Doing Business in China: Is the Big Mac Index Going Down the Commode?

By: Ben Vickery
VP Research, Asian Markets
Blacksand Research





Part I: How Many Burgers Can They Buy?

When we consider both the opportunities and challenges of doing business in today’s global economy, it is often useful (and at the very least, interesting!) to employ comparative indices. These range from using comparative wages to get a better understanding of labor as an input for production costs to employing more complex indices that analyze qualitative and quantitative data to rank the best countries to do business in. Based upon my recent visit to China, perhaps I can suggest a new index as well: the Toilet Index.

First, let’s look at comparative wages. Low-cost production is obviously a primary competitive advantage that China and other nations have leveraged over the last decade. However, how much really is the average wage in China these days?

One of the better studies I’ve come across on this topic was published in the Bureau of Labor Statistics’ August, 2005 Monthly Labor Review. Judith Banister’s “Manufacturing Compensation in China” found that, based on 2002 earnings data, China’s 30 million urban manufacturing employees made approximately 95 cents per hour, while the reported 71 million manufacturing employees outside the cities made about 41 cents per hour. Taken together, the average Chinese manufacturing wage came out to 57 cents per hour, which is about 3% that of U.S. manufacturing wages. Additionally, Newly China’s newly industrialized Asian neighbors had labor costs roughly ten times that of China, and Mexico and Brazil’s manufacturing wages were roughly four times that of their Chinese counterparts.

In other words, China indeed enjoys a significant advantage of low-cost labor when it comes to production, not just when it comes to U.S. manufacturing, but also compared to China’s Asian rivals and other nations that have tapped into low-cost labor in the past as a competitive advantage. While manufacturing wages are rising in China urban centers, particularly along the East Coast, the nation’s 1.3 billion-person labor pool, as well as Chinese efforts to plan and grow new manufacturing clusters in the nation’s interior (is, China’s “Go West” program), means that this should be a Chinese strength for at least the short to mid-term future.

There have also been various efforts to compare the cost of living on an international basis. My favorite is the “Big Mac Index,” produced by the Economist. To quote from their online site:

“Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our "basket" is a McDonald's Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued."

The most interesting thing about the Big Mac index is that, as noted above, it helps one understand the degree to which a given current maybe under- or overvalued. In the case of China, as of a few months ago, a Big Mac is about $1.30 versus the U.S. price of $3.15. This means that the yuan is 59% undervalued. (As a personal aside, I must report that during my time in China, I never actually dined at McDonald’s among my epicurean ramblings, though I must have spotted literally hundreds of locations in Beijing, Shanghai, and Hong Kong.)

In Part II of this Blog entry, I’ll discuss indices that can be used to consider business strategy, such as Michael Porter’s Business Competitiveness Index. Plus, I have a new index in mind that I’ll “keep the lid on” for now…