On Observations Around China: Essay for January 21, 2012

My recent trip to China gave me an interesting perspective on how the world’s fastest growing economy, the People’s Republic of China, views the economic heavyweight champion of the world, the United States of America. It is a perspective gained over lunch. Multiple lunches in fact.

Our hosts were eager to entertain us in a manner that they have come to equate with successful American businesses. On successive noontimes, out came meals from Subway, Kentucky Fried Chicken and Papa John’s Pizza. We swilled this down with Starbucks coffee, of course. That part was my idea.

Has fast food suddenly become a leading economic indicator? Not in the classic sense. What it does indicate is an emulation of an American lifestyle. It is the impact of Western television and Western advertizing in a context of doing business in ways that have proven successful in America for a century.

I toured industrial parks that measured two hundred square miles. The government leveled rice paddies and poured concrete without looking back. I toured factories in excess of 600,000 square feet. That’s a big factory under one roof. And there is not just one of these factories or one of these industrial parks. The fact is that there are scores of these facilities in China. They are brimming with work. My tour took me to factories that manufactured medical devices, printed circuit boards, electronics, cable assemblies and sophisticated semi-conductor test equipment.

What I saw went beyond what I had previously seen outsourced to China. There is a growing level of co-development taking place. Engineers are working together to develop next generation products sourced in low cost countries. Once those seeds are planted it grows increasingly difficult to uproot that business. Supply chains grow out of assembly operations and special process clusters spring from those supply chains to support them. The same is true in reverse. As products leave America, so leave their supply chains.

When it comes to manufacturing, China is not a Paper Tiger nor is it omnipotent. China may looks invincible on paper but in actual practice it will be difficult to maintain the momentum necessary to eclipse and distance itself from the US economy. China is a difficult place to navigate. Language and infrastructure conspire against success. For every high speed train there is a congested highway; for every coastal city with unfettered access to distribution networks there is an inland city with difficult access. The largest manufacturing centers need to import workers from the interior. They dwell in company dormitories and live in circumstances that Americans cannot comprehend. Huge contract manufacturers like Foxcon have experienced worker suicides and just last week, a suicide pact among 300 of its workers over wages and conditions.

Chinese New Year is a two week celebration in China. Workers begin multi-day trips back to their homes only to turn around and repeat the sojourn in reverse. So tedious a lifestyle it is that as workers depart for the Chinese New Year, they are offered bonuses to ensure return, such is the lure of staying back at home.

So what did I learn from my quick trip to China. What lessons are there for America in all of this?

Lesson one: China acts first and asks permission later. Our dithering on the Keystone XL Pipeline project would never happen in China. There is no compromise on economic progress, no compromise with the environment. Economic stimulation is all that matters and the Chinese have a long range vision for their economy. Can that be said of America?

Lesson two: The Chinese worker will eventually revolt. They will demand better wages and better working conditions that will translate into decreased operating margins. The effects of inflation will begin to erode the labor advantage that China enjoys today. Chinese workers will need to organize in protest short of threatening mass suicide. Workers rights in China ought to be where the AFL-CIO and Teamsters should focus their growth opportunities. Really.

And lesson three: Time is running short for American dominance in manufacturing. Remember that the US is still the largest manufacturer in the world. Innovation and new product introduction are the hallmarks of the American factory. The role of government in America ought to be to ensure the success of that factory just as the government of China ensures the success of theirs. Our challenge is to do that within the context of a democratic society. The People’s Republic of China is not bound by such constraints.

Competitive taxes, judicious regulation and coordinated planning are missing in the American economy. We already have enough KFC’s and Papa John’s Pizza.

Press on.

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