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Did Open Borders Destroy U.S. Manufacturing?
By Shlomo Maital
In the recent US Presidential election, Donald Trump campaigned largely on how trade (i.e. imports, open borders) has destroyed blue-collar jobs. His voters agreed.
But is this true? Have globalization, open trade in goods and services, and cheap imports, destroyed good US jobs? Or were there other causes?
You won’t find a more authoritative answer than that from MIT, in Suzanne Berger’s 2013 book Making in America: From Innovation to Market (MIT Press), based on her work with the MIT Task Force on Production in the Innovtion Economy.
Here are some relevnt passages:
“Even taking into account job losses resulting from outsourcing as well as import competition, it was difficult as recently as a decade ago to find clear evidence of a heavy impact of open borders on manufacturing employment. …In 2003, [such job losses] involved less than one percent of layoffs; in 2004 they went up to 2 per cent. …job losses in manufacturing were mainly the result of productivity gains which might reduce the total numbers of those needed to produce a finite quantity of goods. …[Studies showed] the bottom line was that Chinese imports accounted for 33 per cent of manufacturing job decline between 1990 and 2000 and 55 per cent between 2000 and 2007. But [focusing mainly on rising Chinese productivity and falling China-facing trade barriers] 16 per cent of manufacturing job losses between 1990-2000, and 26 per cent between 2000 and 2007, were attributable to rising import competition from China.”
Bottom line: At most, a third to a half. And more likely: one-sixth to one quarter of job losses were due to Chinese imports.
So what does that mean? There were other causes, deeper ones. Labor-saving machinery and automation (robots). Low skills. And dumb policy. Berger notes: “Germany abandoned much of its low-end manufacturingwhile expanding employment in higher value-added segments.” And America??
Recently a former senior VP of Intel, Mooly Eden, spoke at Technion and noted that the moment manufacturing wages rose in China, Intel shifted to Vietnam and built 1 million square feet of manufacturing capacity there.
China lost jobs – why? Globalization? Or because their productivity failed to keep pace with wage increases?
It’s hard to predict the future. But here is one pretty safe guess. While Trump tackles America’s job problem and rebuilds manufacturing, based on a wrong assumption, he will fail. It won’t help to start a trade war with China. So in four years, his supporters will find that he failed to deliver.
What then? Will they vote Democrat? Or will we get an even farther-right crackpot candidate, as has happened in Europe?
How Asia Sees the Trump Presidency
By Shlomo Maital
Here is how my friend Bilahari Kausikan, former First Permanent Secretary of Singapore’s Ministry of Foreign Affairs, sees the Asian reaction to the election of Donald Trump as U.S. President. This is from the Nikkei Asian Review:
Donald Trump will be the 45th president of the United States. Whatever they may say in public, few East Asian governments will greet the news with much enthusiasm — and all will harbour a degree of unease. Only the North Korean leader Kim Jong Un and Cambodian Prime Minister Hun Sen made their preference for him known. But they are hardly typical and the latter, for once, did not follow China’s lead.
- Beijing is usually scrupulous about avoiding comment on the domestic politics of other countries, but still felt it necessary to publicly criticize Trump’s stance on climate change. A South China Morning Post poll published on Nov. 5 showed that 61% of Chinese preferred Trump’s Democrat rival Hillary Clinton, higher than her final share of the U.S. popular vote. Only 39% of the Chinese preferred Trump, lower than his share of the U.S. popular vote. A study by the U.S. journal Foreign Policy of Chinese elite attitudes, published on Nov. 7, concluded that while they viewed Clinton as unfriendly, most felt that Trump would be a disaster for the U.S. and hence for global stability.
- China’s leaders may not admit it, but they know that the U.S. is vital for the maintenance of regional stability. Beijing values stability above everything else, particularly with the Chinese Communist Party’s crucial 19th congress only a year away and internal labour and social unrest endemic. President Xi Jinping’s anti-corruption campaign has generated a great sense of insecurity among cadres across all sectors of the state. In October, about 1,000 military veterans in uniform protested outside the ministry of defense in Beijing. It is impossible for such a large and conspicuous group to have gathered near such a sensitive area without at least the tacit connivance of some senior cadres.
- Like most of East Asia, China hates surprises. Clinton was a known quantity and would have stood for continuity in American policy toward the region. But East Asia is also pragmatic, not wont to just wring its hands in despair over new realities. Governments of the region will work with whoever is in power in the U.S.
Xiaomi: From Nowhere to #4
By Shlomo Maital
Xiaomi may be the biggest, bounciest startup many never heard of. It is China’s biggest smartphone seller, 4th largest in the world, founded in 2010 and growing by leaps and bounds. It makes beautiful, cheap, simple smartphones, sold nearly everywhere but in the U.S., and sold only on-line until recently. Xiaomi means, in Mandarin, “millet technology” or “grain technology”. I’m not too sure why they chose that name. But Innovators can learn a lot from its story.
Xiaomi was founded by 8 entrepreneurs, Hong Feng, Zhou Guangping, Li Wanqiang, Huang Jiangji, Lin Bin, Liu De, Wang Chuan, and Lei Jun, with the latter as the driving force. It is based in Beijing.
It now employs some 8,000 and has annual revenues of some $20 b. It is widely regarded as the high-tech startup with the highest current market value.
An HBR Ideacast podcast by Clay Shirky reveals some of its break-the-rules innovations.
* Simplicity: Xiaomi smartphones are beautifully simple. Why? Android-based, Xiaomi chose 100 sophisticated smartphone users and interviewed them intensively, realizing that the company itself could never fully test ALL the permutations and combinations that smartphones enable, but users could and did.
* Customer-focus: Many companies claim that, but few really do it. Xiaomi does. Fully one-third of Xiaomi new features on their phones come from their users. They truly do practice ‘open innovation’.
* Samsung, once market leader in China, has very short battery life. Xiaomi found ways to lengthen battery life, and thus replace Samsung as China’s market leader.
* Xiaomi is now expanding from Internet sales, to open its own retail stores, somewhat like Apple.
But the main lesson from Xiaomi: China’s 5-Year Plan, “Made and Invented in China”, is no dream. Xiaomi has proved capable of competing head-to-head with giants like Samsung, LG and even Apple, both designing and manufacturing in China. And it is now aggressively invading the Indian market, which is huge.
We all knew Apple was vulnerable in the low-end smartphone market. Xiaomi saw that early on, and moved quickly to capture it.
Global Uncertainty: Lifting the Fog?
By Shlomo Maital
When I want some help in understanding what in the world is going on, I turn to my friend Bilahari Kausikan, Ambassador at Large in the Singapore Foreign Ministry, and until recently Permanent Secretary. Bilahari has met world leaders in person, and is an independent thinker. Here is Bilahari’s ‘take’ on the global fog, in an essay for Nikkei Asian Review:
The problem: “The 21st century global order is becoming more uncertain. The Cold War of the last century had one virtue: structure. The threat of nuclear annihilation focused that structure with stark clarity. Today, we still have danger — although of a lesser magnitude — but without structure or clarity. No one really knows what will replace the Cold War as a frame of reference. More than a quarter of a century has passed since the Berlin Wall was torn down, but we still call that period the “post-Cold War era.” Ours is an age without definition. Without a global structure, there can be no leadership. Without leadership, many urgent issues will be left unresolved or dealt with unsatisfactorily, exacerbating uncertainties.”
What made it worse: “There was a brief post-Cold War unipolar moment, during which the West seemed to define the world alone. The illusions that flourished in this short period were immensely damaging, particularly in the Middle East, where the interventions that destroyed the existing regional order were justified by the illusion of the universality of certain interpretations of democracy and human rights. The disintegration of first Iraq and then Syria shattered the regional balance. Chaos in the Middle East has global ramifications that will play out for many years to come. But the illusion of universality has not yet been discredited and still contributes to the difficulties of establishing a new, stable global order. Notwithstanding loose talk about multipolarity, the U.S. is still dominant in most indices of power. But the U.S. clearly needs help to exercise leadership, as it did during the Cold War.”
So who will step up to help the U.S.? Europe? Forget it. “The region is tangled in knots of its own making” (the worst kind!). BRICS? “Not much unites the BRICS except a vague dissatisfaction with the existing order and the desire for greater recognition of their status. But they are not all equally dissatisfied, and the sources of their discontent are not identical.” China? “China has neither the capacity nor the interest to do so, even in East Asia, its backyard, where Beijing is assertively pursuing a role that is in accordance with what it believes was its historical position and what it believes are its territorial rights. President Xi Jinping’s “One Belt, One Road” strategy is an ambitious vision of a Sino-centric transcontinental order. Can the vision be fully realized? Can China be “contained”? Should it? Does the vision require the U.S. to be displaced from East Asia? There are as yet no clear answers. The fact is that neither the U.S. nor China really know what they want from each other, even as they each seek a new modus vivendi. The strategic mistrust that permeates the Sino-U.S. relationship, which is rooted in the universalist illusions of the U.S. on the one hand and Beijing’s triumphalist nationalism on the other, do not make the search for accommodation any easier.”
Confusing? Ambiguous? Uncertain? Even, dangerous? Indeed. But at least, Kausikan helps us understand why. And who will do best in this confusion?
“The successful will be those who have best learned to live with uncertainty.” And that uncertainty, globally, will be with us for a very very long time.
Chinese Innovation: On the Rise
By Shlomo Maital
An insightful new report by McKinsey Global “China’s Innovation Imperative” sheds important light on China’s massive effort to become more innovative.
Here are some of the report’s key insights:
* “to realize consensus growth forecasts—5.5 to 6.5 percent a year—during the coming decade, China must generate two to three percentage points of annual GDP growth through innovation”. In other words up to half of China’s GDP growth must come from innovation. This is no easy task.
* “…about 40 percent of the increase in total factor productivity could come from innovations in higher-level manufacturing and services enabled by the Internet. Other innovations could come from catch-up activities that bring Chinese enterprises up to global best practices as well as breakthroughs yet to emerge. China will have evolved from an “innovation sponge,” absorbing and adapting existing technology and knowledge from around the world, into a global innovation leader.”
* “China has become a strong innovator in areas such as consumer electronics and construction equipment. Yet in others—creating new drugs or designing automobile engines, for example—the country still isn’t globally competitive. That’s true even though every year it spends more than $200 billion on research (second only to the United States), turns out close to 30,000 PhDs in science and engineering, and leads the world in patent applications (more than 820,000 in 2013).”
* “…we identified four innovation archetypes: customer focused, efficiency driven, engineering based, and science based. We then compared the actual global revenues of individual industries with what we would expect them to generate given China’s share of global GDP (12 percent in 2013). As the exhibit shows, Chinese companies that rely on customer-focused and efficiency-driven innovation—in industries such as household appliances, Internet software and services, solar panels, and construction machinery—perform relatively well.”
In general, China has strengths in process innovation, as it proves each time it takes production blueprints from a foreign firm and quickly produces the product. China also appears strong in incremental innovation. Perhaps a new focus should be placed on radical innovation – game changing new ways to create value and to do business.
The mantra of China’s 13th 5-year-plan is “China dreams”. Dream big, China.
By Shlomo Maital
Financial Times reports that “China devalued the yuan by the most in two decades, a move that rippled through global markets as policy makers stepped up efforts to support exporters and boost the role of market pricing in Asia’s largest economy. The central bank cut its daily reference rate by 1.9 percent, triggering the yuan’s biggest one-day drop since China ended a dual-currency system in January 1994. The People’s Bank of China called the change a one-time adjustment and said its fixing will become more aligned with supply and demand.” The renminbi is seriously undervalued; its purchasing power is about 4 RMB per dollar, not 6. So why devalue it, send it in the other direction?
What is going on?
Well, depends who you believe. Financial Times’ ‘take’ is that China is starting a currency war, a la 1930’s, with countries competitively devaluing their currency to gain export markets and stimulate their economy, while exporting unemployment. The small 2 % devaluation shows China’s leadership is “desperate”:
According to conventional wisdom, wars are easy to start and difficult to end. Similarly Beijing’s devaluation, the biggest one-day currency move since 1993, represents the latest skirmish in an emerging battle which, analysts warn, may be hard to reverse. The move marks a shift in China’s historical policy during times of economic stress. In the late 1990s, the country was widely credited with containing the destruction from the Asian financial crisis because it held fast to the renminbi exchange rate in the midst of competitive devaluations throughout the region. In the global financial crisis of 2008, Beijing also refused to devalue even as its exports, a key driver of the economy, evaporated overnight. But now, in the midst of a pronounced and persistent Chinese economic slowdown and continued appreciation pressure resulting from the renminbi’s “dirty peg” to the soaring US dollar, China’s leaders have decided to take the plunge. “This shows how desperate the government is over the state of the economy,” said Fraser Howie, a China analyst and co-author of Red Capitalism. “If they were trying, as the central bank said it was, to bring the exchange rate back into line with market expectations then they have failed miserably as the market is now just expecting further devaluation.”
But here is Neil Irwin’s ‘take’, in The New York Times: China is seeking twin goals, keeping the flagging economy going and establishing the RMB as a global currency, by allowing market forces to work, rather than pegging the RMB artificially to a soaring dollar.
And my own view: With the dollar losing its pre-eminence as a world currency, largely because the Fed has printed far too many of them, for domestic policy purposes, the world does need a strong well-managed global currency. It could be the RMB?
Who is right? Well, dear reader, in this, as in other issues, you’ll have to think for yourself. The main thing is, be sure you are fully aware of the real issues the world faces, and not some of the puff pieces that fill our newspapers and news websites. China, and everything that goes on there, is one of those key issues.
The Purpose of Life: Ask Walt Disney?
By Shlomo Maital
Last month, I taught a one-week course on entrepreneurship and creativity to 43 dynamic Chinese students, mainly undergraduates studying at Shantou University, Shantou (Guangdong). The course was in English; the students worked on business plans in teams, and made elevator-speech presentations (in English), prepared 2-minute videos, and wrote business plans (in English). (The photo shows a Play-Do, or plasticene, model of one of the team’s ideas, for a novel restaurant – they stayed up all night to create it!).
I just received an email from one of my students. I pasted it below, without correcting the syntax… (Shantou University has a phenomenal English Learning Center, that provides each student with a tailored personal program for learning to read write and speak English)….
I want to ask you a personal question, this question had confuse me for a very long time, the question is that “what do we live for?”, what’s the point of live? create value? make money? love? i not sure. now i just in my 20s age, i always feel there’s no a direction in my life, i’m not sure what is going on in my rest of life. but you have a lot of experience about life, you have make a lot of achievements in your life, so want to ask your answer about the question, i hope you can give me some suggestion.
Dear readers: How would YOU answer my wonderful student?
My own answer was rather woeful – but, here it is. Congratulations for just asking the question. Most of us ask it, at the end of our lives, when it is nearly too late to actually change anything. I think the purpose of life is best defined by Walt Disney. He set the mantra for Disneyland (later, Disney World): “Make people happy”. Create value. Use your brains, your courage, your intellect, and above all, your CREATIVITY – to create value, by widening people’s range of choices, and thus, making them happy, or at least happier. When you make other people happy (those around you, family, children, spouses, relatives, friends, total strangers), you will make yourself happy as well. If you only try to make yourself happy, in the end, you will be very alone.
What I Learned in China
By Shlomo Maital
I try to write a blog almost every day – knowing this keeps me ever alert for new ideas to share. In this sense, blogs are as much for the benefit of the writer as for the reader.
I’ve been in Shantou China, for a week, teaching entrepreneurship to 43 eager young undergraduate business majors at Shantou University. Shantou is in the northern part of Guangdong Province, north of the provincial capital Guangzhou, close to the coast, and two hours by fast train from Shenzhen, which is opposite Hong Kong, on the mainland. My university, Technion, has a joint venture with Shantou Univ., to establish GTIIT – Guangdong Technion Israel Institute of Technology, now headed by Technion Nobel Laureate Dan Shechtman. The initiative arose from a generous grant by Li Ka Shing and his Third Son Foundation; Li Ka Shing, a Hong Kong billionaire, was born in Shantou and his foundation is active in supporting the city and its university. His investment company has invested profitably in Israeli startups.
Supposedly you cannot teach entrepreneurship to undergraduates because “they are too young and lack experience”. But Babson College does it highly successfully, using the method developed by my late friend Ted Grossman, an action learning approach in which teams of students form a real company, make a real product and learn the tools of business through running their company, under the guidance of mentors like Ted (who first launched a successful software company before joining Babson).
I use the same method in Shantou. And in one intensive week, the young students do amazing work; some of their ideas become reality, though not all. The photograph shows last year’s class.
Wages in China have risen dramatically, from about $100 a month in 2000 to $650 today (this is still only one-fourth the average wage in America, and Chinese productivity is in many cases even higher). But Philippines, for instance, has average wages of only one-sixth that of China. So China in principle should be losing its manufacturing to low-wage countries like Vietnam, Indonesia, and Philippines. And indeed it is, with shoes and textiles, low value added products, moving to those countries.
But China is keeping its high value-added jobs and enhancing them. How? China is the world’s biggest market for production robots, buying 20 per cent of worldwide production. Labor productivity rose by 11 percent yearly (!) on average during 2007-12 (it barely budged in the West). China uses its network of highly efficient suppliers to keep factories in China. China has become the hub of a complex ecosystem, in which Asian countries specialize, make components and ship them to other Asian countries. Asia now accounts for nearly half of all world manufacturing output, compared with 27 percent (about one quarter) in 1990.
Bottom line: China’s strategy is: Made in China 2025 (its official name) – boost productivity to keep competitive. If wages rise by 12 percent year but productivity does too…the cost advantage stays. But at the same time: Created in China. China is working to invent more of the products it makes. Like Xiaomi, the innovative smartphone company. And this is where I come in… teaching innovation to the young undergrads at Shantou University, not even a tiny drop-in-the-bucket in huge China, but – China is all about scale, and good ideas spread with lightning rapidity.
I truly love my annual one-week courses in Shantou; the students are fiercely eager to learn and highly creative once their creativity machines are turned on. These young people are literally eating our (Western nations’) lunch. If we don’t wake up, China’s living standards will continue to grow by 11 or 12 per cent a year, the rate of growth of productivity, and our living standards will simply stagnate (the rate of growth of OUR productivity). We need to save more, invest more, build better infrastructure, educate our young people better, and become more productive. This is what I learned in my classroom from 43 eager young Chinese business-major undergraduates.
China: Big Nation, Big Worries
By Shlomo Maital
A new survey shows that half of Americans believe the recession is still alive and well, despite the booming stock market. And close analysis shows that the world’s second biggest economy, China, also has big worries. So when the world’s two largest economies are struggling, global managers need to be on their toes, to daily track events and manage risk.
My friend Clyde Prestowitz, formerly President Reagan’s trade advisor and now head of Economic Strategy, has provided us with some quality insights into China’s current predicament. “This is the start of a new ball game with China,” Clyde warns. Here is a summary:
- Xi Jinping’s two major goals are: 1)Restore the power of the center and ensure the sustainability of the Party’s rule. 2) Restore China to its historical position of prominence of the world stage. This marks a departure from the line of Deng Xiaoping who urged : “observe calmly, secure our position, cope with affairs calmly, hide our capacities, bide our time, maintain a low profile, and never claim leadership.” ● Two schools of thought now contend in Beijing – one advocating the low profile approach, the other saying that this low profile has encouraged Japan and other Asian countries to push their claims in the North and South China Sea, and arguing that it is now time to show a more assertive posture. ● Xi seems clearly to be leaning toward this latter approach: What he is now basically saying to the US is rather something like:” We still have to catch up with you in many domains but from now on we intend to deal with you on an equal footing basis. …While Xi Jinping is the most powerful Chinese leader since Mao, is his grip on power already beyond the risk of a backlash or not and how far are we from a fully stabilized power landscape in Beijing? ● China’s high nominal GDP growth rate is not necessarily a good sign. It arises from an eventually unsustainable system that has already taken China’s total debt to about 250 percent of GDP while continuing on a path to much higher levels. Much of this debt has been contracted in the course of building enormous excess capacity in the real estate, manufacturing, and infra-structure sectors. Since excess capacity does not generate income for the paying off of debt, the debt load will eventually be shifted to some sector capable of paying. ● Regardless of how it is paid, a shift in the structure and direction of the economy would entail at least a temporary slow-down of the Chinese economic growth rate to something like 3-6 5 GDP growth. Such a reduced growth rate would actually be a positive sign. However, because it would be seen negatively by many, and because it would be costly to vested interests, there will be enormous opposition to taking the steps necessary to achieve the temporarily slower growth rate. ● This is obviously a crucial moment in China, during which a number of shifts are occurring, with major implications for the country itself as well as for the global economic and geopolitical balance. ● While trying to decipher the developments it is important for decision-makers and China watchers to think outside the usual obsolete templates of “moderates” and “hard-liners” “reformists” and “conservatives” which serve only to blur the picture and distort judgment. The present reality in Beijing is too complex to be encapsulated in simplistic labels.
- This is the start of a new ball game in dealing with China. It will keep us on our toes for years to come.