July 14, 2003
Can the U.S. Afford to Export its Manufacturing Economy? by Jim Altfeld
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Can the U.S. Afford to Export its Manufacturing Economy?

by Jim Altfeld

Conventional wisdom says that a global economy increases competition and drives costs down. But who pays the price?

Our country is losing its manufacturing base. In fact, unless there is a dramatic change, it appears that the last of America's manufacturing sector will slowly but steadily be swallowed up by China. While the U.S. economy is still struggling to get back on its feet, China's economy is booming with a constant growth of 7 to 8%. Dell, HP, Volkswagen, Black & Decker, GM, Stanley, Honda, Rubbermaid, Toyota, Galanz, Nokia, Sony and Nike are all there, just to name a few.

And it isn't just the Fortune 500 companies that are going. The small to mid-size companies ($5 to $200 million) are leaving as well. In fact, many U.S. manufacturers are giddy at the prospect of climbing into bed with China, because of the incentives it provides to those interested in establishing manufacturing centers there. The result? China already has a firm grip on producing the world's computers, high volume consumer electronics and bicycles.

America is a country founded upon manufacturing. It makes us who we are. Giving it away, at least from my perspective, would be a disastrous mistake. Yes, China is the "Godzilla" of smart, cheap labor, which in the scheme of things, equates to high quality products produced for next to nothing. With its low labor rates (the average factory worker wage is 40 cents per hour -- one sixth that of Mexico and one fortieth that of a US worker), lack of safety regulations and penalties, cheap real estate, tax holidays, a ready network of suppliers and customers and inexpensive supplies, China enables companies to make a product, ship it back overseas and still come in far below what it would cost
them to manufacture it in the U.S.

But what are the hidden costs?

Today, major carriers confirm that planes and cargo ships go empty to China, but return packed full of goods. There is little doubt that China is cleaning our clock when it comes to manufacturing. With an inexhaustible population of 1.3 billion people, China can continue to provide smart, cheap labor for many, many years to come. As it continues to successfully build its manufacturing sector, China is also strengthening its position in the world as an up and coming superpower. China's purchases of raw materials and equipment to power its export sector have bolstered Asian economies weakened by the slowdown in the US and Europe. In fact, a recent study in Assembly magazine showed that Asia
is the number one preferred location to invest in for manufacturers with foreign plants, with 53% maintaining operations there.

Without question, China has done its homework. Its total import and export trade was $510 billion last year, nearly 15 times greater than it was in 1980. A whopping 41% of its exports went to the United States. China is currently the sixth largest trading nation in the world and is poised to leap into second, surpassing Germany and Japan by the end of the decade. The pace of its trade expansion and industrial development is unparalleled. Cities like Dongguan, which ten years ago was little more than vegetable farms and rice paddies, is today a manufacturing center. In just this one city, over 4 million laborers work in some 22,000 factories turning out everything from power tools and shoes,
pc boards to patio chairs, high definition televisions to microwave ovens, and bedroom sets to computers. There are rows upon rows of airplane hangar sized buildings that go on for miles. Container trucks deliver the goods to high-tech ports where cargo gets loaded 24/7 bound for Los Angeles, Rotterdam and Tokyo.

And there's more. China has been accepted into the World Trade Organization, it has reduced tariffs, it offers tax breaks and incentives for those manufacturers interested in opening a factory in China; there is no OSHA or EPA, workman's compensation is unheard of; and there is no demand for healthcare, better working conditions, or pay increases. According to a report commissioned by McKinsey, China's growth is due to a combination of cheap wages, lower taxes and cost of capital. (No kidding.)

Right now, China is the place to be if you are a US manufacturer. Unfortunately, as American businesses continue to move manufacturing to China, the United States becomes weaker. Why? Because with manufacturing jobs disappearing, its middle class is shrinking.

Unemployment levels in the U.S. continue to rise. (A study done for a congressional panel found that at least 760,000 US manufacturing jobs have migrated to China since 1992.) And, we're not alone. Hong Kong, Taiwan, Singapore, Mexico and the Philippines have all lost thousands of jobs and entire industries. In the US, for example, half the bicycles sold in the US were American-made as recently as the mid-'90s. Today, Chinese imports now dominate the market representing 85% or 16.8 million bicycles sold in the US last year. Our trade deficit with China is astounding. Our purchases of Chinese goods last year, which included everything from ceiling fans to pianos, were $83 billion greater
than Chinese purchases of US products. Wal-Mart alone bought $14 billion in Chinese merchandise last year. On the other hand, you can't really blame the manufacturers for trying to compete. Those who cannot match China's prices have two options. Close your doors and perish, or close your doors here and shift production to China.

In a recent Fortune magazine article entitled "Who Sold What to Iraq", China wasn't the only one doing it. According to Fortune magazine "China's great Huawei Technologies is believed to have supplied Saddam's army with sophisticated communications hardware even as it was doing business with the likes of IBM, Motorola, HPand Qualcomm." The article went on to say, "… it's been known since early 2001 that Huawei has had dealings with Iraq."

Last but certainly not least is the issue of counterfeiting and the enforcement of patents and intellectual property laws. To become the power they want to be, China must eventually pay heed to these laws. However, whether China "plays by the rules" (as the president of the National Association of Manufacturers put it recently) or not, China is, and will continue to be, a major threat to the economic stability of the United States as we know it today.

Without manufacturing, the United States will lose strength in the world economy - - and no one knows that better than China. With the overwhelming size of China's middle class, which has been estimated by the Chinese Academy of Social Sciences to be around 200 million, we could be in real trouble. Yes, China remains impoverished with two-thirds of its people living on less than $1.00 a day. Yes, its industries lag far behind ours in technology, innovation, managerial and marketing expertise. But acccording to an article in Financial Times, China's superior economic performance shows tremendous promise due to "its investment in and the constant improvement of its manufacturing sector." As
an example, China has built dozens of high tech research centers and has overhauled its higher education system aimed at training top rate scientists and engineers.

What is astounding is that 37% of Chinese graduates today are engineers. In the United States, that figure is a mere 6%. With that comparison, it stands to reason that China is and will be much better prepared for high tech growth.

What then is America's future? Will America become the world's "enforcer"? Will we become a nation of military might and a reservoir of white-collar managers, business leaders, financial advisors and marketing gurus? Will we become a nation of services? Will we continue to be the world's greatest consumer nation?

The answer to these questions depends upon how much of the store we end up giving away to China. The Chinese leadership has already outlined aggressive expansionary plans for the next 20 years. Their intent is to boost their own middle classes, becoming the world's hub of manufacturing and basically kicking our manufacturing butts.

From WWII through the early seventies, Americans have thrived in an economy of great demand and not enough supply to meet it. The United States has always prided itself in its ability to create and produce. Then suddenly the world began to change. There was still great demand, but supply was coming from several places. We woke up to find that the world was shrinking. We had lost our television manufacturing to the Japanese. Next went many of our appliances.

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