Search
or Search by TOPIC
Search Supply Chain Videocasts
 
 
  Sign-Up Free Newsletter
 
First Thoughts
  By Dan Gilmore - Editor-in-Chief  
     
   
  April 28 , 2011  
     
 

Supply Chain News: Rethinking China

 
 

 

One of the most bothersome anecdotes I have heard lately was the story that a US business executive went to China last year, and met with a high level official there. Somewhere early in the meeting, the Chinese official said to the executive: "China" and pointed his thumb up, and then "US" and pointed his thumb down. (Wish I could find the reference but I can't; believe I read it in the Wall Street Journal.)

Now, that anecdote is bothersome if you live in the US (recognizing we now have thousands of readers outside the US) first because that state of affairs, to the extent it is accurate, is obviously not a happy one. But perhaps worse is the fact that we (and many other countries actually) may have simply abetted the change in the status quo.

Gilmore Says:

The more amazing number is the cumulative total - over that same 12-year period, the cumulative US trade deficit with China is just over $2 trillion


Click Here to See
Reader Feedback


Demography may be (economic) destiny, but that axiom doesn't say anything about when that destiny will actually arrive.

I realize this will border on a political column, and some readers have been critical when I have gone a bit down this path before, but let's just ponder this: has any area of the business done more to change world and economic dynamics relative to China than the supply chain and sourcing from Chinese manufacturers?

The 22nd "First Thoughts" column I wrote for SCDigest was titled "Is Viasystems' Salvation Good or Bad for the U.S. Economy?," and discussed how this printed circuit board manufacturer almost went under in 2002, but was able to recover and even thrive basically by shutting down every Western factory it had a moving it all to China.

As I went back to take a look at that piece, I was struck by this quote: "One of Viasystems' owners is quoted as saying 'The whole U.S. electronics industry will be domiciled to China.'" You can take a look here at our early days and read this article if you care to: Is Viasystems' Salvation Good or Bad for the U.S. Economy? (Think we were OK even back then.)

The "tragedy of the commons" quickly comes to mind, a metaphor I have used only once before on these pages. What is that? A concept made famous by a man named Garrett Hardin in a 1968 article, who noted how sometimes individuals/companies independently pursuing their own self-interest can in the end deliver problems for everyone. The example was the town commons of yesteryear, where farmers could come and graze crops for free. Good for the first farmer, but over time as others joined in the commons was destroyed for all.

Is it not at least reasonable for developed economies to view offshoring like that? Good for an one company, bad for the whole?

As many know, the International Monetary Fund this week predicted that the Chinese economy may now exceed that of the US by 2016, much earlier than previously forecast. Now, many are disputing the prediction, challenging the methodology used to calculate GDP, etc., but the timing is interesting, given there seem to be growing consensus that something must change.

Whether you like him or not, it is one of the reasons Donald Trump is gaining media traction if nothing else. His "tough talk" on China may mostly bluster and self-promotion, but it is resonating nonetheless. There is one thing I have to agree with Trump on: China's advance has been largely built on the backs (and jobs) of Western nations generally, and the US in particular.

Take a look at the chart below, on the US trade deficit with China since 1999. On an annual basis, that has risen from $68.6 billion dollars to an incredible $273 billion in 2010 - a 400% increase in 12 years.

 

Full Size Chart

 

But the more amazing number is the cumulative total - over that same 12-year period, the cumulative US trade deficit with China is just over $2 trillion. The same basic pattern holds true with many if not nearly all developed economies (the story is somewhat different with commodity-rich nations such as Australia, but even in those countries there are downsides - more on that in a bit.).

Now, China's economy has been growing at or near double digit levels for a decade or so. But did you know that 50% of that growth is coming from government spending, primarily in areas of infrastructure? And how can China afford to spend like that on infrastructure? Because it has trillions of dollars in reserves accumulated by huge trade surpluses.

So, China is "thumbs up" and surpassing the US in GDP because the US and other developed nations are providing the funding. This makes sense? It is actually worse, an "unvirtuous cycle" because the government spending is increasing the Chinese domestic market much faster than it would otherwise do, making it increasingly critical for Western manufacturers - or at least "brands" - leading them to do stuff such as Nissan promising to turn over its electric car technology for the right to enter the Chinese market.

I have always considered my a "free trader," but there comes a point when you might have to compromise principle for reality. But maybe you don't have to do that. This week, I had an email exchange with Paul Craig Roberts, a well-known economist, former under-secretary of the US Treasury Dept. under Ronald Reagan, and certainly a conservative, which generally means a free trade advocate.

Here is what he says: The US does not have a "free trade" situation with China. That is when two countries each produce their own goods and trade them with each other. What the US and other developed nations have is instead a "labor arbitrage" situation - companies shifting work offshore for lower costs to send back to the home market. That is much different say from the worry about Japan 2-3 decades ago. It was Japanese companies themselves that posed the threat, not US companies moving to Japan.

Roberts ads that "It is a mistake for the US government and economists to think of the imbalance as if it were produced by Chinese companies underselling goods produced by U.S. companies in America. The imbalance is the result of U.S. companies producing their goods in China and selling them in America."

So, it ultimately comes back to the supply chain.

I am going to get a "two-fer" out of this, and write part 2 in the next few weeks. But as promised above, I will note that even in the commodity-rich countries like Australia, Brazil and even to an extent Canada, what is emerging is that while they have more favorable trade balances with China, they are reverting back to commodity-based economies, generally considered to be one a lower level of evolution than those based on manufacturing and knowledge industries.

They ship China ore and oil, and China ships back finished goods.

Is it too late to change course? Maybe. I'll discuss this and more in part 2.

What is your take on Gilmore thoughts on "Rethinking China?" Do you agree with Roberts that there is a difference between free trade and l abor arbitrage? What is the role of supply chain in all this, and do we have a 'tragedy of the commons" situation? Let us know your thoughts at the Feedback button below.


 
 
     
  Send an Email  
 
Feedback
2011-05-09

This article by has been making rounds ( I got this forwarded from at least 3 sources!).
 
I do not know how many have appreciated the undercurrent... Is a reversal, at least in sentiments, on China Sourcing in the offing ? Were the immediate interests of economical supplies allowed to overshadow the country interests so far (esp in US?)
 
There was a time when Japan was considered a source for cheap duplicates. The lower prices offered for China made products for many items  - has that led to( even) remote thoughts on this line?  Actual facts on quality may be otherwise in many cases, but the opinion that gets generated also is important.
 
Can the cheap China exports to the developed world be considered only a function of arbitrage? I think it is a simplification, the issue is far more complex than that, some having been dealt with in your article.  I would also venture to suggest that the decisions made based on arbitrage in costs (example. Information Technology outsourcing  by developed countries from countries like India) apart from lower costs for the firms in the developed world, would have made those Companies (outsourcing the jobs) more cost-competitive in their own domains.
 
All the same, my thoughts are that in the developing world, for some time to come, China Sourcing efforts will continue to be crucial in managing Supply Chains.
 
T A KRISHNAN
V P & Head-Supply Chain Management
LARSEN & TOUBRO LIMITED
EPC-Power, Knowledge City

2011-04-29

One main difference I can spot between Western economies and China`s economy is that there is a central planner - the government (led by the Leninist and Maoist centrally controlled Communist Party). And this planner is also a player and a referee. Not so in the west. Here in Europe, I see myopic administrations, including the EU Commission, worried with deficits and inflation instead of the fundamentals that have long term systemic implications, like building a truly economic union, instead of this failing monetary and financial union.
Augusto Carreira

2011-04-29

As always - excellent thought-provoking commentary - as valid in the UK as in the US.
 
Keep up the good work - when you are working at the sharp-end you need this sort of "big picture" perspective to help you focus on what are the genuine Supply Chain big issues.

Peter Cutler
BA, MBA, MCIPS and MCILT
Professional Interim specialising in Supply Chain and Procurement

2011-04-29

In answer to your final question: It is not too late but it is getting close.  
 
The problem is even more severe than recognized.  First, Dave Autor, MIT and NBER, et al, recently wrote  The China Syndrome: Local Labor Market Effects of Import Competition in the United States calculating in great detail that the U.S.’ economic costs for unemployment and other benefits caused by globalization are roughly equal to the savings accrued from lower prices from trade. Second, Prof. Pisano and Shih of Harvard Business School recently wrote in the Harvard Business Review that the impact of offshoring is dramatically reducing our ability to innovate.  Third, we have not replaced so many skilled manufacturing specialists that we will increasingly lose the capacity to train the next generation.
 
One positive note: since companies have offshored more than is in their own self interest, economics favors a recovery.  With clear evidence of the fragility of global supply chains, Chinese and other LLCC (Low Labor Cost Country) wages rising rapidly, the U.S. $ declining and oil soaring, this is the perfect time for U.S. companies to reevaluate their offshoring strategies and bring some of the sourcing home.  To help these companies make better sourcing decisions the non-profit Reshoring Initiative, www.reshorenow.org, provides for free a Total Cost of Ownership (TCO) software that helps them calculate the real offshoring impact on their P&L.  Readers can help improve profitability, bring back jobs and simplify their supply chains by asking their companies to reevaluate offshoring decisions. Suppliers can use the TCO software to convince their customers to reshore. 
 
Harry C. Moser
Founder
Reshoring Initiative 

2011-04-29

In our role of helping clients with outsourced supply chain and manufacturing planning since the early 90’s - we have observed many global business practices.   It became clear to us at DCRA Inc. through our  S&OP solutions deployment  that the game with China was one of “tricking” US business to move production to Asia for low labor rates in return for a system that sucked the valuable intellectual capital from the business.   It was easy to see in the S&OP solution linked with global transport that the total costs after factoring in excess inventory and long product cycle times that the labor cost advantage was negligible particularly when IP risk was factored in.     In essence the Chinese developed a system to bait naïve US CFO’s based on labor rates to move or expand production in return for a system that allows Chinese firms / government to own the intellectual property. Thus for a few quarters of improved EPS (earnings per share) a business might give up brand and IP that took 50 years to create.    Obviously this approach is consistent with a 10,000 year old patient society. To further amplify this I was speaking to one of my Chinese colleagues who emigrated from China in his 20’s.   Recently over a casual lunch discussion he pointed out a few cultural differences that are worth nothing
 
  1. Chinese leaders are generally all from an engineering background ?   I found this fascinating … President Hu Jintao according to my colleague is of an engineering background
  2. The Chinese system can act without distraction when it wants. Clear land and build a high speed train in a year… not decades ?
  3. There really is no such thing as a lawyer in China… key judges and government officials obtain these roles because they are good party supporters - supporting the system described above.  Thus protection for intellectual property is not a skill taught or practiced in the Chinese system.    I am not a lawyer - but have managed to obtain several patents over the years - and have to think IP law is the most difficult - and thus for a society without formal legal training is just never going to embrace IP protection ?
  4. Lastly the most stunning anecdote was what my friend described as a cultural difference in children stories we tell our children as he now has a young child.    A longer conversation then this note - but essentially the observation from my friend was how - in the US we tell our children fun and fair play type of stories  - where all HE remembered from his kindergarten days of the Chinese children stories were stories that told you how to not be tricked ?   He described a story about a Fox in charge of splitting a pie for a  Bear and a Squirrel.  How the fox purposely gave the bear less of the pie  knowing the bear would complain and his strategy then to keep the split even was he the Fox kept eating portions of the Fox and Squirrel`s portions of pie until he finally managed to make the two parts even.  But in the end the Fox had eaten most of the pie.  You draw your own conclusions and maybe your readers should read “The Art of War” before negotiating their next deal in China ?
On an opportunistic note for your readers, there are solutions (in my opinion) that leverage engineering the product for supply chain and business advantage.   For example using postponed manufacturing into the supply chain and product design to do final assembly in the US.   We have helped nearly all of our client use their S&OP solution to provide a brain to their outsourced operation so they can control costs and positively influence IP control. We believe at DCRA the benefits for JOBS, total cost, reduction of volume on shipping ports, infrastructure are enormous as well as IP protection are available for almost all products.   We also believe our government leaders should provide even more incentives.   The benefits to solving this current challenge are enormous and supply chain leaders can and have to play a critical role in rebalancing this Chinese / US equation – period.    See a “not for profit” knowledgebase site www.TexasLCC.org for case studies and tips and techniques for all roles in an organization to do their part in this rebalancing effort. 
 
Last point… Dan to bring these observations forward is not “political” but purely one of economics of which the proper supply chain measurement systems can provide an early warning system and a measurements system to FIX – period.
 
Keep up the good work.
 
Jon Kirkegaard
President
DCRA Inc.

2011-04-28

You’re analysis sounds right on.  At what point will we in the U.S. begin focusing on the best policies for the people who live here?
 
The process of moving production to China and sending finished goods back to the U.S can only go on so long.   At some point the market in the U.S. will deteriorate, perhaps we are seeing that already.
 
Thanks for the article, well stated.
 
Dan Wancura

2011-04-28

I`m Chinese American. Our only solution is to fight fire with water.
 
Tell the American people to manufacture the goods in the US and except lower pay and no benefits and stop complaining.
 
That`s how we beat them at their own game.
 
Henry    

2011-04-28

You mention in your article that US Companies are moving to China because of lower costs.    Translation … lower labor costs.    I am a believer in the American Dream and giving everyone the opportunity to achieve this.   However,  I feel that labor costs in the USA have risen disproportionately to the scope of the work.     Instead of investing in new technologies to boost productivity and lower manufacturing costs while training people to handle this new environment,  we opt to maintain our old standards which only increases labor costs while sacrificing productivity gains.     Japan is an excellent example … Japan is one of the most expensive places to live yet they are strong exporters.      The high costs in Japan are not making masses of Japanese companies run away to China.   These Japanese companies offset their high local costs with increased productivity, leveraging technology and ensuring their citizens are well educated and trained to handle the new technologies.        
 
The USA needs to start with our education system.    American kids are lagging in test scores with their global counterparts.   How can we prepare this future generation to handle the new technology?    What about labor unions and the demands they make to industries?    Is it right that a person working on an assembly line earns more than a teacher,  a nurse, and many college grads?    What’s the incentive for a kid to strive for excellence if they can make a good living on an assembly line without expending the effort to be excellent and just be mediocre.  
 
You are right that we need drastic change.   I wouldn’t necessarily blame China.   They are the villain now, but sooner or later, China’s labor cost will rise due to their successes as did USA costs.    As this happens, another country will emerge as the new low labor haven … India,  Africa,  Eastern Europe, etc.    These countries won’t be in the stone age forever.    Developing countries are full of people willing to work for nothing.   Once they have a stable government and decent infrastructure, they too can become the new China. 

Don’t forget that the USA did just this to Europe during the Industrial Revolution.   We need to continually evolve and take down the barriers that are preventing America from evolving.  
  
Emil Ray Sanchez
Chief Financial Officer
Phoenix International Freight Services, Ltd. – World Headquarters 

2011-04-28

I agree that China enjoys benefits from trade surplus especially from the States. However, I do not see any problem of it. Comparing with how Europe and the States accumulated their wealth, what China has been doing looks much better.

Giho
S. Korea

2011-04-28

First of all let me thank Dan Gilmore for writing eye opening article.
 
The trade deficit numbers for US, with China $273 bn in 2010 and cumulative number $2 Trillion in last 12 years is quite alarming, not only for US but for the whole world.
 
US needs to switch over to "Free Trade" mode from "Labor Arbitrage" which will ensure that US starts the manufacturing within and which opens better prospects for US people also at the same time this ensures global economic balance and reduces chances of the next recession. Also US as "big brother" needs to act as a catalyst of growth of other developing nations.
 
Having learned lessons from natural calamity what we seen recently and geographical dependability, it makes sense for Supply Chain people to relook at supply chain strategy. Over period of time, having spent >16 years in supply chain, I learned the best way to define Supply Chain Strategy is with "Reasonable Price with Long Term Sustenance" rather than "Source at Lowest Price". 
 
Looking at new trends in the market with increased competition and globalization, Supply Chain needs to change gears and needs to be synchronized with Customer Demand and Shorter Product Life Cycle Management. It needs to adopt more collaborative approach with supplier and work on reduce response time to customer who have become more demanding over a period of time.
 
The overall business scenerio had put a lot pressure on Supply Chain being a key part of business so the prime message for SCM is "Be Proactive" and "Be reasonable" in making decisons.
 
 
Arun Kumar Ojha
Global Category Sourcing Manager
Asia Global Sourcing
Schlumberger
Shanghai - China 



Supply Chain Digest Home | Contact Us | Advertise With Us | Sitemap | Privacy Policy
© 2006-2014 Supply Chain Digest - All Rights Reserved
.