December 10, 2019

Strong Chinese Manufacturing Data Point to Turnaround

HSBC’s manufacturing purchasing managers index — a survey that takes the temperature of China’s important factory sector — rose to 51.2 in September, from 50.1, topping analysts’ expectations. The index HSBC released on Monday was based on a preliminary assessment of survey responses. A final reading will be published on Sept. 30. A separate index compiled by the authorities in Beijing, more focused on larger, state-owned enterprises of the kind that benefit from state-led investment, will be released on Oct. 1.

Readings above 50 indicate expansion, so the September figure provided more evidence that the Chinese manufacturing sector was growing again after several months of contraction, while the economy as a whole had stopped decelerating.

The firmer reading “was supported by simultaneous improvements of external and domestic demand conditions,” Qu Hongbin, chief China economist at HSBC, said in a note accompanying the data release.

Faced with slowing growth, the authorities in Beijing have in recent months announced a series of measures aimed at increasing economic activity.

Although China has avoided a repeat of the sweeping, large-scale stimulus of late 2008 and 2009, the smaller-scale, more targeted support measures of the last year or so have helped to put a floor under the economy, analysts have said.

Measures announced this year have included tax cuts for small businesses and measures aimed at speeding up railroad construction in inland and poor areas. In a bid to raise the economy’s efficiency, the authorities have also issued instructions to more than 1,400 companies in 19 industries to cut excess production capacity this year.

“We expect a more sustained recovery as the further filtering-through of fine-tuning measures should lift domestic demand. This will create more favorable conditions to push forward reforms, which should in turn boost mid- and long-term growth outlooks,” Mr. Qu wrote.

Improving demand in the beleaguered United States and European economies also is helping activity in China. New orders for exports picked up speed in September, the HSBC poll showed, echoing a trend seen in trade data for August, released this month.

“Looking ahead, we expect the cyclical pickup to be consolidated in the coming quarters, benefiting from the strengthening global demand outlook, which supports growth directly via stronger exports and by improving sentiment and profitability in industry and thus the willingness to invest,” wrote Louis Kuijs, a China economist at RBS in Hong Kong.

The latest signs of China’s resilience on Monday helped push Chinese stocks higher; the Shanghai composite rose 1.33 percent.

Still, many analysts continued to caution that the upturn may not last into next year, given that the leadership in Beijing will have to step up its efforts to combat issues — like overcapacity in some major industries, often poor allocation of capital, and a buildup in debt over the last few years — that haunt China’s economy.

“The third plenary session of the Central Committee, which is to be held this November, will lay out the agenda of economic reform going ahead,” said Zhu Haibin, chief China economist at JPMorgan Chase. “Addressing these problems in the coming years implies that the economic recovery tends to be limited.”

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Staying Alive: Something in My Last Post Didn’t Add Up

Staying Alive

The struggles of a business trying to survive.

Well, commenters to my last post quickly revealed why I am not a wealthy and successful businessman.

My calculations of the cash cost of training “Bill,” our theoretical new engineer, were faulty. In my desire to make a point, I included the wage cost of both workers involved as additional expense of training, when I should have been sufficiently appalled by the value of the lost production. As Arend from Europe pointed out, the real cost of training, during the period when the engineer is fully occupied in training the newbie, is $170 per hour, or $6,800. The cost of the ramp-up period, 13 weeks, is the cost of the lost shop output ($80) less the output of an engineer at 50 percent efficiency ($45), which equals a cost of $35 per hour, for an additional expense of $18,200. The total cost is $25,000, not $43,720. But I stand by my original thesis: Training is expensive.

Many commenters objected to the concept that training a worker should be considered a cost, emphasizing that the additional engineering capacity would provide for more output, and presumably more profit, at some point in the future. I have no beef with this thinking, but that’s not what I was writing about. I stopped my analysis at the consideration of the amount of money involved in training, because that in itself is a huge problem for a struggling business. You can’t reap the rewards if you can’t afford the investment. Twenty-five thousand dollars is a quarter of my average working capital this year. I would think long and hard about whether spending it makes me vulnerable to some unexpected event.

If I do make this change in my own shop floor, my bank balance isn’t the only place where I will take a hit. I will also need to add in the expense of finding and training a replacement for Bill. Putting a new guy out on the floor means that the shop foreman is subjected to the same kind of distraction that my engineer was. No one starts a new job and operates at 100 percent efficiency on Day 1, at least not in a highly skilled shop like ours. So there’s a ripple effect from new hires and lateral promotions that inevitably affects our shipping schedule, and that means further cash flow disruption, as well as the potential for issues with unhappy clients.

If my business had extra cash on hand, and the engineer had a bunch of extra time available, then I would feel much more comfortable about starting training. Unfortunately, we are still recovering from a slow spring, and I need the second guy only because the first one is tapped out. This is what stinks about being small. You just don’t have extra capacity. The leap from one engineer to two is hard, which is why I found this comment from HT to be so unrealistic. Here’s the meat of HT’s thesis:

1) You are operating below 100 percent capacity, so Bill has some downtime when he’s not doing billable bench labor, and he can fill that time with training.
2) There are other workers who also have downtime during which they can pick up some of Bill’s work, so even some of Bill’s “lost billable hours” are compensated for.
3) Bill will be willing to put in extra hours during this training, so even if you are paying him hourly, these extra hours are not “lost billable hours” since he wouldn’t have worked those hours before the training.
4) A full-time employee with benefits like Bill may be salaried, in which case you could ask him to put in a significant amount of extra hours during the training period, costing you $0 per hour and further mitigating Bill’s reduced billable hour output.

HT, I appreciate your contribution, but none of that applies to us. There is no such thing as downtime. There is time spent doing things we are paid for, and there is all of the other time. As long as we have a backlog of work, and we always do, time spent on any other activity is a cost. It’s not just the value of the work we didn’t do, but there are also the fixed costs: rent, electricity, heat, insurance, etc. They never stop. Ideally, neither would my workers. If they are willing to work extra hours, I want that time devoted to paid work.

In my last post, I tossed in my observations on using specialized drafting software — and its implications for hiring — as a kind of afterthought. I was surprised at the lively discussion that resulted. Many people wondered why I don’t hire workers fresh out of community college to fill the engineering position. They correctly observed that this shifts the costs away from me and onto an institution that can deliver training more efficiently.

I should tell you that I made my only engineering hire in 1997, so it’s been 15 years since I last encountered this problem. My engineer started on the shop floor, and worked there for two years before I moved him into the office. The world has changed since he started. Graduates these days do have computer skills, but they tend to be entirely divorced from the experience of making physical objects. Shop class and apprenticeships are gone. I discussed this with my engineer and my shop foreman today, and we all agreed that the lack of shop-floor experience would be a crippling impediment for the next engineer.

College courses do provide a good introduction to how to use a computer program, but the real issue is knowing what to draw. Manufacturing any physical object is complicated. Our primary material, wood, is more difficult than most. And our procedures on the shop floor are varied and subtle. It took years of close collaboration between my engineer and my shop floor guys to develop programming that works for us. A designer who doesn’t know the shop floor in his bones will cause more trouble than he’s worth. (I don’t mean to be sexist, but the vast majority of cabinetmakers are guys.) I’ll stick with my plan to move an experienced bench hand into the office as the second engineer.

I should also add that I made the decision to use PowerCADD in 1996, when I was new to computers. Autocad didn’t have quite the dominant position then that it has today, so it wasn’t obvious that my choice would cause problems 16 years later. This was also before I had access to the Internet, so I wasn’t able to solicit a wide range of opinions about which program to choose.  An architect I knew was using PowerCADD, he loved it, and that was good enough for me. And, to be honest, it really hasn’t been an issue in day-to-day operations. We don’t need to exchange drawings with architects very often. We did do more work with architects in 2007 and 2008, so we bought a copy of Autocad and my engineer learned to do basic work with it. Every now and then we fire it up to read or translate a drawing. That’s been fine.

Every program can read pdf formats these days, so that’s how we share drawings when we need to. Also, Autocad and PowerCADD are conceptually quite different. PowerCADD is much better at making the proposals that we show clients. In my mind this is a classic “ain’t broke, don’t fix it” situation. There’s never been a day when switching to Autocad was the best use of our time, and I don’t see that day arriving anytime soon. We’ll keep things as they are as long as my computers will run PowerCADD.

Thanks to all of the commenters. I always appreciate the effort people put into them, even when my own shortcomings are exposed. I have never claimed to be a genius, and I offer my own failures for their educational value. If they help another small-business owner avoid a fatal error, we’ve done some good.

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.

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Europe to Propose a New System to Allocate Airport Slots

PARIS — The European Commission on Thursday is expected to propose a new market-based system for allocating takeoff and landing slots at airports to help increase efficiency and reduce travel delays.

The draft legislation also calls for stricter rules for the use of existing airport slots, requiring airlines to use at least 85 percent of their allocated positions in a given year — up from 80 percent — or risk forfeiting their unused capacity to other airlines.

The latest proposal does not include an expected provision to enable the auctioning of new airport slots, a plan that had been strongly opposed by airlines.

According to Siim Kallas, the European Union’s commissioner for transport, the proposed measures on slots would allow airports across the union’s 27 member states to handle 24 million more passengers a year by 2025, generating 5 billion euros (about $6.67 billion) in additional economic activity and creating up to 62,000 jobs.

“Europe’s airports are facing a capacity crunch,” Mr. Kallas said in remarks prepared before the official announcement of the proposals at midday Thursday in Brussels. “If business and the traveling public are to take best advantage of the air network, we have to act now.”

Current European Union law does not expressly allow for the trading of airport slots among airlines, and so far Britain is the only member state where a secondary market has developed. Elsewhere, slots have tended to change hands informally, with terms negotiated privately.

The commission argues that the existing system is inefficient and hinders competition among airlines. By creating a market that would assign a financial value to slots, Brussels hopes to create incentives for airlines to sell underused slots to other carriers that could make better use of the capacity.

Five European airports are already operating at or near full capacity: Heathrow and Gatwick near London; Frankfurt and Düsseldorf in Germany and Linate airport in Milan. According to the commission, that number could nearly quadruple by 2030 — and include major hubs like Charles de Gaulle in Paris — if air traffic continues to grow at its current pace of 4 percent to 5 percent a year.

“The resulting congestion could mean delays for half of all flights across the network,” Mr. Kallas said.

The commission backed down from proposing that new airport capacity be allocated by auction. Currently, when an airport expands, additional takeoff and landing slots are allocated by an independent coordinator, which sets aside 50 percent of them for new entrants. The other 50 percent goes to incumbent airlines on a first-come-first-served basis.

The airline industry has successfully fought against slot auctions in the past, arguing that they amount to a tax on the industry, because airlines do not now pay for new slots. A similar plan to auction slots at Kennedy and La Guardia airports in New York and Newark Liberty International Airport in New Jersey was abandoned in 2009 because of opposition from airlines and the airports.

Airlines have generally supported the creation of a secondary market for slots, as well as penalties for airlines that hold on to slots that they do not use. But they are critical of the so-called use-it-or-lose-it approach, which they say creates perverse incentives that are harmful to the environment.

“Increasing the threshold to 85 percent will only encourage airlines to fly empty planes to preserve their slots,” Tony Tyler, secretary general of the International Air Transport Association, an airline lobby group, said at briefing in Paris last month.

The draft legislation also includes measures aimed at increasing competition among providers of baggage handling and other ground services at airports. It also seeks to give Brussels a right to more closely scrutinize measures taken by member states to restrict airport noise, to ensure that the economic effects of such curbs are taken into account.

The commission’s proposals would need to be approved by the European Parliament and all 27 member states before they could become law, which could take a year or more.

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High & Low Finance: Accounting That Comes in Flavors

That is not going to happen.

Instead, it appears increasingly likely that for a substantial period of time there will be two sets of accounting rules in the United States, with companies able to choose between American or global rules.

And while most countries, including the United States, will say they embrace international accounting standards, there may be numerous flavors of them, with investors perhaps having trouble figuring out just how comparable financial statements really are.

The Securities and Exchange Commission is moving toward a formal decision, promised this year, on whether to adopt international financial reporting standards, known as I.F.R.S., as set by the International Accounting Standards Board. It already allows foreign companies whose securities trade in the United States to use those standards. It is expected to decide if, and when, to allow American companies to use them as well. It will also decide whether to require companies to use such standards.

Any decision will offend some people. Many international companies want to use the international standards everywhere, saying that would improve efficiency by no longer forcing them to use one set of rules in some countries and a different set at home.

But other American companies, particularly smaller ones, fear the expense involved in learning and applying a different set of rules. Some investors are highly suspicious, and fear that international standard setting will be more influenced by politics. Other investors think the political risk will be far higher if the United States does not sign on.

One member of the S.E.C., Kathleen L. Casey, said in a speech last week that the commission should move promptly to accept the international standards, saying investors would benefit from “accounting standards that provide investors with highly comparable, decision-useful information about businesses without regard to their domicile” and that American acceptance will lead to “continued improvements in the efficiency of the global capital markets.”

But in the same speech, she made clear that she did not really want one set of rules for everyone. She said any American company that did not like the international standards should be allowed to opt out, “at least initially, if not permanently.”

Mary L. Schapiro, the chairwoman of the S.E.C., has not made clear what she wants to do, and members of the S.E.C. staff have suggested a sort of middle ground between the two alternatives that have seemed most likely.

Rather than “endorsement,” in which the S.E.C. would simply accept the international rules, or “convergence,” in which American rules would move toward the international standards and eventually be so similar that it would not matter, Paul A. Beswick, the deputy chief accountant of the commission, suggested “condorsement,” a sort of combination of the two.

Under that outcome, the American standard setter, the Financial Accounting Standards Board, would continue to set United States GAAP — Generally Accepted Accounting Principles — and would consider each new international standard.

“The ideal would be to incorporate such standards as issued by the I.A.S.B. without modification,” he said. “However, criteria would need to be established for F.A.S.B.’s consideration of endorsing or incorporating standards — for example, whether incorporating a given standard is in the interests of U.S. investors or the U.S. capital markets.”

If that were to happen, then there would be an American flavor of international financial reporting standards, just as there is now a European flavor. The European Commission, under heavy pressure from French banks, agreed to allow banks to opt out of part of one rule set by the international accounting board.

For practical purposes, there once was a single set of accounting standards for most major international companies —United States GAAP. Companies that wanted to raise capital internationally needed a United States listing, and that was available only if they either used GAAP or reconciled their statements to GAAP. Not all companies did so, but many did.

The road away from GAAP is partly a story of technological change and of globalization of markets. It is now quite easy for American investors, whether institutions or individuals, to buy shares on overseas exchanges, and for companies to tap American capital markets without registering with the S.E.C. It is also a story of others chafing under American dominance and of an international board that has established a respectable record of standard setting.

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