Here is what I think we should be doing with China: export anything we can still make in this country to them. China is not the US by any means – proprietary rights for starters are almost non-existent, the state still controls everything, and human rights is a real issue, especially in the work place. But like it or not, China is fast becoming the biggest market in the world and what are we doing in the US? Bitching about it when we should all be looking at how do we develop the Chinese market for our products.
I fundamentally believe this one opportunity could have a massive impact on the state of economic affairs in the US and the West. My old economics professor at the European University used to say “business flows in one direction at any given time, and it flows West!” True. For the past 60 years business has flowed West because the US specifically was the land of opportunity. Europe was the “Old Master”, leading in fashion, design, trends and know-it-all culture because of centuries of history. A wall separated the West from the rest of the world. This was more than a wall between Communism and Soviet reign, it was a wall that attracted every country West of Germany to the shores of Europe and the US.
While things have changed drastically in the last few years, our behavior and perceptions have not. We still think business flows West, but that is no longer the case. You could argue there are multiple directions now – Australia is the land of boom, Brazil is like the US of 1905, India the land of riches. South Africa, Turkey, Czech Republic, Israel, even the Congo are major emerging markets. And of course there is China, the ‘culprit’ who we have outsourced everything to if you listen to the pundits in print. I think everyone is missing a big point here. Let me explain why.
With China's ascension to the world's second largest economy recently, surpassing Japan, many 'experts' are predicting the inevitable - China will take the No. 1 spot from the United States in a decade or so, surpassing its GDP on its way to accounting for 40% of the world's GDP by 2050 according to economist Robert Fagel. Americans are generally worried about the prospect of slipping status and this is a valid concern, but how we rise to the occasion is both an opportunity and the key to whether we can hold on to being the world's strongest and most dynamic economic power.
Predictions would have us believe that the US economy will shrink to a measly 14% halfway through the century, brushed aside by China and other emerging powers like India and Brazil. However these predictions could prove to be greatly exaggerated in my view because of the various disconnects between the macro and micro economic climate in China, the short-comings of their one-party government system, and the advantages the US and the West have IF and WHEN we decide to compete instead of whine. You also have to factor in that eventually costs rise, internal pressures grow and natural limitations will slow their economy, making it highly unlikely to sustain the kind of growth China has enjoyed for the last decade.
We in the US have a decent shot at remaining the world's pre-eminent economy well into this century if we understand the bigger picture and focus all of our efforts (both government and business) on competing at market level. First lets understand the big picture, as highlighted by Joel Kotkin of Chapman University, and author of The Next Hundred Million: America in 2050, and what it means for us from a competition perspective. There are five key big picture facts that Kotkin presents:
1. China's energy demands are soaring and it lacks the domestic resources to meet these needs. Most of its energy comes from so called 'dirty' sources like coal, burning more than the US, Europe and Japan combined, often using primitive technology. China is today the largest consumer of energy, overtaking the US (this is a direct correlation to the size and growth of its economy so no surprise), and has the highest greenhouse gas emissions. China's dependence on foreign oil will continue to grow in the coming decades, as it turns from a coal exporter to a net importer.
The U.S. meanwhile sits on largely untapped fossil fuel resources, including coal, natural gas and oil. Add Canada to the equation and North America ranks second, behind the Middle East, in energy resources. In contrast to China, America's energy use and greenhouse emissions appear to be dropping while still enjoying enormous, still largely untapped renewable resources, particularly from wind power in the Plains and biomass (yet proven but showing signs of meaningful relevance). We are in far better shape to meet our energy needs than China.
2. Most people do not realize that water is the "new oil," and China faces a thirsty future. China's freshwater reserves are about one-fifth per capita those of the United States, notes Steve Solomon, author of Water: The Epic Struggle for Wealth, Power and Civilization. Much of that supply has become dangerously polluted; ours, for the most part, has become cleaner.
More important, the U.S. has become more efficient in its water usage, says Solomon. China, with a far less developed economy, will face increasing demands from industrial and agricultural users as well as hundreds of millions of households that now don't enjoy easy access to clean drinking water.
3. Food continues to be a significant problem for China. Scarce water, mass pollution and high energy costs all will limit China's future food production. It is unclear to me why such a large land mass could not meet the country's agricultural requirements, but the fact remains China has long suffered a shortage of food like we have not seen since the 60s in this country. Some experts point to a combination of pollution (acid rain falls on a third of all agricultural land), floods and urbanization as key contributors to the agricultural demise.
All this means that China is and will have to look to the U.S. and Canada to meet demand for crucial food supplies, particularly corn. And the food deficit may get worse over time: As China becomes wealthier, demand for high-protein foods like beef and pork will increase. The U.S. remains the world's most reliable supplier of many of those agricultural products.
4. China's rapidly aging population and shrinking workforce will slow growth, perhaps dramatically, by the next decade. The problem of population decline is highly advanced in countries like Russia, Italy, France and Germany, where birth-rates are down and far behind death rates. Europe has been shrinking for the better part of a quarter century. But China has had a more accelerated decline, partly brought on by government regulation of one child per household and the subsequent preference for boys to girls, dramatically skewing the sex demographics. China's economic rise has been fueled by an expanding young workforce, but with the low birthrate this trend will reverse within the next decade or two. The US continues to be one of the few countries in the West that has a growing population, albeit we are living longer and this has other economic implications.
The logical solution to this dilemma would be immigration, but China's culture appears far too insular for such an event. Rather than a benevolent "socialist" super power China, whose population is made up over 90% Han Chinese, will remain a racially homogeneous, and communalistic land. In contrast, the U.S., despite occasional fits of nativism, remains remarkably successful at integrating cultures from around the globe, a fact supported by the statistic that between 1990 and 2005 immigrants started one quarter of all venture-backed public companies.
5. Dictatorship thrives sometimes in a "take off" period, but often fails to compete well with more open societies during later stages of growth. Many American intellectuals and journalists celebrate China's achievements, much as some of their predecessors admired past "successful" economic regimes in fascist Italy, Nazi Germany and the late Soviet Union. The longest lasting of the authoritarian superpowers, the Soviet state massively misallocated its resources in its unsuccessful competition with the more flexible systems of the U.S. and its allies.
Kotkin goes on to make a very valid socio-economic point:
"Big Brother economies experience more subtle problems. Chinese entrepreneurs, according to a survey by the Legatum Institute in London, depend far more than their more nimble and self-reliant Indian counterparts. Overweening Chinese state power also might be chasing many foreign businesses - and some developing countries - toward more congenial investment and trade partners.
For all these problems, the Chinese emergence remains the dominant business event of our epoch, but world-wide dominion seems highly unlikely. One often overlooked factor: political problems stemming from growing inequality in this officially Marxist state. Over the past 20 years China's income distribution pattern has shifted from the relative egalitarianism of Sweden, Japan or Germany to that of countries like Argentina and Mexico.
The class divisions will deepen further as growth inevitably slows. Roughly one-third of 2008's 5.6 million university graduates have been unable to find work. Things are even worse for those less skilled, rural residents and small manufacturers.
Ironically, the Communist Party appears to further concentrate wealth and power; most of the richest people in China are linked to the party. Policies push growth, but with diminishing rewards to the masses. Over the last decade the share of GDP going to consumption dropped from 46% to less than 36%.
Not surprisingly, class anger has reached alarming proportions, with almost 96% of respondents, according to one recent survey, agreeing that they "resent the rich."
America also faces its own share of social problems but not to such an extreme degree. Many Americans resent the affluent, but also dream of becoming them. any Americans resent the affluent, but also dream of becoming them. How else to explain the popularity of paeans to bourgeois vulgarity like Housewives of New Jersey?"
The above points strongly support my view that in the coming decades China, not the currently depressed U.S., is likely to face greater headwinds. For this reason I firmly believe we in the West need to move toward a pro-growth course driven by investments in our productive economy, basic infrastructure and skills-based education as well as sustainable immigration and population growth levels. We hear all of these points from business leaders today, yet little seems to move in Washington. So let me suggest another avenue that I have been looking at over the past several months, and that our businesses, big and small, can pursue when it comes to China: make your products here and export to China.
The US has a major trade deficit and the reasons behind this are far too complex to analyze in a blog. However, the one major opportunity I see in China is that country's thirst for products "Made in the USA". We should be focusing on designing, developing and manufacturing products here to sell over there. Its true that any product can be made for less in China or other off-shore locations, but think for a moment – that is relevant when you are competing with “Made in China”. I am suggesting that its not the case when you are exporting “Made in USA” TO China. As more and more people prosper in China, their craze for American made goods is soaring. But most of us are too blind to see this opportunity, and our leaders also don't get it.
My first realization of the importance of "Made in USA" was back in 2003. I was dating a girl who managed a telecom business, selling cell phones in Brussels. Cell phones were the craze back then, they still are I guess, a status symbol for all, and generation Y trends. One Saturday evening I went to pick her up at her store and, while she had locked the doors for the night, there were a dozen Chinese guys surrounding her, looking at dozens of phones laid out on the counter. I got the story from her an hour later after the Chinese customers had departed having purchased over 30 cell phones.
Basically, these guys were in Brussels on business and wanted to buy Nokia and Motorola cell phones. The only problem was that most of the phones in her store were 'Made in China' or 'Made in Taiwan'. That wouldn't do. These gentlemen wanted a Nokia that was made in Finland, or a Motorola that was made in the US. And they were willing to pay more. It may seem silly, but she opened over 100 boxes of brand new phones in order to dig out the models that were not made in China. She called other stores to get their inventory. They took all of them. If she had had more they would have bought those too. Amazing.
That 'trend' for all things made in the West continues today in China, while their ‘middle class’ grows. Sure, they still have a very uneven distribution of wealth and the majority of their population is focused on feeding themselves, not buying luxury goods made in France or Italy. But when you are talking about the kind of numbers they have over there it is a massive opportunity that can literally solve a big part of our economic issues across America.
So how can you make it happen? Well, you need a product to start off with. ANY product. I wouldn’t start with services, that’s a whole different headache, but products work. And the product can be anything as long as its made in here and serves a purpose. In fact, the hardest part of this opportunity is to come up with a viable product by Chinese standards, not American standards. While this means a lower standard of product, its still difficult to develop in my view, but you may have some ideas.
Once you have a product the next step is to take it to China. This is where the second half of the investment comes in. I spoke with a friend of mine, Moise Levi, in Brussels this past summer. Moise is an amazing guy, a financial advisor with clients who are exploring opportunities in China today. His view on China is similar to mine: take your "Made in USA" product over there, rent a booth at a trade show, build relationships over a few days, and start taking orders from would-be distributors. China's 'middle class' are emerging, albeit under government restraint, but they are willing buyers of all things Western as they flock to cities, apartments, condos and jobs in pursuit of the Chinese dream. Its real, its happening, and we are blind to it.
According to Moise and other sources, renting a booth at a trade show and traveling to China for a week is likely to cost you between $25k and $50k at most. But at this stage the challenge is about match making more than anything else, and there are other ways to meet Chinese distributors albeit face-to-face is key according to Moise given the importance of trust and friendship in Chinese culture. Online market makers like MFG.com and AliBaba.com are good places to explore if you are not willing to get on a plane at the outset and go see for yourself what I am talking about. Personally I would jump on a plane tomorrow and go, but then again I am a nomad…
I want to stress my point one last time – China is not to be feared, China is to be seduced and courted. Some of our leaders like Andy Grove, founder and former head of Intel, advocate starting a trade war with China to “protect American jobs and manufacturing”. I disagree. Build something for $1 in this country and sell it for $4 in theirs. The market can take it. You need a China strategy, now.
While things have changed drastically in the last few years, our behavior and perceptions have not. We still think business flows West, but that is no longer the case. You could argue there are multiple directions now – Australia is the land of boom, Brazil is like the US of 1905, India the land of riches. South Africa, Turkey, Czech Republic, Israel, even the Congo are major emerging markets. And of course there is China, the ‘culprit’ who we have outsourced everything to if you listen to the pundits in print. I think everyone is missing a big point here. Let me explain why.
With China's ascension to the world's second largest economy recently, surpassing Japan, many 'experts' are predicting the inevitable - China will take the No. 1 spot from the United States in a decade or so, surpassing its GDP on its way to accounting for 40% of the world's GDP by 2050 according to economist Robert Fagel. Americans are generally worried about the prospect of slipping status and this is a valid concern, but how we rise to the occasion is both an opportunity and the key to whether we can hold on to being the world's strongest and most dynamic economic power.
Predictions would have us believe that the US economy will shrink to a measly 14% halfway through the century, brushed aside by China and other emerging powers like India and Brazil. However these predictions could prove to be greatly exaggerated in my view because of the various disconnects between the macro and micro economic climate in China, the short-comings of their one-party government system, and the advantages the US and the West have IF and WHEN we decide to compete instead of whine. You also have to factor in that eventually costs rise, internal pressures grow and natural limitations will slow their economy, making it highly unlikely to sustain the kind of growth China has enjoyed for the last decade.
We in the US have a decent shot at remaining the world's pre-eminent economy well into this century if we understand the bigger picture and focus all of our efforts (both government and business) on competing at market level. First lets understand the big picture, as highlighted by Joel Kotkin of Chapman University, and author of The Next Hundred Million: America in 2050, and what it means for us from a competition perspective. There are five key big picture facts that Kotkin presents:
1. China's energy demands are soaring and it lacks the domestic resources to meet these needs. Most of its energy comes from so called 'dirty' sources like coal, burning more than the US, Europe and Japan combined, often using primitive technology. China is today the largest consumer of energy, overtaking the US (this is a direct correlation to the size and growth of its economy so no surprise), and has the highest greenhouse gas emissions. China's dependence on foreign oil will continue to grow in the coming decades, as it turns from a coal exporter to a net importer.
The U.S. meanwhile sits on largely untapped fossil fuel resources, including coal, natural gas and oil. Add Canada to the equation and North America ranks second, behind the Middle East, in energy resources. In contrast to China, America's energy use and greenhouse emissions appear to be dropping while still enjoying enormous, still largely untapped renewable resources, particularly from wind power in the Plains and biomass (yet proven but showing signs of meaningful relevance). We are in far better shape to meet our energy needs than China.
2. Most people do not realize that water is the "new oil," and China faces a thirsty future. China's freshwater reserves are about one-fifth per capita those of the United States, notes Steve Solomon, author of Water: The Epic Struggle for Wealth, Power and Civilization. Much of that supply has become dangerously polluted; ours, for the most part, has become cleaner.
More important, the U.S. has become more efficient in its water usage, says Solomon. China, with a far less developed economy, will face increasing demands from industrial and agricultural users as well as hundreds of millions of households that now don't enjoy easy access to clean drinking water.
3. Food continues to be a significant problem for China. Scarce water, mass pollution and high energy costs all will limit China's future food production. It is unclear to me why such a large land mass could not meet the country's agricultural requirements, but the fact remains China has long suffered a shortage of food like we have not seen since the 60s in this country. Some experts point to a combination of pollution (acid rain falls on a third of all agricultural land), floods and urbanization as key contributors to the agricultural demise.
All this means that China is and will have to look to the U.S. and Canada to meet demand for crucial food supplies, particularly corn. And the food deficit may get worse over time: As China becomes wealthier, demand for high-protein foods like beef and pork will increase. The U.S. remains the world's most reliable supplier of many of those agricultural products.
4. China's rapidly aging population and shrinking workforce will slow growth, perhaps dramatically, by the next decade. The problem of population decline is highly advanced in countries like Russia, Italy, France and Germany, where birth-rates are down and far behind death rates. Europe has been shrinking for the better part of a quarter century. But China has had a more accelerated decline, partly brought on by government regulation of one child per household and the subsequent preference for boys to girls, dramatically skewing the sex demographics. China's economic rise has been fueled by an expanding young workforce, but with the low birthrate this trend will reverse within the next decade or two. The US continues to be one of the few countries in the West that has a growing population, albeit we are living longer and this has other economic implications.
The logical solution to this dilemma would be immigration, but China's culture appears far too insular for such an event. Rather than a benevolent "socialist" super power China, whose population is made up over 90% Han Chinese, will remain a racially homogeneous, and communalistic land. In contrast, the U.S., despite occasional fits of nativism, remains remarkably successful at integrating cultures from around the globe, a fact supported by the statistic that between 1990 and 2005 immigrants started one quarter of all venture-backed public companies.
5. Dictatorship thrives sometimes in a "take off" period, but often fails to compete well with more open societies during later stages of growth. Many American intellectuals and journalists celebrate China's achievements, much as some of their predecessors admired past "successful" economic regimes in fascist Italy, Nazi Germany and the late Soviet Union. The longest lasting of the authoritarian superpowers, the Soviet state massively misallocated its resources in its unsuccessful competition with the more flexible systems of the U.S. and its allies.
Kotkin goes on to make a very valid socio-economic point:
"Big Brother economies experience more subtle problems. Chinese entrepreneurs, according to a survey by the Legatum Institute in London, depend far more than their more nimble and self-reliant Indian counterparts. Overweening Chinese state power also might be chasing many foreign businesses - and some developing countries - toward more congenial investment and trade partners.
For all these problems, the Chinese emergence remains the dominant business event of our epoch, but world-wide dominion seems highly unlikely. One often overlooked factor: political problems stemming from growing inequality in this officially Marxist state. Over the past 20 years China's income distribution pattern has shifted from the relative egalitarianism of Sweden, Japan or Germany to that of countries like Argentina and Mexico.
The class divisions will deepen further as growth inevitably slows. Roughly one-third of 2008's 5.6 million university graduates have been unable to find work. Things are even worse for those less skilled, rural residents and small manufacturers.
Ironically, the Communist Party appears to further concentrate wealth and power; most of the richest people in China are linked to the party. Policies push growth, but with diminishing rewards to the masses. Over the last decade the share of GDP going to consumption dropped from 46% to less than 36%.
Not surprisingly, class anger has reached alarming proportions, with almost 96% of respondents, according to one recent survey, agreeing that they "resent the rich."
America also faces its own share of social problems but not to such an extreme degree. Many Americans resent the affluent, but also dream of becoming them. any Americans resent the affluent, but also dream of becoming them. How else to explain the popularity of paeans to bourgeois vulgarity like Housewives of New Jersey?"
The above points strongly support my view that in the coming decades China, not the currently depressed U.S., is likely to face greater headwinds. For this reason I firmly believe we in the West need to move toward a pro-growth course driven by investments in our productive economy, basic infrastructure and skills-based education as well as sustainable immigration and population growth levels. We hear all of these points from business leaders today, yet little seems to move in Washington. So let me suggest another avenue that I have been looking at over the past several months, and that our businesses, big and small, can pursue when it comes to China: make your products here and export to China.
The US has a major trade deficit and the reasons behind this are far too complex to analyze in a blog. However, the one major opportunity I see in China is that country's thirst for products "Made in the USA". We should be focusing on designing, developing and manufacturing products here to sell over there. Its true that any product can be made for less in China or other off-shore locations, but think for a moment – that is relevant when you are competing with “Made in China”. I am suggesting that its not the case when you are exporting “Made in USA” TO China. As more and more people prosper in China, their craze for American made goods is soaring. But most of us are too blind to see this opportunity, and our leaders also don't get it.
My first realization of the importance of "Made in USA" was back in 2003. I was dating a girl who managed a telecom business, selling cell phones in Brussels. Cell phones were the craze back then, they still are I guess, a status symbol for all, and generation Y trends. One Saturday evening I went to pick her up at her store and, while she had locked the doors for the night, there were a dozen Chinese guys surrounding her, looking at dozens of phones laid out on the counter. I got the story from her an hour later after the Chinese customers had departed having purchased over 30 cell phones.
Basically, these guys were in Brussels on business and wanted to buy Nokia and Motorola cell phones. The only problem was that most of the phones in her store were 'Made in China' or 'Made in Taiwan'. That wouldn't do. These gentlemen wanted a Nokia that was made in Finland, or a Motorola that was made in the US. And they were willing to pay more. It may seem silly, but she opened over 100 boxes of brand new phones in order to dig out the models that were not made in China. She called other stores to get their inventory. They took all of them. If she had had more they would have bought those too. Amazing.
That 'trend' for all things made in the West continues today in China, while their ‘middle class’ grows. Sure, they still have a very uneven distribution of wealth and the majority of their population is focused on feeding themselves, not buying luxury goods made in France or Italy. But when you are talking about the kind of numbers they have over there it is a massive opportunity that can literally solve a big part of our economic issues across America.
So how can you make it happen? Well, you need a product to start off with. ANY product. I wouldn’t start with services, that’s a whole different headache, but products work. And the product can be anything as long as its made in here and serves a purpose. In fact, the hardest part of this opportunity is to come up with a viable product by Chinese standards, not American standards. While this means a lower standard of product, its still difficult to develop in my view, but you may have some ideas.
Once you have a product the next step is to take it to China. This is where the second half of the investment comes in. I spoke with a friend of mine, Moise Levi, in Brussels this past summer. Moise is an amazing guy, a financial advisor with clients who are exploring opportunities in China today. His view on China is similar to mine: take your "Made in USA" product over there, rent a booth at a trade show, build relationships over a few days, and start taking orders from would-be distributors. China's 'middle class' are emerging, albeit under government restraint, but they are willing buyers of all things Western as they flock to cities, apartments, condos and jobs in pursuit of the Chinese dream. Its real, its happening, and we are blind to it.
According to Moise and other sources, renting a booth at a trade show and traveling to China for a week is likely to cost you between $25k and $50k at most. But at this stage the challenge is about match making more than anything else, and there are other ways to meet Chinese distributors albeit face-to-face is key according to Moise given the importance of trust and friendship in Chinese culture. Online market makers like MFG.com and AliBaba.com are good places to explore if you are not willing to get on a plane at the outset and go see for yourself what I am talking about. Personally I would jump on a plane tomorrow and go, but then again I am a nomad…
I want to stress my point one last time – China is not to be feared, China is to be seduced and courted. Some of our leaders like Andy Grove, founder and former head of Intel, advocate starting a trade war with China to “protect American jobs and manufacturing”. I disagree. Build something for $1 in this country and sell it for $4 in theirs. The market can take it. You need a China strategy, now.
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