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January 1, 2006

China’s Looming Labor Gap

Although China has a population of roughly 1.3 billion, the emerging economic giant faces shortfalls in creativity, lacks a business environment that encourages risk taking and is short of talent to manage corporate initiatives, says a recent report by the Shanghai office of international consultant McKinsey & Co. Inc.

Education and training are essential, says Roger E. Herman, an expert on employment trends and CEO of Greensboro, North Carolina-based consultancy The Herman Group. “However, when people acquire these skills, their wage demands will increase as well,” Herman says. “As technology expands in China, manufacturers will need a more sophisticated workforce than what is currently available. China’s methods for preparing people for work must change, become more modern and more responsive.”

This talent lag could buy time for the U.S. metals industry to capitalize on knowledge-based advantages and opportunities and become more cost competitive. While Herman isn’t suggesting that U.S. metals companies will be able to reach a point of price competitiveness, he does suggest that they look at this looming labor shortage as a time to invest more in research and in ideas. “The U.S. was built on innovation and regardless of the maturity of an industry, there is always more that it can do to improve its position,” he says.

Dr. David Lei, associate professor at Dallas-based Southern Methodist University Cox School of Business, agrees that the country faces a labor crunch. “China in the next couple of generations will face a declining number of workers to support a bourgeoning aging population,” Lei says. “As a result of the strict adherence and application of the one-child policy for the past 30 years, the Chinese population is steadily aging and the average age level is rising fast.”

In addition, Lei anticipates that China may indeed become a country with a big social security problem without ever attaining the high income levels of mature, developed economies such as the United States, Europe and Japan.

“Although there is a strong likelihood that China will dominate an increasing number of industries over the
next few decades, the need for knowledge workers will continue to grow if Chinese firms want to build and sustain a knowledge-based competitive advantage,” Lei says.

“Paradoxically, in some sectors, the relative dearth of younger workers in the future may result in China's becoming a high-cost labor nation in some key sectors where it is fast becoming dominant now.”

“The U.S. business community can be just as powerful
in defeating global terror as the U.S. military.”


 


STEEL TRENDS

World steel production has grown at just under 2% per year—more than twice the rate of growth for the Organisation for Economic Co-Operation and Development (OECD ) as a whole—from 1990 to 2003. Experience within the OECD has been mixed with falling production in several countries, especially the Czech Republic, Poland and the U.K., and strong growth in Korea, Mexico and Turkey and, from a low base, in Austria and Finland.

The OECD, with 30 member countries, functions as an economic counterpart to NATO. Its largely mature European economies have been mostly surpassed in terms of growth rates by non-OECD countries. (See Forward, July/August 2005.)

For example, steel production in China has been growing at nearly 10% per year, at 6% in India and more than 3% in Brazil. By the end of 2003, China had become by far the largest steel producer. Its production in 2003 of just under 200 million tons was nearly twice that of the second country, Japan. The next largest producers were Korea, Germany and the U.S.

The OECD Factbook 2005 shows that, in 1990, while the EU produced more than 132 million metric tons of steel compared with 144 million tons in 2003, over the same period China went from 52.3 million tons to 196.7 million tons, which was almost a quarter of the then-total world production of 844.4 million tons. Due largely to China’s continued skyrocketing growth, world production now exceeds a billion tons annually.

 
Source: OECD Factbook 2005
 

 


TAMING THE TAX CODE

The President’s Advisory Panel on Federal Tax Reform is recommending two alternative approaches to the administration and Congress.

PROVISIONS CURRENT LAW [2005]
SMALL BUSINESS  
Tax Rates Typically taxed at individual rates
Recordkeeping Numerous specialized tax accounting rules for items of income and deductions
Investment Accelerated depreciation; special small business expensing rules allow write-off of $102,000 in 2005 [cut by 3/4 in 2008]
LARGE BUSINESS  
Tax rates *Eight brackets: 15%, 25%, 34%, 39%, 34%, 35%, 38%, 35%
Investment Accelerated depreciation under antiquated rules
Interest paid Deductible
Interest received Taxable [except for tax-exempt bonds]
International tax system Worldwide system with deferral of business profits and foreign tax credits
Corporate ATM Applies second tax system to business income
*The eight tax brackets are calculated on three variables: base tax liability, the threshold for any additional liability (excess) and the percent at which that excess is taxed. Two of the brackets appear to be repeated but are, in fact, distinct brackets based on calculations for the Alternative Minimum Tax (AMT).

 

PROVISIONS SIMPLIFIED TAX PLAN GROWTH AND INVESTMENT TAX PLAN
SMALL BUSINESS    
Tax Rates Taxed at individual rates [top rate has been lowered to 33%] Sole proprietorships taxed at individual rates [top rate lowered to 30%]
Other small businesses taxed at 30%
Recordkeeping Simplified cash-basis accounting Business cash flow tax
Investment Expensing with exception for land and buildings Expensing
LARGE BUSINESS    
Tax rates 31.5% 30%
Investment Simplified accelerated depreciation Expensing for all new investment
Interest paid No change Not deductible [except for financial institutions]
Interest received Taxable Not taxable [except for financial institutions]
International tax system Territorial tax system Destination-basis [border tax adjustments]
Corporate ATM Repealed Repealed
Source: President’s Advisory Panel on Federal Tax Reform, Tax Policy Center

 


 

MITTAL TO SUPPLY EU MILLS FROM LIBERIA

Mittal Steel Co. recently entered into an iron ore mining agreement with the Liberian government that will lead to new supplies for European Union (EU) mills. The agreement, facilitated by EU officials, gives Mittal access to more than 1 billion metric tons of rich iron ore reserves in the western part of the country. The new supply source follows a period of shortages, but political instability in the West African nation adds an element of risk.

“Africa is a region that has been left behind with a lot of the industrialization efforts,” says Nabil Nasr, an expert on EU development initiatives and director of the Rochester Institute of Technology Center for Integrated Manufacturing Studies in New York. “However, this does not mean that the potential is nonexistent. Just because they have lacked an aggressive nature in the past does not mean that they will remain passive in years to come. Like any other region in the world, they have a desire to grow and improve their economic well being.”

The deal won’t have an immediate impact on the international market, but it will provide Liberia with much needed domestic capabilities, he says. It also will put the EU in a favorable position to tap into
potential resources over the next five to 10 years.