It’s hard to escape the latest news stories from China. Unfortunately, much of the news is not good. The four “Cs” mentioned above help to frame this news and how it affects us.
China’s growth is very dependent on the demand in the U.S. and worldwide for cheap food and consumer goods. In fact, exports to the U.S. account for about half of China’s total. China now manufactures 70% of the world’s toys, 90% of the vitamin C, 70% of the penicillin and assembles 80% of the world’s computers. A recent Wall Street Journal article indicated that China could soon become the third-biggest economy – behind the U.S. and Japan – nudging aside Germany. Just eight years ago, China was the seventh-biggest economy.
The primary reason for this is that the price of goods from China are 30-50% less than for the same product if made here in the U.S. Currency is said to be the cause as experts argue China is rigging trade in their favor by keeping currency undervalued. The U.S. met with a large Chinese delegation in late May and encouraged China to allow its currency to float freely in the world market.
One thing that makes Chinese manufacturing/supply unique is that it is generally comprised of hundreds of thousands of tiny factories and farms. This makes regulation very difficult, allowing some unscrupulous operators to take advantage of the situation. Scrupulous or not, the bottom line is that quality suffers in this type of environment. A new report shows that as companies cut costs to remain more globally competitive, they are more vulnerable to lapses in the supply chain. What is the result? “Poisoned” toothpaste and dog food, seriously defective tires, and innumerable food concerns. In June, the top food and drug regulator in China was sentenced to death for taking huge bribes from pharmaceutical companies. A U.S.-based health-food company has even begun to add “China-free” to its labels.
These specific examples should encourage all companies doing business in China to appoint a senior executive exclusively to manage your supply-chain risks. Investigate any important junctures in the supply chain, and monitor them ceaselessly. Your brand is at risk if you don’t!
Another risk in exposing your products to the Chinese market is counterfeiting. For many of the same reasons that quality is suffering, counterfeiting – intellectual-property abuses – are also too common. Counterfeited goods accounted for 5-7% of world trade in 2006. Interestingly, a recent world poll indicated that 10 of 15 countries did not trust China to “act responsibly in the world.”
Looking at the steel industry as an example of the global impact, Chinese policies have allowed China (now the largest steel producer in the world) to go from a net importer of 34.7 million metric tons (MMT) of steel in 2003 to a net exporter of 33.2 MMT in 2006 – a shift of 68 MMT in three years. Additionally, Chinese steel-product exports surged 116.7% year-on-year in the first five months of 2007.
All of these exports have resulted in major trade deficits. Perhaps in response to actions by the U.S. to address this trade imbalance, China’s most recent steel-industry-related action is to set a ceiling for steel exports at 10% of the country’s output. Reductions of up to 65 MMT of production capacity are also being targeted through mergers and acquisitions. Reasons cited for this reduction include reducing energy consumption and cutting pollution. Later this year, China will have the dubious distinction of surpassing the U.S. as the world’s largest emitter of greenhouse gases. It is already home to eight of the 10 most polluted cities – a fact that may now be beginning to have fallout on the U.S. West Coast.
A recentWashington Timesarticle reminds us that China is unlike other trading states. The challenge it poses is not just economic but strategic. It uses gains from trade, technology transfer and investment to support a rise in global power applied against U.S. interests. Interestingly, China has recently suggested that one way to reduce the trade deficit with the U.S. is to increase the import of advanced technology to China. This would give China a greater source of economic wealth and power.
Enter the Panama Canal. China is the canal’s biggest customer shipping 18 MMT in 2005 alone. Through questionable means, China is gaining operational control of the canal. It now runs two ports of entry and “temporarily” has assumed control of ships to navigate them through the canal. Chinese-controlled ports account for 15% of the world’s maritime traffic and lie along six of the eight choke points labeled by the Defense Department as “U.S. lifelines and transit regions.”
Could this result in conflict? Well, China did blind a U.S. satellite in 2006 and is particularly concerned with overcoming anti-ship missile defenses of Aegis-equipped warships. The words of Ronald Reagan are perhaps apropos – “Trust but verify.”