Monday, November 22, 2010

Who earns more in China, college or junior high school graduates?

The Wall Street Journal's China Real Time blog has written up research on a subject I've been mentioning for a while in talks: the tiny premium a university education may offer in China today.

The research, by a giant in the field of demographic research in China, Cai Fang of the Chinese Academy of Social Sciences, finds that Chinese university graduates earn, on average, only RMB300 or about US$44 more than migrant workers. Migrant worker earnings are converging with university graduate earnings. Remember that many workers in China's export factories didn't even graduate from high school - many often stop after junior high. In Guangdong province, the situation may be even more extreme: According to my own unscientific studies, in Guangzhou today, you can hire a university graduate with good, serviceable English for RMB2200 or US$331 a month. Factory workers in the same city or nearby Foshan might earn the same. (On an hourly basis, migrants still likely earn less, because they work longer hours.)

Given what we know about Chinese factory worker wages lagging behind economic growth, I have long been fascinated to know how this situation compares with the US. We know there is an emerging shortage of people who see work on a Chinese assembly line as a career - this is driven by demographics, in part, but also by a shift in worker mentality (that is itself difficult to separate from the demographic change). And we know that there are lots more people going to university in China, as there are in lots of other countries.

How does this compare with the situation in the US? Are wages for comparable jobs in the US already the same? It's very hard to do an apples to apples comparison, given how different these economies are, and how many possible professions there are to compare. But the US Bureau of Labor Statistics does conduct surveys of annual wages. Taking two jobs that might be similar to the ones I'm thinking of in China (factory worker and entry-level white collar administration job), the salaries are not that different, according to this data: They're both around US$31,000 a year.

I'm loathe to draw larger conclusions yet, but given what we know about what's happening with Chinese factory wages, it's likely that Chinese factory wages will soon exceed those of the entry level administration positions, at least in shortage-prone areas like Guangdong. Depending on where you sit (in Bentonville, Arkansas, say, or the offices of a labor advocacy group in Hong Kong), this might be a good thing or a bad thing. But it does put the value of a university education in China in a new light. What do you think?

Friday, November 12, 2010

Japan's Pentagon Papers

I'm in Osaka for Yomiuri TV's Wake Up Plus! again, and the theme of the hour is the posting on You Tube by a member of the Japanese Coast Guard of the entire video of the September collision between a Chinese fishing trawler and a Japanese Coast Guard boat.

Yomiuri TV is playing a central role in this story, because the Coast Guard member, who is male and 43 but whose name is not yet public, recently called YTV and told his side of the story before coming clean to his boss. The Coast Guard member (whom I'll identify by the handle he used on You Tube, sengoku38) is now in his second day of questioning, though he has not been arrested.

There are lots of issues wrapped up in this story, but a few thoughts:

1. This story has the potential to become Japan's Pentagon Papers. While Americans and Europeans are familiar with WikiLeaks, Japan hasn't had to contend with this kind of leak before.
2. If I were a Japanese potential whistle-blower, this event would give me a degree of confidence. My hope is that there will be a trickle-down effect in other areas, such as companies and government organizations, where Japanese come forward with evidence of misconduct.
3. Acting against point two is that the Japanese public, from what I can tell, is not entirely supportive of sengoku38. Many of the people YTV found on the street were critical of sengoku38's decision to release secret information (though some questioned why the video itself should have been a secret).
4. There are a lot of contradictions in the Japanese government's response to the collision, as the lovely Takenaka Heizo, who sat to my right, pointed out. They arrested and detained for two weeks the captain of the Chinese trawler, and insisted they had grounds to do that. Then they set him free, all the while insisting they had video of the event that would make the situation clear. Instead of showing this video to the public, they showed a brief portion to Diet members. Now they are questioning for two days the man who has from the beginning said he posted the video on You Tube. How could there possibly be two days worth of questions in this situation?
5. Whether or not sengoku38 is arrested appears to be a political decision. The Kan government is watching public opinion closely. There is no consensus among lawyers and other academics I have seen interviewed on whether sengoku38 broke laws.

Initially, I felt this story was another distraction, another example of Japanese politicians playing domestic games with international consequences. To a certain extent, I still agree with that, but I am more in favor of a rigorous domestic debate about this story. As Jeff Rosen, a professor at George Washington University and an expert in this area, put it to me in an email overnight: "I hope this case will provoke widespread reflection in Japan about the values of free expression versus the government's interest in avoiding embarrassment in foreign policy: in practice, plugging leaks is difficult today, even if the Japanese government wants to take a hard line."

This will not be the last time a Japanese person leaks politically sensitive information to You Tube. A new era has begun, a little later in Japan than elsewhere.

Saturday, October 9, 2010

Could better logistics revive American factories?

Could logistics help revive American manufacturing? I have been thinking about this question since my latest meeting with Bill, a Canadian inventor. I'll keep his full name out of this for now, but the basic outline of his story is simple: A couple years ago, Bill invented a new kind of shower head. He had hoped to have it manufactured in the US, but all the factories he spoke to insisted Bill pay up front the tooling costs to build a prototype.

Through a personal connection, Bill found his way to Sichuan province, China. A giant factory there was happy to cover tooling costs and make him a prototype. Soon, though, it became clear that there were some parts of the shower head that the Sichuan plan couldn't produce. Bill shopped around, exclusively in China at first. Nobody could do it. For all their strengths, Chinese factories are not always kind to small inventors - they're all about volume, and often about the quick win rather than building a long-term relationship. (This is a chicken-and-egg problem, it seems to me, since Western companies have also churned through their factories quickly. Who was teaching whom to think short term?)

Bill ended up buying the two components he needed from American factories, both in Pennsylvania. American factories are still competitive - hooray! But the final assembly was still going to be done in Sichuan. These two components - both rubber, very light and small - were going to need to be shipped by air to China. The factories suggested FedEx or UPS. Bill did a cost analysis and realized that FedEx and its brethren were going to eat up any profit he made from his shower head. FedEx was asking 75 cents per item. The US Postal Service, by contrast, was only charging 30 cents. Plus, the USPS offered the same tracking number system that FedEx and other express carriers did. For Bill, it was a no-brainer. He chose the postal service. "America has got an untapped resource, and that is its postal service," he told me recently in Hong Kong.

This all sounds hopeful, right? American factories, American services have a crucial role to play in global supply chains. Without those two parts, Bill would not have a shower head.

But that's when things started to break down. Both of the US factories he was buying from refused to ship by the US Postal Service. Part of the problem appeared to be concern about reliability; another was a fairly off-the-wall worry that the USPS, as part of the government, was evil. In the grim, shrinking world of small US manufacturers, managers are still willing to impale their businesses on these kinds of opinions.

Bill now has a friend physically pick up his components and hand-deliver them to the post office in Pennsylvania. He hasn't had a single problem with delivery to Sichuan. He thinks this is because government services - the US Postal Service and China Post - design their schedules to fit well together.

It sounds far fetched, I'll admit, but it did get me thinking. I asked a friend in the US, a very sharp veteran board member in tech and other sectors, and he asked some of his colleagues what they used to ship out of the US. They preferred DHL, and used the other services selectively by region, depending on their network. "The USPS. . .that got a head scratch," he wrote, describing his conversation with his logistics colleagues. "'If we were sending letters,' my logistics friend said, 'we might look. But anything with any size--it's hard to think the Post Office would be competitive.'" In short, the USPS is missing a trick. Nobody trusts them.

My friend feels the problem goes even deeper. He wrote: "From my own perspective, the USPS feels like it's running under 20th-century rules. Their revenues and market share are falling so they are raising rates and cutting services. 25 years of technology marketing should have convinced them that protecting share is all about lowering prices and adding services."

Talking to someone in the furniture industry this past week, he said nothing short of a major terrorist attack in a port or $250 oil would shift manufacturing back to the US. The Planet Money podcast in the link above describes 70-employee high-tech, R&D-intensive factories in New York as the model for prosperous American manufacturing. They are better than nothing, but they don't seem to be, in and of themselves, very big job creators.

A lot of American industries have simply lost the capability to make things they used to produce. A friend here in Hong Kong just raised his prices 25% for Chinese-made building materials and got no pushback from his US customers. Why? Because the US customer had nowhere else to go. They couldn't bring production of that component back in-house because they had sold the machines, closed that line, fired those workers. And who, in this environment, was going to invest in restarting manufacture of a low value-added product?

Monday, September 20, 2010

The temporary economy

This NPR story on retailers hiring temporary workers reminded me of a conversation I had yesterday with the head of a big sourcing company based here in Hong Kong. The executive mentioned how the Great Recession had accelerated the trend towards retailers shunning inventory.

(To his credit, wise Liam Casey of PCH International has been telling me about this for years. I suspect that the electronics industry is way ahead on this no-inventory rule.)

Retailers are asking vendors and factories to produce as close as possible to the moment the products will be needed in stores, or to hold the inventory themselves, if they wouldn't mind, until then. Order quantities are getting smaller, product updates more frequent. (See my Bloomberg column for more on this.)

The NPR story above points out that retailers are waiting until the last possible moment to hire additional staff for the Christmas season, which accounts for 40-50% of retail sales in the US.

And this NPR story talks about Harley-Davidson's attempts to keep costs down and keep manufacturing in America by making its workforce as flexible as possible. Owners of factories in southern China, who protested vigorously Beijing's attempts to make firing workers more costly in the 2008 Labor Contract Law, already operate precisely as Harley-Davidson would like, staffing up and down in response to order volumes.

It all makes me feel like we are living in a temporary economy, where goods and labor are applied only in bursts, in response to market needs. One could argue that companies devastated in the downturn have rightly become more conservative, or that Wall Street's demands for quarterly improvements have goaded companies in this direction, or even that this is simply an inevitable extension of the Japanese just-in-time model. Or that globalization, or the arrival of lots of fresh-faced Chinese workers on the global labor market, drove us to this point. What seems clear is that, for a certain and likely growing percentage of people in America, China and elsewhere, the temporary economy is the new normal.

It does make me wonder where it leaves us economically in the long run. China, with its migrant workforce, has been perfectly suited to the temporary economy. Maybe this is part of the global contribution of Chinese labor - that it has given the world the flexibility to create temporary economies.

In the US, the picture is more muddied. In the long run, the economy should be more efficient, and in theory, those people who are working seasonally are free to do other jobs when they aren't making Harleys or selling e-book readers to put under the Christmas tree.

But even if the economy this ultimately creates is more efficient, it does make me wonder about our ability to create good temporary jobs, and whether those jobs can pay people enough to maintain their standard of living.

Tuesday, August 17, 2010

Bee in my bonnet

This is not in any way to toot my own horn, but to make a point. In the last two weeks, I have twice been introduced to big multinationals as a speaker about China and Japan. These are both companies with operations in China, and one is definitely a group you've heard of. Both times, the conversation has gone like this: The company and I chat about what kinds of issues I think are interesting going forward as China tries to move away from an export-dependent model to a more consumption-oriented economy.

They listen politely, express enthusiasm, and then say: many of our staff are in other countries, so we're not sure they're really interested in China. Or, to quote directly from an email sent to the person acting as my representative in this: "Alex sounds great! Very interesting background. Just thinking, as the audience is from all over Asia. It would be useful if it was something that has relevance/interest to people across the region rather than just those in China and Japan.” The other company mentioned that they had staff in South America, where staff definitely didn't care about China.

What amazes me is that anyone today sees economic and business issues in China as somehow only relevant within Chinese borders. It feels kind of moronic to repeat here, as I know my readers already know this, but pick a subject - commodities markets, cars, America's debt, industrial design, innovation, manufacturing, inflation or deflation - and China's fingerprints (and sometimes its whole paw) are all over it. Officially now the world's second largest economy, China is a driving force in most industries.

There is a debate underway about the gap in understanding or knowledge of each other between China and the US, or China and the West. The Chinese migrant workers I speak to don't have a very sophisticated understanding of the US, but I am starting to wonder how different this is from the executives at these big multinationals.

Friday, August 6, 2010

The mummification of Japan

I'm in Osaka this weekend to appear on Yomiuri TV's Wake Up Plus, that rare beast: an intelligent TV show. The story of the moment in Japan is the nationwide hunt for missing centenarians, following the discovery of a modern-day mummy in his bed, 30 years after his death. Officials suspect that a relative did not notify the government of his passing in order to receive the man's benefits.

For the moment, the debate in the Japanese media (including Wake Up Plus) is focused on three main elements: the government's failure to detect which of its benefit-receiving citizens are living and which are dead; the Japanese tendency to leave family matters to the family; and the fact that Japan's privacy laws hinder investigations into this kind of fraud. To me, the tenor of the debate itself reflects Japan's self-flagellating tendency to blame the government and politicians in the first instance.

The fact is that these missing pensioners are a reflection of how deeply and painfully Japan's long stagnation has affected its oldest and youngest citizens. Trite as it sounds, I'll recount a conversation I had with a taxi driver here in Osaka yesterday: at 65, he receives about US$1200 a month in pension benefits from the government. His rent accounts for half of this, and after utilities, his cell phone bill and food, there isn't much left. So he continues to work as a taxi driver, taking home about $1800 a month. (One might wonder how he is allowed to work while receiving public benefits, but the benefits, like the minimum wage, were not meant for people to depend on entirely, I believe.) $36,000 a year isn't bad by global standards, but consider that this man might live for another 30 years and this is as good as it will get for him. While he is clearly putting money aside for his retirement, he expects he will have to move into a smaller apartment when he retires. This is not the fancy globe-trotting retirement that I, at least, had imagined for Japan.

While we hear much talk about China getting old before it gets rich, Japanese people are getting poor before they get old. Younger Japanese will not receive the $1200 a month that that taxi driver gets; they will likely receive much less.

Putting aside the fact that pension fraud is a crime, one larger issue behind these missing old people and their mummified remains is that younger Japanese need to rely on their parents' retirement benefits because the economy is not providing sufficient job opportunities.

Every trip to Japan is more depressing than the last these days; I stay in hotels that will, without the help of big spending Chinese tourists, likely lay fallow, listen to music from pianos that play themselves, pass through ghostly tourist districts designed for a wealthier country. Japan is no longer the country it once was. Policymakers in other rapidly aging countries (and those that struggle to create new jobs, like the US) should take notice.

Tuesday, August 3, 2010


If there is anyone out there still reading, I apologize for the long silence. Since I last posted, the issues I raised in The China Price have become headline news internationally. I’ve been traveling for most of that time, mostly in China and the US. I have become increasingly worried, in my travels back and forth to the US, about the lack of debate about one of the consequences of China’s rise for the rest of the world: the increasing difficulty developed countries will have creating jobs.

A brief conversation I had yesterday with two business types – one an investor, the other the CFO of a coal company heavily involved in China – underscores the point. I said I was worried about the way that China’s economic growth, the flypaper nature of manufacturing and technology combined to make creating jobs for ordinary Americans substantially more difficult. They swiftly changed the subject.

What I was talking about is not just “Chimerica”, but “Techimerica”, or China + America + technology. I haven’t drawn any grand conclusions on this subject, but it seems to me that as China’s manufacturing engine draws in more (not less, ye “rising wage rates will drive factories out of China” enthusiasts) jobs, the Chinese consumer becomes more important to the global economy, and American companies become ever more focused on cutting costs by eliminating jobs at home, there will be less and less for Americans to do. Technology accelerates this trend, in part because so much of manufacturing is related to technology, and so much of that manufacturing now happens in China, but also because technology makes the economy more efficient. We no longer need as many people to get the same job done (that’s the old “increasing productivity” chestnut-argument about US manufacturing, but it applies more broadly to things like the iPod, which has created more jobs in China than in the US.)

What I’m describing on the cost-cutting side is the same kind of full-throated capitalism that daily leads to the excesses of “the China price” for Chinese people. But despite all the rhetoric about creating “green jobs”, the larger problem is that there is not a greater sense of urgency about the long-term consequences of these factors for American job creation, and therefore for the standard of living for many Americans. Anyone who wants a preview of what this will look like can visit the people I talk to in Japan, who, after years of standing elbow-to-elbow with mainland Chinese on factory lines in Chiba (competing with the Chinese factory worker in their own country), are giving up hope of ever making a living above the poverty line. Or talk to some of the ordinary Americans who already have little choice but to work at Wal-Mart in order to be able to shop at Wal-Mart.

Andy Grove wrote eloquently of this problem in Bloomberg BusinessWeek last month, describing how Silicon Valley start-ups don't create American jobs the way they used to, how that mechanism is broken, and thus how this blind faith that innovation will save the US economy is a fallacy. Grove asks: “what kind of a society are we going to have if it consists of highly paid people doing high-value-added work—and masses of unemployed?” The US has become “wildly inefficient” at creating technology jobs, he says, citing compelling calculations. Bob Herbert also wrote passionately about this subject in the New York Times last week.

One luxury of blogging, as opposed to writing papers, books or newspaper articles, is that you don’t have to strain for policy recommendations. Commentary suffices. Though I have no grand plan for creating American jobs, I will say that while I agree with the arguments that both Grove and Herbert make, I am interested in the arguments Matthew B. Crawford makes in Shop Class as Soulcraft. I worry about the policies Grove and Herbert propose. Grove wants to tax American companies that rely on offshore labor (good luck with that protectionist gambit). Herbert, in an outro so vague that if written by an external contributor it would never pass the New York Times op-ed editors’ muster, suggests that we follow the examples of Germany and Japan and “value our workers”. Anyone who has spent any time in Japan in the last few years can tell you Japanese workers don't feel valued.

I don’t know what the solution is, but to return to my discussion with the investor and the coal man, I can say that very few people want to talk about it. It’s a lot more fashionable to opine about the US deficit and the Krugman-Ferguson spat.

American companies and investors (not workers) are benefiting so hugely from Techimerica in the short and medium term (and who really wants to think about the long term?) that it will require discussions as painful as the ones we had about “death panels” in the health care reform discussion to address it. But, as I meet American aerospace engineers helping the Chinese design airplanes and talk to my brother, a talented industrial designer whose work is increasingly being outsourced to Chinese engineers at a fraction of the cost, I know that this is a debate we must have, and soon.

Monday, March 29, 2010

Leveling the playing field

In the great debates about international trade, the voices of ordinary people get drowned out by politicians, executives and economists. I wrote The China Price to put a face on Chinese workers for people in the West. Starting today, I hope to add to that discussion the voices of other workers.

Matt is about my age and works at a unionized Ford transmission plant in the Detroit area. A Michigan native and the son of a General Motors employee, he has always worked at car component factories. Matt and his wife, an employee of the same Ford factory, earn about US$30 an hour, 45 hours a week. They are about to have their first child.

I wanted to speak to Matt, who asked that I not use his real name, to see what it was like to work at an American factory and what people in America’s industrial heartland thought about China. It wasn’t easy to find him. I emailed friends and contacts in the US and Asia, and found only two people who knew anyone who worked in a factory. As a friend who lives in Washington, DC wrote: “Man, you really made me realize how far removed I am from mainstream USA in DC. We don't make ANYTHING here (besides bad policy), do we?”

Matt’s factory proves that contrary to what a lot of executives out here in China say privately, unionized American manufacturing can still be extremely competitive. The question is for how long.

Matt first applied to work at Ford in 1993. “I’ve been waiting since I graduated from high school to get in,” he says. Ford jobs were scarce, and even the application forms were prized. Matt’s uncle, who worked at the plant where he works today, brought him the application form. Then as now, the unionized plant only hired when enough older workers retire to justify new additions. Today, there are people on the floor next to Matt who have been working there for more than five decades. Many were hired in the late 1970s. There is another, smaller cohort that joined in 1995. The plant hasn’t hired a single new employee since 2000.

Being a union member guarantees Matt benefits and job security – almost antiquated privileges in today’s economy. Manufacturing has lost more jobs than any other non-agricultural sector in the US except construction since December 2007, according to the Bureau of Labor Statistics.

Production at Matt’s factory is expanding, not shrinking. The main reason is trade. About 60 percent of the transmissions Matt and his colleagues make are exported, mostly to BRIC countries – Brazil, Russia and China. It’s still cheaper to make them in Michigan and ship them overseas than to make the transmissions abroad.

China is Michigan’s third largest export market, after Canada and Mexico. Some 43 percent of the state’s exports are transportation equipment (cars and trucks). About 28 percent of Michigan manufacturing workers depend on exports for their jobs, according to the US Department of Commerce.

As grateful Matt is for his job security, he admits that “some of the stuff [about the union] is not the greatest.” Employees who regularly miss work get the same paycheck as Matt, who is rarely absent. “There’s no bonus for working harder than another person,” he says. “Everybody’s equal, whether or not they’re equally efficient.”

There’s little incentive to go the extra mile to get the job done better or faster. “In a place like this, nobody’s going to give you a kudos, nobody’s going to give you a promotion. Everybody is on a level playing field.”

Although China’s one national union is the world’s largest, at the coastal consumer goods factories I visit in China, factory workers are paid by the piece and almost never unionized. If they’re lucky, they work 11 or 12 hour days, six days a week (a 72 hour work week). They don’t even necessarily want job security. When orders slow, many resign to take time off and find another job elsewhere. Average wages in China were 81 US cents an hour in 2006, 3 percent of the average US hourly wage of $30.

Auto workers in China may be better paid and thus less flighty than those in electronics and apparel factories, but maybe not. An economist friend tells me that even the International Monetary Fund struggles to hold on to its Chinese economists because so many leave for better pay at foreign investment banks. To me, this seems not cultural but rational: there are inevitably more job openings in the world’s fastest-growing economy. In an economy that is growing 8.7 percent a year, people are naturally less interested in job security than the freedom to switch jobs and earn more elsewhere.

But in my conversations with Matt as well as Chinese and Japanese workers over the last few months, I have been surprised by the contrast between the desire for stasis in the US and Japan (the desire to hold on to what we used to have) and the hunger for movement in China. Chinese people’s appetite for mobility – whether it be leaving your children and moving across the country for a job on the coasts, or forgoing the relative security of a factory or white collar job to start your own business, or switching jobs once a year – is part of what makes China such an attractive place to manufacture consumer goods.

I wonder whether those same qualities make China any more attractive as a place to manufacture transmissions. I also wonder whether you could make the case that trade is not a zero sum game, that the more transmissions Chinese people need, the more Matt will make, regardless of whether Ford starts producing the same transmission in China.

Turns out, what Matt and his neighbors talk about over lunch and across their lawns in Michigan isn’t China – it’s Japan.

“Japan doesn’t allow many American cars to be sold in their country,” he said. “If a country’s not going to accept our imports, we should cut down on the stuff they’re allowed to import to us.”

Tuesday, February 2, 2010

China's export advantage

I've got an oped in this morning's Wall Street Journal Asia about China's export advantage. I spoke to a lot of people whose insights didn't make it into the piece, so I'm going to include a couple here. The first is an email interview with Lou Longo, practice head of global services at Chicago-based advisory group Plante & Moran (pictured on the left). He advises mid-sized mid-Western firms in American's industrial heartland. With his approval, I include his comments below verbatim. My questions in italics.

1. In your practice, what sectors have you seen the Chinese gaining market share in over the last year? (This can be very specific.)

Machine tooling industry specifically stamping dies and plastic injection molds. Durable medical devices including hospital and home care machines, hospital med components, diagnostic equipment and surgical tools. Automotive machined components such as castings machines into body frame components and structural members. Aircraft components especially large body components such as aircraft door and nose assemblies.

2. What reasons can you find for this expansion of market share? If the answer is simply that the Chinese are cheaper, perhaps you can be specific about how cheap, and why the customers weren't buying from the Chinese (who have obviously been cheap for years, and are more expensive in some categories now than they were two years ago). Do you see any reasons beyond them simply being cheap?

In the case of machine tools, it is the significant labor savings and lack of work rules which allow the manufacturing time to produce a tool to be as much as 30% less in time (meaning customers can shorten their manufacturing lead times ) than what it takes U.S. and EU tooling shops to produce a tool. In medical device, it is a combination of the industry being late to follow an off-shoring production strategy as well as the belief that China has a huge, undeveloped market for the use of such products in the future. In automotive, it has shifted from an export, low-cost country expansion into China being the most significant vehicle market with the strongest growth prospects in the world. As a result, automotive companies and their suppliers are investing in world class technology in China allowing the quality of production to be the best as well as cheaper based on labor and input savings. In aerospace and aircraft, it is specifically a function of cost but mostly it is in negotiation by the aircraft manufacturers in competition to serve the growing airline business in China the Chinese government is expecting if not requiring that a certain amount of content be China sourced. For example, if Boeing hopes to beat Airbus, one method is to show it has a higher China content in the airplanes it wishes to sell to the China airlines. A critical difference in the China low-cost model to other low-cost locations (e.g., Vietnam, Thailand, Sub Sahara Africa) is that China is the only one with strong manufacturing infrastructure (transportation, education, raw materials, etc.) and the world’s largest potential domestic market. I am seeing sourcing decisions being made where China is a lower cost than the U.S. but not the lowest cost yet the sourcing decision is made for China since it gives the added perceived benefit of learning the domestic market for future sales and growth.

3. Have you dealt with any cases of Chinese companies which previously exported to the US setting up manufacturing operations in the US? Can you tell us more about whether that is helping these companies gain market share?

Yes – in machine tools and automotive components. The financial distress that the U.S. automotive market has gone through has allowed Chinese companies to buy market share in the U.S. and a beach head through acquisition of suppliers and manufacturers of vehicles. Three years ago I was involved in assisting several clients in looking for target Chinese acquirers as the U.S. companies were starting to face financial difficulties and they weren’t successful in attracting U.S. or EU buyers for the companies. In several discussions I had in China with the Chairman of China automotive companies, they listened to the opportunity I presented and respectfully told me they would be interested only at liquidation pricing. In effect, what they told me was there was no reason to pay a fair on-going value for the business since eventually they would be able to acquire it or a similar company when it was liquidated through bankruptcy or a last ditch sale. We are seeing that come true today.

4. What sectors do you expect to see Chinese market share gain in the future and why?

Life sciences, agriculture, medical device, aerospace and heavy equipment both off highway construction and farm-related. Life sciences because the cost of educated scientist is low and the Chinese have little external pressure on western morality based matters such as animal testing, stem cell research and the like. Agriculture because as the economic influence of China increases, more people will want to eat better and will demand local availability of meat, dairy and produce which is expensive and is currently leading to eventual export capacity of these items. Medical device and aerospace because these industries are behind consumer goods and automotive in the development of a low cost sourcing base so this will drive some growth regardless of China’s direct efforts. Heavy equipment since labor is cheap and most of the development in terms of mechanizing construction and agriculture will occur outside of the U.S. and EU driving local or more regional supply chains offering China base to grow this sector.