Download - What Fuels China's Growth?

What Fuels China’s Growth? – 6/19/03 NIST MEP

What Fuels China’s Growth?What Fuels China’s Growth?

Ben VickeryBen VickeryManufacturing Futures GroupManufacturing Futures GroupMEPMEP

What Fuels China’s Growth? What Fuels China’s Growth? – 6/19/03 NIST MEP 2

Why is China’s Why is China’s Manufacturing Capacity Manufacturing Capacity Growing at Historic Levels?Growing at Historic Levels?

Factors include…Factors include…•Foreign Direct InvestmentForeign Direct Investment• International Trade PolicyInternational Trade Policy•Labor SupplyLabor Supply•Currency PolicyCurrency Policy•Market Promise and ExportsMarket Promise and Exports•Education and RecruitmentEducation and Recruitment•Formal and Informal IP PolicyFormal and Informal IP Policy•Transition From Low to High Tech ProductionTransition From Low to High Tech Production


A Quick Look At China…A Quick Look At China…especially Beijing, Shanghai especially Beijing, Shanghai

and Guangzhouand Guangzhou


Three clusters for Chinese Three clusters for Chinese transformation: Beijing, transformation: Beijing, Shanghai and GuangzhouShanghai 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 China’s land and 1.25% of its population, but also garner 73% of China’s foreign direct investment and creates 30% of the nation’s GDP!

Dr. Wehan Tang, Economist of the Delaware River Port Authority


Economic Westernization Economic Westernization Leads to Massive FDILeads to Massive FDI

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


China surpassed the U.S. in FDI China surpassed the U.S. in FDI for the first time in 2002for the first time in 2002

Sources: Sources: United Nations Conference on Trade and Development (UNCTAD), United Nations Conference on Trade and Development (UNCTAD), U.S. Bureau of Economic Analysis, Bank of ChinaU.S. Bureau of Economic Analysis, Bank of China

0

50

100

150

200

250

300

350

2000 2001 2002 2003(projected)

Bill

ions

ChinaU.S.


FDI Trends…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.” People’s Daily (1/2/03)


International Trade PolicyInternational Trade Policy

China’s 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 China’s service industries (such as telecommunications).


WTO Impacts Continued…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.

• China’s 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 China’s East and West (“Go West” initiative).

• Reform of state-controlled banking…the removal of China’s “safety net” practice of covering firm by state-owned banks (which will hopefully create opportunities for U.S. and other Western financial institutions).


What WTO Entry Means to What WTO Entry Means to ChinaChina

“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 US$445.1 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)


Ready Access to Cheap LaborReady Access to Cheap Labor

These low labor costs are also driven by China’s almost inexhaustible native labor supply, with nearly 1.3 billion inhabitants.

• This contrasts with the economic challenge posed by Japan in the 1980s, as Japan’s 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 you’re at Wal-Mart and wonder how they can sell Chinese-manufactured goods so cheaply!


Currency PolicyCurrency Policy• China’s 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 yuan…While Beijing told top Bush administration officials in 2001 that it will eventually allow the yuan to move more freely, the central bank’s 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)


Market Promise & ExportsMarket Promise & Exports

China’s 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.

• China’s export of goods has effectively reduced prices of many manufactured goods to those of commodities.


The Impact of Chinese The Impact of Chinese ProductionProduction

CommodiCommodityty

Price, 1997Price, 1997 Price, 2001Price, 2001 DecreaseDecrease

DVD DVD PlayerPlayer

$491$491 $165$165 66.4%66.4%

Fax Fax MachineMachine

$314$314 $136$136 56.7%56.7%

VHS VHS RecorderRecorder

$157$157 $70$70 55.4%55.4%

TelephonTelephonee

$19$19 $12$12 36.8%36.8%

Glass Glass WindshielWindshieldsds

$27.41/sqm$27.41/sqm $18.5/sqm$18.5/sqm 32.5%32.5%

Source: Nikkei BP Network, National Automotive Glass Consultants


Knowledge Recruitment & Knowledge Recruitment & RetentionRetentionThe 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)


Knowledge Recruitment & Knowledge Recruitment & Retention Continued…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 China’s 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)


Intellectual Property Intellectual Property AcquisitionAcquisitionChina 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.


Intellectual Property Intellectual Property Acquisition Ctd…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 world’s highest rate of software piracy. Think about that when you consider why Bill Gates has given Microsoft Windows source code to China.


Intellectual Property Intellectual Property Acquisition Ctd…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)


Software Piracy RatesSoftware Piracy Rates

0%10%20%30%40%50%60%70%80%90%

100%

1996

1997

1998

1999

2000

2001

US

China

Asia

W Europe

E Europe

India

Source: Seventh Annual BSA Global Software Piracy Study


Transition From Low-Tech to Transition From Low-Tech to High-Tech ProductionHigh-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)

• China’s 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)


Low-Tech to High-Tech Low-Tech to High-Tech Continued…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%. 0

5

10

15

$Bill

ions

1990 2001

U.S. Advanced Technology Product Trade, 1990-2001

U.S.

China


How many U.S. Jobs have we How many U.S. Jobs have we lost?lost?

““We estimate that the actual number of jobs lost We estimate that the actual number of jobs lost through production shifts to China and Mexico through production shifts to China and Mexico averages between 70,000 and 100,000 job each year averages between 70,000 and 100,000 job each year for each country. This is in keeping with our for each country. This is in keeping with our preliminary macroeconomic analysis of the preliminary macroeconomic analysis of the employment affects of U.S.-China trade balance that employment affects of U.S.-China trade balance that estimates as many [as] 760,000 U.S. jobs have been estimates as many [as] 760,000 U.S. jobs have been lost due to the U.S.-China trade deficit since 1992.”lost due to the U.S.-China trade deficit since 1992.”

U.S.-China Security Review Commission (6/30/01)


So, what does this all mean?So, what does this all mean?

• Manufacturing has driven the rapid growth of China’s 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.


Furthermore…Furthermore…

• The factors driving China’s growth are negatively impacting the U.S. economy and will continue to do so.

• China’s 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.


What can we do?What can we do? • Recognize that the permanent shift of a majority of lower-tech, Recognize that the permanent shift of a majority of lower-tech,

lower-wage manufacturing jobs from the US to China is likely lower-wage manufacturing jobs from the US to China is likely inevitable.inevitable.

• U.S. manufacturers must focus more on innovative products U.S. manufacturers must focus more on innovative products that are agile to rapidly changing markets and nimble to meet that are agile to rapidly changing markets and nimble to meet each customer’s needs. each customer’s needs.

• U.S. manufacturers must also focus more on the upstream U.S. manufacturers must also focus more on the upstream functions of the product/manufacturing lifecycle and less on functions of the product/manufacturing lifecycle and less on actual production. actual production.

• Future U.S. manufacturing must also shift toward leading-edge Future U.S. manufacturing must also shift toward leading-edge industries, such as biotechnology, nanotechnology/molecular industries, such as biotechnology, nanotechnology/molecular manufacturing, and next-generation manufacturing, and next-generation computing/telecommunications.computing/telecommunications.


How Will Chinese How Will Chinese Manufacturing Trends Manufacturing Trends Particularly Impact US Particularly Impact US Small Manufacturers?Small Manufacturers?

• See points from the previous slide…PLUS…See points from the previous slide…PLUS…• Smaller manufacturers must optimize their Smaller manufacturers must optimize their

effectiveness within larger supply chains — both effectiveness within larger supply chains — both domestic and international — or else die.domestic and international — or else die.


Thank You!Thank You!