of its current recession, little growth can be expected in the China trade. Airlines and forwarders have to look elsewhere in the world for meaningful growth.

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Boeing And Its Machinists See The Light

Shortly before this edition of the Newsletter went to press, Boeing and its machinists’ union reached a tentative agreement to settle an almost two month-old strike. The strike was a long and costly one with Boeing losing about $100 million a day in revenues with workers losing additional millions in pay. Why did Boeing allow the strike to drag on for so long when its order books were full with airline customers demanding delivery of airplanes already ordered—particularly the company’s new 787.

The answer can be summed up in one word—outsourcing. Company executives insisted on retaining traditional management prerogatives in choosing how, when and where to manufacture their products. The unions said “stop” to outsourcing, pointing to the disastrous decision by Boeing to outsource many of the new 787 components to companies with little knowledge or experience in making highly precise parts for a modern jet airliner. Although Boeing agreed to a 15 per cent wage increase over three years (a very generous amount in these recessionary times) and an $8,000 bonus to each worker, the company won on the most important issue. Boeing retains the ultimate authority to run its factories in the U.S. or anywhere else in the world exactly as it sees fit. Executives throughout the U.S. can breathe easier knowing they have a powerful precedent in Boeing.

While neither side mentioned the recent American Airlines’ decision to order almost 50 new 787s at a cost of about $5 billion, this must have been a major factor in settling the strike. The American order is the first large purchase by a U.S. carrier of the new plane and may be the harbinger of future orders by other domestic airlines. Boeing didn’t want to delay production of its 787s any further. Behind the scenes, the Pentagon was breathing down Boeing’s neck for delivery of the substantial military equipment Boeing produces for all three services. And of course, Wall Street was screaming for an agreement to halt the company’s slide in its stock price which has dropped more than 50 per cent in the last year. With the strike settled, it will be interesting to see just when the first 787 actually will roll out of Boeing’s assembly plant in Everett, Washington.

"Boeing retains the ultimate
authority to run its factories
in the U.S. or anywhere else
in the world exactly as it
sees fit. Executives
throughout the U.S. can
breathe easier knowing they
have a powerful precedent
in Boeing."

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