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.”

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.

Beyond grass-eating men and meat-eating women

I've been doing some research on Japanese social trends, and came across a fascinating article that I thought was worth sharing. The piece, by the astute social commentator Maki Fukasawa (who coined the term "grass-eating men"), is in Japanese, so I will summarize it here.

Fukasawa's piece, part of a column she does for Nikkei BP's Associe, a smart Japanese website aimed at working women, is ostensibly about the gap in male and female views on marriage, but it covers a lot more territory that has relevance to anyone interested in the Japanese economy. (As an aside, why are so many women's sites in America so trivial and fluffy?)

It won't be surprising for anyone who has been to Japan and been served tea by a female secretary before meeting with a male executive that Japanese women earn, on average, just over half of what men make. What was new to me was that Japanese women's average income peaks in their early 30s at just under US$34,000, and falls for the rest of their lives. By their early 50s, women are earning just US$30,000. Japanese men, by contrast, see their income rise over the same period. Men's income peaks in their early 50s at more than twice what women the same age earn, at almost US$75,000. Unsurprisingly, women represent just 10 percent of Japanese managers, compared with more than 40 percent in the US, according to Fukasawa.

These data reflect the "M-pattern" of Japanese female workforce participation, which climbs in their 20s, falls in their 30s and picks up again in their 40s. Lest you think that this is changing, Fukasawa reminds us that the M-pattern has been in place, essentially unchanged, since the 1980s. While clearly women in many countries struggle to balance work and home life, Japanese women are handicapped in their advance in the workforce by local prejudices (many carried by women themselves) but also the ridiculous shortage of nursery school places. There are 20,000 children on waiting lists for day-care centers in Japan. Only 28.5 percent of women with children under three work; by the time these kids are 6, 48.2 percent of their mothers work.

And I'd be willing to bet that many of those women aren't working full time. Women, like young men, are much more likely to be on non-staff contracts. Women accounted for 30 percent of Japan's non-staff workforce in the 1980s. Today, they account for more than 50 percent. I suppose you could argue that this reflects a higher total workforce participation for women today.

Fukasawa argues that these data support why men and women in Japan are so far apart on marriage. Women, including the "meat-eating" hunter women Fukasawa talks about, are very keen to get married, but men are shying away from this rite of passage. (This might explain why 25 percent of first children in Japan are conceived out of wedlock, according to Japanese government data, and why wedding planners now cater to pregnant brides, something that would have been unheard of as a business model a decade ago.)

The problem isn't hidden, Fukasawa says. It's obvious. That's why women care so much more about marriage - it's their best shot at financial security. And it's why men, concerned about being laid off, are even more reluctant to get married, since that means supporting another person (and likely a child as well) economically for the rest of their lives.

China will be having the red, thank you

As I write, my piece on New Zealand wine is running at the second most read on the New York Times' Global Business section. I'm sure this won't last, but I did want to add a few things for anyone interested in the China market, one of the future growth opportunities New Zealand is targeting for its wines.

I did some research on Hong Kong's wine market as part of this piece, and learned that a whopping 78 percent of wine imported into Hong Kong is red. Japanese wine drinkers, I was told recently by a well known wine writer, apparently also prefer red, in part because it's obvious to passerby what it is in their glass - the whole point of conspicuous consumption. I don't know if Japanese (or Chinese) wine drinkers are that facile, and I haven't done any specific research on wine in the mainland, but I'd be willing to bet there is a similar preference for red, and probably (at least once you get out of the weeds of mainland-produced wines) for famous French red in China.

All of this makes New Zealand's attempt to transition out of sauvignon blanc, which accounted for 81 percent of exports last year, that much more important. New Zealand's pinot noirs are not well known in Asia, though to me at least, many are excellent (she says as though she knows anything about wine!). There is a long marketing and brand-building road ahead, and maybe one conclusion is: as New Zealand's wine industry looks to the Chinese market, the more boutique, the more exclusive, the more expensive, the better.

For evidence that the New Zealand wine industry is hungry for better international exposure, see here.

The risks of remaking ourselves in China's image

In the wake of the financial crisis, there has been a lot of justified hand-wringing in America about our economic prospects. Some of this criticism has pointed to China, and particularly China's industrial policy, as an example we should follow. “In China, shovel-ready means shovel ready,” James Owens, Caterpillar’s chief executive, said in April, lauding the country’s quick mobilization of resources. Fareed Zakaria, editor of Newsweek, declared China “the winner of the global economic crisis.” While it's clear that China's political system allows it to respond more quickly in a crisis, it isn't clear to me that China's industrial policy is the reason for its prolonged and rapid economic growth. Other factors - foreign investment, a cheap renminbi, zealous local governments where officials are promoted on the basis of how much economic growth they can chalk up - these seem more important in driving growth than the policy of propping up a few industries with state bank loans. There are plenty of lessons we can learn from China, as Bill Powell of Time argues articulately here, but they aren't in the realm of big, unwieldy policies to stimulate development (and sometimes overdevelopment) in certain sectors. China has changed the competitive landscape. Revaluing its renminbi, while long overdue and important for addressing some global imbalances, is not going to bring back any significant number of manufacturing jobs. America needs to look carefully at preserving and building on what has made our economy so competitive in the past, and how we can ensure that our future growth trajectory brings as many people as possible into the fold. For more of my thoughts on this, see my piece on Foreign Policy's website published this week here.

Kicking America while it's down?

More than a year after the product scandals that shook China's international brand image, Beijing has paid for a TV advertisement intended to put the record straight. The 30-second ad, now playing on CNN and commissioned by the Ministry of Commerce with "participation" (=money) from four industry groups, is already stirring up debate in China. International debate, I'm sure, is not long behind.

Created by DDB Guoan and hailed by unnamed experts in the China Daily as "a PR breakthrough", the ad shows how widespread Chinese-made goods are in everyday Western life. An Ipod is "Made in China with software from Silicon Valley"; a pink dress is "Made in China with French designers", an airplane is "Made in China with engineers from all over the world", running shoes are "Made in China with American Sports Technology".

The ad is fascinating on multiple levels. For one, it's the first attempt I've seen by a Chinese government ministry to defend Chinese products to the English-speaking world using a TV advertisement. I remember covering CNOOC's bid for Unocal and seeing how the Chinese failed to make their case to the Americans. So at first glance, this ad might suggest China had learned its lesson.

But the timing and message of the ad could well be unfortunate. While it's absolutely accurate to say that the world is bringing more of its design and manufacturing to China, I wonder if viewers in America will feel like China is kicking America while it's down. Americans are understandably anxious about our economic prospects right now, and to me at least, this ad seems to touch that nerve. Made in China with American technology? Factually, totally accurate. But to the average American, could it be a reminder of what America no longer does, of the fading of our own industrial glory. And could it even bring to mind some of the less savory ways that China was able to win this business? Its poor track record on the protecting the environment, labor and intellectual property rights and its management of its currency to keep its exports competitively priced, to name a few?

The most disturbing part might well turn out to be the airplane - given the national significance and economic importance of companies like Boeing and Airbus, the obvious military carryovers from the aircraft industry, and China's recent product safety scandals, I'm not sure how comfortable ordinary Americans would be with the idea that China wants to dominate airplane manufacturing the same way it has shoe making. Again, what the ad says is right: China is playing a larger role in airplane manufacturing, and it is doing it with help from foreign engineers.

Still, the commercial demonstrates the challenge China faces in crafting an intelligent message about its products, and the inherent mutual suspicions that lurk within China's relations with its major trading partners. China can speak the truth, as it does in this ad, and it can still strike the wrong chord with some people. China should be able to promote its own products without seeming to do so at the West's expense.

The ad is here and here. What do you think?

China Quality Issues

The University of Southern California's US-China Today has a piece out yesterday on product safety issues in China quoting me and a range of other non-Chinese people. I wish the reporter had talked to an actual factory manager or an actual Chinese person involved in global supply chains to get their perspective. Anyway, the piece is here.