What Fuels Chinas Growth Ben Vickery Manufacturing Futures Group MEP

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What Fuels Chinas Growth?Ben
VickeryManufacturing Futures GroupMEP
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Why is Chinas Manufacturing Capacity Growing at
Historic Levels?

• Factors include
• Foreign Direct Investment
• International Trade Policy
• Labor Supply
• Currency Policy
• Market Promise and Exports
• Education and Recruitment
• Formal and Informal IP Policy
• Transition From Low to High Tech Production

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A Quick Look At Chinaespecially Beijing,
Shanghai and Guangzhou
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Three clusters for Chinese transformation
Beijing, Shanghai and Guangzhou

• The Guangdong Region A key manufacturing base
  for China, whose investors include Intel, Honda,
  IBM and Wal-Mart, among others (also the
  originator of SARS).
• The Shanghai Region 250 of the Fortune 500
  invest here, and the city has become world-class
  in the last decade.
• The Beijing Region Motorola (with more FDI than
  any other MNC) focuses efforts here, top
  universities are located here, and the area is
  gearing up for 2008 Summer Olympics.
• These three areas represent 7.5 of Chinas land
  and 1.25 of its population, but also garner 73
  of Chinas foreign direct investment and creates
  30 of the nations GDP!
• Dr. Wehan Tang, Economist of the Delaware
  River Port Authority

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Economic Westernization Leads to Massive FDI

• As a result of the Chinese governments economic
  reform efforts, particularly in Eastern China,
  the nation has experienced an explosion of
  Foreign Direct Investment (FDI).

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China surpassed the U.S. in FDI for the first
time in 2002Sources United Nations Conference
on Trade and Development (UNCTAD), U.S. Bureau of
Economic Analysis, Bank of China
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FDI Trends

• As recently as 2000, the U.S. received roughly
  seven times as much FDI as China, yet 2002 marked
  the first point at which China (52.7 billion)
  surpassed the U.S. (23.6 billion) to become the
  leading global FDI recipient.
• FDI in China by U.S. firms has increased from
  only 200 million in 1989 to more than 7.8
  billion in 2000. U.S.-China Security Review
  Commission (6/30/01)
• FDI in China is expected to reach 100 billion in
  every year of the 11th Five-Year Plan period
  (2006-10). China Development Research Center
• A major reason behind the big increase in
  China's foreign direct investment is that more
  transnational corporations are moving their
  manufacturing operations to China. Peoples
  Daily (1/2/03)

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International Trade Policy

• Chinas economic Westernization is being
  accelerated by international trade policy,
  particularly entry into the World Trade
  Organization (WTO).
• A five year process begun in November 2001.
• Average tariffs on products will gradually drop
  below 10 (versus 44 in 1991).
• Nontariff barriers (quotas, licensing) will ease.
• Increases in jointly-owned enterprises (9 in
  1990, 40 now, perhaps 60 by 2006).
• Reforms of state-run monopolies expected to
  accelerate in the next three years, with new
  antimonopoly laws driving restructuring of
  Chinas service industries (such as
  telecommunications).

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WTO Impacts Continued

• Chinese deregulation should streamline
  regulations and simplify administrative
  procedures. 789 of the 4000 types of business
  permits and authorizations are slated for
  elimination by the end of 2003.
• Chinas government will be required to redirect
  its efforts to focus on current and growing
  social issues, including pensions, unemployment
  and health benefits, safety and health measures.
  This is also being driven by the extreme economic
  stratification between Chinas East and West (Go
  West initiative).
• Reform of state-controlled bankingthe removal of
  Chinas safety net practice of covering firm by
  state-owned banks (which will hopefully create
  opportunities for U.S. and other Western
  financial institutions).

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What WTO Entry Means to China

• Galvanized by its WTO admission, China's
  macroeconomic situation has improved remarkably.
  Its gross domestic product (GDP) grew by 7.9 per
  cent year on year in the first three quarters of
  this year.
• Last year many people were worried over China's
  trade situation in the wake of its WTO entry.
  Some famous institutions and scholars predicted a
  less than 6 per cent growth rate for China's
  trade sector.
• The fact is China's exports increased by 19.4 per
  cent in the first three quarters of this year
  2002. Its total trade volume during that period
  was US445.1 billion, an 18.3 per cent increase
  year on year
• A WTO report released on October 10 this year
  said that China has become the fourth largest
  trade body in the world following the United
  States, European Union and Japan.
• The rapid growth in China's trade volume is
  directly attributable to the improved trade
  environment following its WTO entry.
• China Daily (11/18/02)

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Ready Access to Cheap Labor

• These low labor costs are also driven by Chinas
  almost inexhaustible native labor supply, with
  nearly 1.3 billion inhabitants.
• This contrasts with the economic challenge posed
  by Japan in the 1980s, as Japans total
  population has remained relatively steady since
  1985, and is currently about 1/10th that of
  China.
• Nearly 700 million Chinese live in the West, and
  these rural peasants flock to the East for
  improved pay and living conditions.
• The standard Chinese labor rate is roughly 40
  cents per hour, or about 1/40th that of the U.S.
  Think about that the next time youre at Wal-Mart
  and wonder how they can sell Chinese-manufactured
  goods so cheaply!

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Currency Policy

• Chinas continued under valuation of its currency
  has kept the cost of Chinese labor and good
  extremely low.
• It maintains an extremely tight trading band on
  the yuan, or Renmenbi (RMB), between 8.276 and
  8.280 to the dollar, varying by only 0.02 since
  April 2000.
• This policy has helped the nation to accumulate
  280 billion of currency reserves, including 75
  billion alone in 2002.
• China, which ran an estimated 100 billion
  trade surplus with the U.S. for 2002, maintains
  heavy controls over the convertibility of the
  yuanWhile Beijing told top Bush administration
  officials in 2001 that it will eventually allow
  the yuan to move more freely, the central banks
  new governor, Zhou Xiaochuan, and other Chinese
  leaders have given no indication they are
  inclined to do so soon.
• Wall Street Journal (1/24/03)

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Market Promise Exports

• Chinas economic development is also being
  driven by the promise of a growing market for
  goods and services.
• As multinational corporations that have located
  manufacturing facilities in China wait for the
  internal markets to mature, they focus largely on
  goods for export to the U.S. and other
  established markets, thereby impacting
  international trade balances.
• Chinas export of goods has effectively reduced
  prices of many manufactured goods to those of
  commodities.

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The Impact of Chinese Production

Source Nikkei BP Network, National Automotive
Glass Consultants
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Knowledge Recruitment Retention

• The Chinese state is committed to building a
  strong educational system, and China has
  undertaken a strategy to bring back expatriate
  Chinese scientists and engineers that have been
  educated in the U.S.
• Since 1979, more than 400,000 mainland Chinese
  students have traveled abroad for graduate study,
  with only 10-25 estimated returning to China.
• However, in 2002, over 18,000 overseas students
  returned to China, double the number from 2000.
• More than 30,000 returnees are in Shanghai alone,
  with 90 holding graduate degrees from overseas.
• These Shanghai returnees are expected to exceed
  120,000 by 2010. Wall Street Journal
  (3/6/03)

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Knowledge Recruitment Retention Continued

• Potential China returnees include green card
  holders, H1B visa holders (for skilled high-tech
  workers), and naturalized American citizens
  (including many granted blanket asylum after the
  1989 Tiananmen Square incident).
• Chinese firms now offer salary and benefits to
  scientists and engineers roughly equivalent in
  purchasing power to those here.
• The Chinese Government sponsors all-expenses-paid
  visits to China for potential engineering
  recruits and holds recruiting fairs in Silicon
  Valley.
• With the ascension of Hu Jintao as Chinas
  General Secretary earlier this month, the
  recruiting push is expected to accelerate. Jintao
  is himself a graduate of the Qinghua University
  engineering school. Los Angeles Times (11/25/02)

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Intellectual Property Acquisition

• China has also undertaken a strategy to greatly
  enhance its intellectual property, both by
  requiring that foreign manufacturers train their
  local partners in the technologies associated
  with their products and by illegally acquiring
  intellectual property.
• By applying lessons learned from joint ventures,
  Chinese manufacturers have been able to develop
  competing products and introduce them into global
  markets.
• China is benefiting from a fast-follower
  advantage, and has successfully leveraged the
  strategy of being first to put together a
  combination of features, value, and sound
  business economics to leverage profitable
  markets.

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Intellectual Property Acquisition Ctd

• In some cases this has led foreign partners to
  shift production away from China (ie, Sony).
• In other instances, investors in Chinese joint
  ventures have experienced the loss of their
  intellectual capital more rapidly than expected.
• Chinese intellectual property acquisition is
  particularly rampant in the electronics and
  software industry.
• In 2001, software piracy rates in China resulted
  in 1.6 billion lost in retail software revenue
  and that China was surpassed only by Vietnam for
  having the worlds highest rate of software
  piracy. Think about that when you consider why
  Bill Gates has given Microsoft Windows source
  code to China.

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Intellectual Property Acquisition Ctd

• China always attaches great importance to the
  protection of intellectual property rights.
  China Council for the Promotion of International
  Trade (CCPIT), China Chamber of International
  Commerce (CCOIC)
• Ha. Ben Vickery (6/19/03)

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Software Piracy Rates
Source Seventh Annual BSA Global Software Piracy
Study
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Transition From Low-Tech to High-Tech Production

• The notion that China is purely a source of
  low-quality goods produced with low-tech
  manufacturing operations and processes is now
  inaccurate. Over the last decade, China has
  shifted from traditional, low-tech production and
  processes toward higher-tech, higher-wage
  manufactured products and processes.
• Although in 1989 only 30 of imports from China
  competed against goods produced by high-wage
  industries in the U.S. market, by 1999 that
  percentage had risen to 50, Economic Policy
  Institute (5/00)
• Chinas computer production appears poised to
  surpass Japan in 2003 and could surpass the U.S.
  in 2005 or 2006, U.S.-China Security Review
  Commission (6/5/02)

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Low-Tech to High-Tech Continued

• In 1990, the U.S. had an overall trade deficit
  with China of 10.4 billion, but also a surplus
  of over 1 billion in bilateral trade of advanced
  technology products.
• However, while the value of U.S. exports of
  advanced technology products to China grew by
  483 between 1990-2001, the value of such exports
  from China to the U.S. grew by 8126.

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How many U.S. Jobs have we lost?

• We estimate that the actual number of jobs lost
  through production shifts to China and Mexico
  averages between 70,000 and 100,000 job each year
  for each country. This is in keeping with our
  preliminary macroeconomic analysis of the
  employment affects of U.S.-China trade balance
  that estimates as many as 760,000 U.S. jobs
  have been lost due to the U.S.-China trade
  deficit since 1992.
• U.S.-China Security Review Commission
  (6/30/01)

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So, what does this all mean?

• Manufacturing has driven the rapid growth of
  Chinas production and economy.
• During the 1990s, the U.S. began losing an
  increasing number of lower-tech, lower-wage
  manufacturing jobs to China.
• We are increasingly experiencing accelerated
  losses of higher-tech, higher-wage manufacturing
  jobs and related capacity to China as well.
• This loss of capacity to manufacture high-tech,
  innovative products may have an effect on the
  ability to maintain our national security.

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Furthermore

• The factors driving Chinas growth are negatively
  impacting the U.S. economy and will continue to
  do so.
• Chinas growth poses a unique challenge to our
  economy unlike challenges of the past, such as
  Japan in the 1980s.
• China has demonstrated the ability to
  successfully utilize its capacities, and as its
  growth continues, China may well challenge U.S.
  economic primacy during the twenty-first century.
  

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What can we do?

• Recognize that the permanent shift of a majority
  of lower-tech, lower-wage manufacturing jobs from
  the US to China is likely inevitable.
• U.S. manufacturers must focus more on innovative
  products that are agile to rapidly changing
  markets and nimble to meet each customers needs.
  
• U.S. manufacturers must also focus more on the
  upstream functions of the product/manufacturing
  lifecycle and less on actual production.
• Future U.S. manufacturing must also shift toward
  leading-edge industries, such as biotechnology,
  nanotechnology/molecular manufacturing, and
  next-generation computing/telecommunications.

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How Will Chinese Manufacturing Trends
Particularly Impact US Small Manufacturers?

• See points from the previous slidePLUS
• Smaller manufacturers must optimize their
  effectiveness within larger supply chains both
  domestic and international or else die.

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Thank You!