If you are in business for yourself or run a company, shouldn't you be reading more about China? After all it is now the second-largest economy in the world now, and it seems to be growing and it should keep on growing for quite a while. There are far too many people who are too willing to label China in a single sentence, and think they understand what China is all about - can you imagine trying to describe the USA in one-sentence? It is for this reason that I like to recommend a very good book that I think you should read, the name of the book is;
"China * INC - How the Rise of the Next Super Power Challenges America and the World," by Ted C. Fishman, Scribner Publishing, a Simon Schuster Company - MacMillian Licensed, New York, NY, 2005. (pp 342), ISBN: 0-743-5752-9.
This book is extremely eye-opening and very well written, the author writes for the New York Times Magazine, Money, Worth, USA Today, Business 2.0, and also was a trader at the Chicago Mercantile Exchange. His book takes us from Communist China to Capitalist Super Power, and talks about how it is expanding at roughly three-times the US growth rate, (approximately 10% year-over-year), and how 300 million peasant farmers left their work in agriculture to work in factories. This was the largest migration in human history from rural China to the Guangdong Province and other factory areas.
It is estimated that this cost 2.9 million jobs in manufacturing in the United States. Speaking of which I don't want to cut into Mr. Fishman's excellent book here, but I would like to recommend another very good reading;
"How the Farmers Brought Change to China," by Kate Xaio Zhou, 1996.
He suggests that China is dangerously competitive. It is now getting into computers, auto industry, airlines, aircraft manufacturing, and even big pharma. In this book the author tells all about it, along with the harsh reality that follows. China is already the largest maker of computer electronics and China has over 100 cities with over 1 million in population while the United States only has nine. The American Chinese moving back to China to join in the prosperity is causing a brain drain, meanwhile as their economy increases that 10% year-over-year many of the best and brightest with advanced degrees and the ability to research who have been US educated are also leaving. Worse, the brain drain is accelerating.
Today, China is considered the world's factory floor, it is our greatest economic threat, actually also for the entire developed world and it is also paradoxically the greatest opportunity. China's real GDP including its illegal underground economy is at least 15% higher say some economists. China has a huge underground economy that is often overlooked. The book also lets us realize that 40% of all the furniture that was made in the United States, some of what went to NAFTA countries is now all basically made in China.
China also makes ships, submarines, heavy equipment, trucks, cars, airplanes, satellites, rockets, and can build just about anything; just look at the Great Wall of China, or the World's Largest Dam (Three Gorges Dam) so that's nothing new. It is difficult to keep China as a customer and supplier at the same time as keep them at bay as a competitor, it's almost a no win situation states the author. The United States is not the only one with problems - also consider China's effect on Canada, Brazil, Australia, Germany, Japan and Mexico. China has unbalanced trade with the good number of first world countries.
Of course, China is not without its own problems and there are many problems in the banking sector, the potential for a peasant revolt, huge pollution issues, and currency valuations, and worst of all if they have a bubble burst it can make any recession that has ever occurred in the United States look like a child's game. In fact, it would also hurt the United States, if something like that happen in China.
Another problem would be China's Mao resurgence, which could cause a revolution and a nightmare, and China has not yet had their industrial revolution. By 2050 China could be two thirds larger than the current US economy at the present growth rate, which many believe is completely unsustainable; stating that China is overheating, and can produce enough to supply five times what the US could buy. And that's a real problem because there are not five markets the size of the United States. In fact, there may only be 2 1/2 or three, if you consider the European Union, all the Asian countries combined. Meaning that as China increases it faces severe overcapacity problems.
In the mid-1950s China copied the USSR's form of Stalin collectivism with regard to animals, farms, land, etc. The collectives were required to meet production goals, and they couldn't migrate to the cities or buy food there when passing through. In fact, the farmers who were producing the food were first to go hungry if production was not met. Farmers were essentially turned into slaves in the 1960s and 70s. The Farmers secretly plotting to subvert this system for themselves, created small collectivism local farms and co-ops and they work much better than the forced collectivism, then trading amongst themselves as well as supplying the excess. When they were found out the Communist leaders decided to use that in their favor and adopt those principles so that production increased.
In the year 2000 40% of Chinese made less than two dollars a day - today there are 470 million Chinese in the middle class, which makes over three dollars per day or about 00 per year. Eventually, the farmers create cash networks and private banking and once rural farmers were allowed to go into business entrepreneurialism accelerated. Things started to work pretty good and yet, they weren't so good for American manufacturers. For instance just as one belt factory closed in Massachusetts, 1000 new belt factories opened in China, stated the author. Nevertheless, it's hard to beat the wage as many Chinese factories pay only $.40 per hour.
Shenzhen-Hong Kongers financed and run 30,000 factories attracting some 6 million rural workers. Beijing wants to out modernize Shanghai meaning they also want to out Modernize New York City, Tokyo, London, and all the rest as well. But in all this modernization in the factories China still uses low-grade sulfur coal for power, they have lots of it and it burns very dirty, meanwhile they must build new power plants constantly to keep up with the demand. China will need at minimum the same amount of energy as the USA, and in the end probably two times as much.
The Chinese week pollution standards for cars is even worse, they have no standards at all (at the time of the publishing of this book, some things have now changed), not to mention China does not have enough roads for all the cars they are selling now. Many Chinese consider pet ownership a sign of decadence, but it is a growing past time to have a pet. Personal Tech is also becoming the thing to have, as a sign of wealth, status, and arrival.
China's entry into the World Trade Organization in 2001 changed everything forever, and still, Chinese trade barriers seem to come and go without warning, often claiming American jobs. China's industrial might obviously is causing a stir in nearby Asian countries like Thailand and Malaysia. The decentralizing of China will be the good for America in the long term, and even American farmers will benefit as Chinese eating more and more besides just fish and rice. One serious issue is how China is also taking factory jobs in Mexico, and when Mexicans lose their job in the factories in Mexico, they come to America to work, and they send back remains to Mexico exacerbating the deficit in money flows. In the end America loses all the way around.
Australia on the other hand wants China to keep growing because they sell them lots of resources. Australia has lots of resources to sell, and China doesn't seem to be able to quench its thirst for these resources. Automakers in the US are forcing their suppliers into China, telling their suppliers that they need the "China price" for the car parts, and therefore, small manufacturing companies cannot possibly survive the United States in states like IN, OH, MI, IL, KY, TN, etc. and still supply the auto industry. This will eventually hollow out world manufacturing.
Between 2002 and 2003 one and eight jobs in US manufacturing went to China. In North Carolina it was one in five jobs. China does buy quite a bit from other countries, unfortunately they are buying more manufacturing machines from places like Germany, which are also replacing the German workers. It's good to export to China but each machine kills more jobs in the US and other industrialized nations where once healthy companies were paying high wages, thus now getting out of the business which means there will be no one left to buy expensive products, therefore everyone will have to buy cheap Chinese goods. Although the argument is circular it is not ending now.
One prediction is that 10% or 14 million jobs will be transferred overseas in the next decade alone, we are half way through since this author wrote this book, he's more than right on so far. Before the global economic crisis one third of the automotive growth in the world came from China. China is known for stealing designs of popular automobiles and will not enforce international patents, and the Chinese government says; "companies are liberally influenced by competitors," and that's why the cars tend to look the same, as if that is an excuse for stealing the designs.
There are some Chinese automakers who are exporting Chinese cars with Toyota logos on them to the Middle East, selling them throughout Asia, and even trying to peddle their wares in Australia. Auto imports into China require huge cost cuts and even with the price is very high comparatively speaking, US quality automobiles are still very much in demand in China.
In fact, in the Middle East, Jeep Cherokee's for only ,000 are being sold, and they are nearly identical in looks, but the Chinese quality isn't there, in five years it might be able to compete to comparable models from the US and Japan, but that's not happening right now, many people the industry say that the cars made in China are junk and not comparable. Of course that's what they said about Honda Toyota and Dotsun once upon a time.
Will safety standards in the US be able to keep Chinese cars out of US markets? It is doubtful, as Warren Buffett already owns a good chunk of one of the Chinese hybrid companies, which makes electric cars, and surely he has the influence to get them here. In other words, we will all be driving Chinese cars eventually it's only a matter of time.
What happens when high-tech Chinese factory workers make cheap manufacturing robots, what happens after that? That is one question that the book hints at. Today China is producing five times as many engineers each year as US colleges are. 40% of Chinese college students are on an engineering track. China makes MRI software now, and many of the US big pharma companies are exporting their manufacturing jobs to China and outsourcing the making of products.
From an investment standpoint it's an interesting market, although it sets the United States companies up for pirating of patents and counterfeiting. The Chinese are producing counterfeit beer, counterfeit wine, and often put them in shoddy bottles, and when someone cuts their hand they only remember the logo, not the fact that that company never produced in the first place. China produces fake Starbucks, Coke, counterfeit cheese, ice cream, shampoo and even Cisco and 3Com computer cards. They counterfeit cigarettes, tires, batteries, clothes with name brands, shoes, car parks, and even Nintendo.
They also counterfeit Swiss watches, and Gucci watches, which makes it almost impossible to tell that it isn't real. They produce billion worth of Ford car parts each year that are actually for, not to mention all the DVDs, movies, songs, books and is one reason analysts said; "you can't sue them all," and perhaps I should suggest and propose a counterfeit stimulus package for US companies. MP3 players, Harry Potter, fake vaccines, Viagra, and even Yamaha mopeds. Toyota vehicles with the logos on them which have been made by Greeley auto in China have been found. 90% of Microsoft products sold in China are counterfeit. Many of the counterfeit factories are actually financed by foreigners to top it all off.
Chinese entrepreneurs are reading about Carnegie, Ziglar, Dell, Ford, and they are learning all about American management and they are beating us at our own game, using our technology, and counterfeit products. Text messaging software most of it is counterfeited. They say that the Adobe software which is counterfeit in China works actually better than the original. Since 90% of all the software sold in China is bootleg, and since the citizens can afford the real software, somehow they feel they are justified.
The author also explains the interdependency between the US and China. China consumes half of the world pork. In one quarter in (2000) 58 US companies, 55 European companies, and 33 Asian companies all announced moving jobs to China. Delphi is moving jobs to Mexico and to China also, the unions are very upset that the company is allowing the jobs to migrate at such a rapid pace. And they believe that this pushes costs down causing nonunion jobs to also migrate to compete, also asserts the author. And the author asks the dubious question; is relentless innovation really the key, is it really?
I believe it isn't because, if they steal the innovations as fast as we create them how did we help ourselves by spending all that money in R&D. If we attempt to make the US the leader in innovation again, we will have to consider that question very closely. Meanwhile, all of China's trade with all the Asian nations just barely equals the amount of trade China has with the United States, which begins to show you the problem.
If the Chinese citizens doubled their income, they would be the same size GDP is the United States. If they doubled it again and realize that this would only be a day, their economy would be 2.5 times as large the United States. The writing is on the wall, it should be obvious where China is going.
This book was a scary book to read, but one that I think every American should read, so they know exactly what's going on in the world, and then I think they should vote accordingly for elected representatives who will demand accountability and better trade policies in the future. Please consider all this.
