Don’t Put All Your Eggs In China’s Basket

I recently gave a speech at a Trans-Pacific Air Cargo Conference in Los Angeles titled, “Don’t Put All Your Eggs in China’s Basket,” and I was practically booed offstage.

The audience did not want to hear negative, derogatory, or dismissive talk about the booming China economy. My listeners were the economic counterparts of religious evangelists; nothing could counter their almost mystical faith in the Chinese economy’s limitless power and growth.

Certainly, there is much to admire about China. Within a few generations, it has transformed itself from a primarily rural nation into an economic colossus—a feat unparalleled in modern times. Warning signs, however, point to an economy that is turning from white-hot to red-hot to red.

The Warning Signs

The signs are plain to see, if people look at reality instead of fantasy. A few facts point to a potential slowdown in the Chinese economy:Foreign investment in China during the first half of 2005 is level with last year. This is the first period without growth in capital investment in almost a decade.

Exports, key to the Chinese economy, have slowed. Today, you can place an airfreight shipment on the next flight out of any airport in China, including Hong Kong. One year ago, cargo shipments were backlogged for days and even weeks—embargoed cargo sat on tarmacs at Hong Kong and Chinese mainland airports waiting to be loaded onto already full aircraft.

China’s domestic economy has cooled. Car sales, particularly luxury models, have collapsed. Consumer electronics purchases for homes and businesses have also dropped appreciably.

Housing prices—always a sensitive barometer of economic health, or lack thereof—have declined with softened prices. (The United States is not the only nation facing a housing bubble.)

In addition to an economy that is inevitably slowing, China has an overlooked Achilles heel. Its weak spot? China relies almost totally on goods produced to others’ specifications. It does almost no product manufacturing, shipping, or marketing for its own products.

As The Wall Street Journal recently commented, “The toughest challenge for China is how to transition from low- cost, often no-name manufacturers to respected global brands.”

China’s contrast with Japan in this area is striking. After World War II, “Japan Inc.,” the informal name given to the partnership between Japan’s government and private industry, was determined to produce quality goods. The shoddy merchandise that was the hallmark of Japanese manufacturing in the 1920s and 1930s was to be erased. And they have largely succeeded.

Toyota makes great cars, and will soon surpass General Motors as the largest automaker in the world. Sony sells the best laptops of any manufacturer. Canon produces the best photocopiers. And Bridgestone tires are market leaders.

China’s Fate

By contrast, it’s hard to name one indigenous, homegrown Chinese product. Instead, Chinese factories seem content to churn out lingerie for Victoria’s Secret, computers for Hewlett-Packard, toys for Mattel, and thousands of other products for end users in the United States and Europe.

Making unsuccessful bids for international oil companies hardly solves China’s utter lack of brand identification in the West.

China is not immune to the “maquiladora syndrome.” Maquiladora plants sprung up about 30 years ago along the U.S.-Mexico border to produce a wide range of low-cost components and finished products for the American market. For a number of years, these factories flourished, with laborers often working 24-hour shifts.

Then came the great sucking sound from China. U.S. manufacturers, always looking out for new, cheap production sources, moved en masse to China. Today, many of the maquiladora plants are closed; some 75,000 Mexican workers living in border cities either lost their jobs or are working part-time shifts. Many of the communities are ghost towns.

Will China suffer a similar fate? Not completely, because China’s industry is far more diverse than in Mexico and other parts of Asia where outsourcing is under siege from low-cost competitors.

During the next few years, however, companies will likely start to disengage from production and distribution facilities in China. U.S. transportation companies rushing into China for the first time to create trucking networks, or establish large sorting facilities, for example, have missed the boat.

What Next?

Who will take the production reins from China? I’m betting on the Eastern European nations formerly under Communist rule.

These nations have embraced capitalism and are now hungry for work. They have skilled, experienced, yet low-cost labor forces; offer substantial tax abatements to train workers; and other inducements for U.S. and Western European companies to establish production and distribution facilities in the region.

And the similar cultural, political, and historic heritage shared by these nations and the West is an intangible, yet equally important advantage.

To keep up with the constantly evolving global market, businesses must remove the blinders that have them focused exclusively on China and open their eyes to the other five billion people on our planet.

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