China's exports in perspective

In the past few days many stories in the mainstream media have noted a new study released by the Organization for Economic Cooperation and Development that shows China has surpassed the U.S. as the world's top exporter of high—tech communications and information products such as cell phones, laptop computers and digital cameras. 

Once again, the editors at New York Times (and its subsidiary publication the International Herald Tribune) have shown their ignorace of how many multinationals operate in today's competitive global environment.

According to the report, the value of China's combined exports and imports of such goods soared to $329 billion in 2004 from $35 billion in 1996. Over the same period, the value of U.S. information technology trade expanded at a slower rate, to $375 billion from $230 billion.

With its large population of semi—skilled laborers, China's economy has long been dominanted by labor—intensive industries.  Now a story by Mr. David Lague in the IHT proclaims:

To some industry experts, the report is more evidence that China has made progress in its long—term plan to upgrade the capacity of its manufacturing as it strives to become a major economic power.
 
"It confirms that the Chinese economy is really moving up the value chain from simple manufactured goods like textiles, shoes and plastics to very sophisticated electronics," said Arthur Kobler, a business consultant in Hong Kong and former president of AT&T in China.
 
The most spectacular demonstration of China's ambition to become a consumer electronics heavyweight came this May when the Chinese computer maker Lenovo Group, bought IBM's personal computer unit for $1.75 billion.  

This passage creates the false impression that many Chinese firms like Lenovo are gaining ground on their American rivals in areas involving the most advanced technology.  In this story, Mr. Lague overlooks some critical points: 

First, the main reason China has increased its high—tech exports in recent years is that more American companies like Dell are setting up shop in China and exporting finished products to the U.S.  In fact, around 60% of China's total exports come from the final assembly factories of foreign—invested firms. 

More importantly, much of the critical technology, which creates most of the product's value, is still imported from subsidiaries in developed countries (like Japan and Singapore).

Second, multinational companies from countries such as Japan and Taiwan are doing the same, meaning that the U.S. imports of electronics from these countries are falling while they rising from China.

Third, when Chinese companies, like Lenovo and Haier try to acquire famous brands in the West, this shows their marketing weakness, not their strength.  Many Western firms have much more experience in building a brand reputation in a foreign market.  Earlier this year, many experts claimed Lenovo was overpaying for IBM's struggling PC division.
   
Fourth, some American firms like Motorola are seeing their share of the Chinese market erode, not because of domestic Chinese competition, but from the growing competitiveness of other Asian rivals. For example, South Korea's Samsung has used a superior branding strategy to come on strong in recent years in China and all over Asia.
 
Before too many Americans get too alarmed by the OECD report,  it is important for us to keep China's economic rise in perspective.  On October 13th, I wrote at the Thinker:

According to a report recently released by the World Economic Forum, China's overall global competitiveness has, in fact, declined for the past three years. 

And demographic trends are transforming China's labor market from 'limitless supply' into 'limited surplus' with labor supply gaps showing up in the manufacturing strongholds, most notably in the south city of Shenzhen.

Despite the claims by (some liberals), the reality is Intel, IBM, Dell, and countless others still think America is still a pretty good place to open factories and create new jobs. Consider some recent announcements by some high—tech giants:

Chip—maker Intel has announced plans to build a cutting—edge semiconductor plant in Chandler, Arizona. The plant, which will cost $3 billion, will employ about 1,000 workers when completed in 2007. Intel also said it would spend $105 million to revamp an old factory in New Mexico that is now idle. About 300 jobs will be created there.

In another article in late August, I wrote that China has, as many American firms have painfully realized, many hidden weaknesses as well:

China suffers from a serious shortage of skilled business managers and researchers with international experience.  While the number of MBA programs in China has greatly increased, demand for talent greatly outstrips supply.  To understand the depth of this problem, consider the figures in the current issue of Newsweek International:

China faces a critical shortage: experienced, highly skilled managers. The numbers are astounding. The country has some 25,000 state companies, 4.3 million private firms and massive industrial overcapacity. But it has too few experienced managers for even the elite firms.  The consulting firm McKinsey & Co. estimates that even the relatively small number of Chinese companies trying to expand abroad will need up to 75,000 internationally experienced leaders if they want to continue to grow over the next 10 to 15 years. Currently, McKinsey estimates, there are only 3,000 to 5,000 such men and women in China.

As an American instructor of business management in Beijing and Shanghai for the last five years, I'm becoming increasing convinced that the Chinese economy in the years ahead will not be as strong as many so—called Western journalists like Mr. Lague and his colleagues at the New York Times would like readers to believe. 

While it is true many Americans and Europeans face the possibility of layoffs and lower wages caused by intense Chinese competition, we should not underestimate American hidden strengths.

Brian Schwarz  12 15 05