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China's Big Challenge Is Ours, Too
07/29/2010 2:44 pm EST
Americans won't be spectators in China's next big changes; we will be deeply involved, whether we like it or not.
That’s because the critical transition China is going through will affect our businesses and our livelihoods.
As I laid out in the last two columns, China is trying to move from being an export-oriented manufacturer to boosting domestic consumption, developing the country’s interior, and becoming a more technologically advanced, high-value-added economy.
That will inevitably spur more conflicts with the US, Europe, and Japan about currency and trade issues and intellectual property. Some companies are seriously reevaluating their investments in China, which once looked like the Promised Land.
And American businesses and workers shouldn’t expect much let-up in the competitive pressures China is putting on prices and wages. China’s transition is bound to be gradual, and in the meantime it needs to keep revving up its export machine to spur growth.
“I see the next ten years as more driven by friction as the Chinese compete with the Europeans, Japanese, and Americans,” says Christopher McNally, fellow of the East-West Center and an expert on China.
“’I really worry about China,’” Mr. Immelt [said,] accusing the Chinese government of becoming increasingly protectionist. “‘I am not sure that in the end they want any of us to win, or any of us to be successful.’”
Immelt, of course, tried to walk that quote back, but he’s not the only one complaining. We all know about Google’s (Nasdaq: GOOG) travails in China, and Microsoft’s (Nasdaq: MSFT) constant kvetching about software piracy there over the years.
Even the stodgy Germans are objecting—and they’re among the most successful exporters to China.
“Two of Germany's leading industrialists—Jürgen Hambrecht, chairman of chemical giant BASF SE and Peter Löscher, chief executive of conglomerate Siemens AG (NYSE: SI)—raised complaints about a range of Chinese policies toward foreign business during a public meeting with Chinese Premier Wen Jiabao and visiting German Chancellor Angela Merkel,” The Wall Street Journal reported.
“The concerns center on policies that foreign executives feel put them at a disadvantage against increasingly potent Chinese competitors, or compel them to transfer valuable technology to China.”
|Robot plays piano at the Shanghai Science and Technology Museum|
One Japanese consortium led by Kawasaki Heavy Industries learned that lesson the hard way when it joined a Chinese company, Sifang, to manufacture “bullet trains,” for which the Japanese are world-renowned.
But by two years into the six-year deal, “Sifang had ‘digested’ all the technology required for their manufacture,” the FT reported.
Result: China had its bullet trains, and Sifang, not the Japanese companies that originally provided the technology, will likely reap the rewards of supplying China’s rapidly growing high-speed rail network—and those of other countries, too.
So, thank you very much. Now, go home.
Don’t get me wrong: I’m not trying to demonize China, which is acting thoroughly in its own self-interest. Along with honest innovation, theft of ideas is just part of capitalism.
Think of all the lawyers in Silicon Valley who got rich helping major tech companies sue each other for patent infringement. And they didn’t call some of the great Gilded Age industrialists “robber barons” for nothing.
Except now, the shoe is on the other foot, and US companies need to protect themselves and their shareholders when they do business in China.
Next: China’s competitive threat to US workers|pagebreak|
So do businesses and workers who only do business here. True, wages are rising in China as the government tries to boost income and consumption. But they are still so far behind those of developed countries that the deep cost advantage of producing goods (and even some services) in China won’t go away soon.
Stephen Roach, chairman of Morgan Stanley Asia, who will be teaching at Yale University in the fall, wrote recently in The Economist:
“Compensation of Chinese manufacturing workers was only $0.81 per hour in 2006—just 2.7% of comparable costs in the US, 3.4% of those in Japan, and 2.2% of compensation rates in Europe…They underscore the magnitude of the gap between China and the developed world—and how difficult it would be to close that gap even under the most excessive of Chinese wage inflation scenarios.”
Even if they rose to the unlikely amount of $1.98 an hour since 2006, Roach writes, “Chinese hourly compensation in manufacturing would still be less than 15% of that elsewhere in East Asia (ex Japan) and only about half the pay rate in Mexico.”
You need to add a lot of value to compete with that.
Lowell Bryan, a director of the global consulting firm McKinsey & Co. drew some troubling conclusions on this issue in the June McKinsey Quarterly.
Capital and commodities trade globally, while companies can arbitrage differences in labor costs, he argues. “The cost of performing the same job in different nations can vary significantly,” he writes. “As a result, multinational corporations that are able to source their production in emerging markets can enjoy large labor cost savings.”
Meanwhile, he says, productivity of workers in emerging markets is rising sharply.
But unfortunately for us, “a significant fraction of this emerging-world labor displaces jobs that would otherwise be created in Europe, Japan, and the United States,” he says. “This may be the underlying reason why unemployment in Europe, Japan, and the United States is becoming more structural rather than cyclical and may get worse over time…”
Also, Chinese manufacturers are moving up the value chain to produce more sophisticated goods than socks, underwear, and wooden toys. Chinese telecom manufacturer Huawei led the world in patents last year, McKinsey reports.And on our recent trip to China, families mobbed the Shanghai Museum of Science and Technology on Sunday morning, where kids sang karaoke with a robot playing the piano. A whole wall in this impressive new museum displays picture of members of China’s Academy of Science. The message: You can do this, too. I found another example of burgeoning Chinese innovation in an unlikely source—Home Theater magazine, which recently reviewed speakers made by a Taiwanese-owned company under the venerable Wharfedale brand.
Making good speakers is as much art as science. Americans and British engineers excel at it, and even the formidable Japanese never really cracked the code. But now the Chinese are coming.
“In the factory [in Shenzhen] where they are produced,” reviewer Mark Fleischmann writes, “ the designer is virtually omnipotent…The on-site tool and die shop makes parts for him, and he can redesign them as many times as he wants…It also lets him stuff products with high-quality parts at a fraction of what it would cost somewhere else.
“This means you get better sound. It also means you get unbeatable value.”
Result: The Wharfedale home-theater speaker set, priced at $599, won a coveted Editor’s Pick from the magazine, and ranks with speakers that sell for three and four times that price.
Back in 1995, President Bill Clinton told China’s president Jiang Zemin that America had more to fear from a weak China than a strong China.
We will find out soon enough whether that’s true.
Howard R. Gold is executive editor of MoneyShow.com. The views expressed here are his own.
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