Can China innovate its way out of a prolonged economic growth slowdown?
Shaun Rein, managing director of the China Market Research Group, believes so. In his new book, “The End of Copycat China – The Rise of Creativity, Innovation and Individualism in Asia”, he argues that China will start innovating now because it has to – and that it didn’t before simply because it didn’t need to. That’s an interesting theory, but is he right?
Rein first does battle with common perceptions that the Chinese political system or culture limits its ability to innovate. It’s not because China is a communist-led country with limited individual freedom, that it does not come up with corporate inventions, he says.It’s also wrong, he says, to think that Chinese are simply unable to innovate because of some perceived “Confucian conformity”, as academic Panos Mourdoukoutas argued in Forbes in 2012. For Rein, such an argument is historically incorrect, as even at the height of Confucianian influence, the country brought about huge innovations such as “gunpowder, multi-stage rockets and the compass”.
The real reason why we saw less innovation – and more imitation – emanating from China in recent decades, has simply been that this approach was best suited to the country’s economic reality until now.
In a country where common products have often been under-supplied, there was little motivation to strive to create the most sophisticated technologies. Better not to reinvent the wheel; rather make as many wheels as cheaply as you can with the technology provided by those who invented it in the first place. That’s exactly what many Chinese companies did in the last few decades, whether in manufacturing washing machines, computers, mobile phones, or online marketplaces.
It is not until the next phase of development that we would expect to see some innovation. As companies such as Haier, Lenovo, Xiaomi and Alibaba faced internal competition to their cheap and relatively straightforward products, they responded not by aspiring to the cutting edge of global technology, but by upgrading their existing technologies and producing them more efficiently.
Having won the battle to provide the most basic goods to domestic consumers, Chinese companies are now increasingly, and often for the first time, forced to turn to product innovation, Rein writes. They either have to start climbing the value chain abroad or in China, as the low hanging fruit of supplying basic goods has gone. They won’t fail. Why? Because they didn’t when faced with the previous challenges.
As examples, Rein points to companies like Alibaba. Through its subsidiary, TMall, it made consumers trust small and even unknown sellers of branded goods online. Through AliPay, a third party online payments system that is equivalent to PayPal, it addressed China’s weak consumer protection environment by collecting personal details from vendors that allow them to be tracked down if they sell substandard products. It seemed to work; Alibaba raised $21.8bn in its recent debut on the US stock exchange.
Such cases – for which Rein gives a few more examples from companies such as Tencent, Huawei or Xiaomi – have to show that a communist or developing country background can be as fertile of a ground for innovation as any other. Indeed, the innovations Rein puts forward use the flaws of communist China to their advantage, rather than to be paralyzed by them.
For sure, Rein is not alone in his view that Chinese companies are getting to the innovation phase. Consulting firm BCG this year put four Chinese companies (Lenovo, Xiami, Tencent and Huawei) in its annual list of the world’s most 50 innovative companies.
In the later chapters of his book Rein comes up with a number of fields in which we can expect to see Chinese innovation, such as health care, healthy living, or tourism. In each of the fields, Rein shows that with increasing demand from Chinese consumers, innovative solutions are likely.
But are the examples of a handful of companies enough to prove the bigger picture? Or is innovation in China still the exception, rather than the rule? After being convinced by Rein’s appealing storyline in the first few chapters, the reader is left wondering just that. While we are prepared to accept that some Chinese companies have innovated to a significant extent, we are less ready to believe that this means that the longstanding habit of copying is dead, as the title of the book suggests.
Yet Rein’s is an intriguing book, with many interesting anecdotes, mini-case studies, and interviews. If you discount the author’s obvious self-interest in writing it (he is, after all, the founder of a consulting group helping Chinese and foreign companies succeed in the Chinese market), you will be pleasantly surprised by the author’s fluency, and the “teachable moments” that arise from his writings.
“The End of Copycat China – The Rise of Creativity, Innovation and Individualism in Asia”, (227p) by Shaun Rein, and published by Wiley, will be available as of November 14, 2014 in the UK for £15.39. It is already on sale in the US ($25.00).
Can China innovate its way out of a prolonged economic growth slowdown?
The longest rail link in the world sent a cargo train from China to Spain in early December. Impressive, but does it make any economic sense?
When the cargo train from the Chinese manufacturing hub of Yiwu arrived in Madrid on December 9, it was welcomed with a celebration of superlatives.
This “21st-century Silk Road” was the “longest rail link in the world,” longer than the Trans-Siberian railway and the Orient Express combined. And after spending 21 days covering more than 8,000 miles through China, Kazakhstan, Russia, Belarus, Poland, Germany, France and Spain, it did set a distance record.
The question is, does a commercial cargo service from China to Spain – especially one whose maiden voyage to Madrid included a container filled with kids’ spinning tops – make economic sense?
While it may seem like a fanciful adventure, extreme long distance rail service is an important piece of the international shipping arsenal. Use of the so-called Eurasian Land Bridge between China and Europe is well established at least as far as Germany, which receives some five trains a week.
The recently arrived 30-container train of cutlery, toys, and other consumer goods will return to China after Christmas loaded with wine, ham, and olive oil. In the first half of 2014, international container traffic on the Trans-Siberian rail line rose 8%, to 865,600 teu (20-foot equivalent units).
Long distance rail cargo splits the difference between airplane and boat delivery in terms of price and speed. According to Miklós Kopp, director of freight at the International Union of Railways, sending a 10-ton 40-foot container from Chengdu, China, to Lodz, Poland, takes 12 to 14 days by train, compared to several days by plane (if you include customs and delivery on each end) and some six weeks or longer by boat. The price tag comes to some $40,000 by air, compared to $10,000 by train, and as low as $5,000 by boat, Kopp says.
“If you go from the center of China to the center of Europe, it’s [rail travel] a good decision, though not as cheap as by sea,” says Kopp.
Still, carrying rail freight across the Eurasian Land Bridge comes with many problems, says Jean-Paul Rodrigue, a professor of global studies and geography at Hofstra University and lead author of the textbook The Geography of Transport Systems.
For one, freight trains in Europe carry less than half the cargo of such trains in the U.S. because low bridges, tunnels, and other infrastructure problems prohibit the use of double-stack containers. Another problem, Rodrigue says, is that the trip from Germany to Spain adds another week to the journey, cutting out some of rail’s speed and cost advantages.
“Spain is the worst place in Europe to do a train trip. It’s as far as you can get in continental Europe from Asia,” he says. “I think it’s a bit for show, to demonstrate the technology and capability to put on these services. But I have some doubts that these services are commercially feasible.”
Added to these problems, notes Joan Jané, a lecturer in production, technology and operations at Barcelona’s IESE Business School, is that the average winter high temperature in Kazakhstan is 20 degrees Fahrenheit. Such cold temperatures require special containers for sensitive electronic goods, not to mention Spain’s big exports.
“The train can spend six to eight days in places with very low temperatures,” he says. “And you can’t have frozen wine or ham.”
The three operators of the Spain train – InterRail, DB Schenker Rail, and Transfesa – are still deciding whether to add twice monthly China-to-Spain service in spring 2015. If they do, the service will likely have to take a different form to be profitable.
Higher travel costs mean that this kind of train service will be best for high-value goods like electronics and medicines, not cheap toys, says Libor Lochman, executive director of the Community of European Railway and Infrastructure Companies (CER) trade association.
The service could also offer more competitive prices if it were regular and direct to Spain (instead of dropping off and picking up goods along the way), says Jané of IESE. And, he adds, operators could further lower costs by finding high-value goods to sell back to China, making sure containers do not return empty. That will be difficult, as Spain ran a €13 billion trade deficit with China in 2013. (Right now, many containers are sent back from Europe empty; others are filled with cars, car parts, and manufacturing equipment.)
Despite the hurdles, China-Europe rail trade will most likely grow in the coming years. The CER’s Lochman notes that, in the future, a new tunnel opened from the Asian to the European sides of Istanbul could be used for a new Eurasian Land Bridge. And, he says, while it will continue to be impossible to double stack containers, European rail freight authorities are trying to make rail more competitive by upgrading infrastructure to allow for longer, 1,000- to 1,500-meter trains, compared to the 600-meter trains used today.
Still, while traversing a gaggle of countries on the 21st-Century Silk Road may seem romantic (and perhaps even profitable), the method comes with geopolitical problems that planes and boats don’t have to contend with, says Rodrigue of Hoftra.
“You have a lot of border issues,” he says. “You have to think entering Russia with the embargo, that’s going to be a lot of fun.”
Author: Ian Mount
Today HSBC published the monthly PMI perspective here are some features of the report:
Flash China Manufacturing PMI™ at 49.5 in December (50.0 in November). Seven-month
Flash China Manufacturing Output Index at 49.7 in December (49.6 in November). Two month high. Data collected 4–12 December 2014.
According to The National Bureau of Statistics of China, in November 2014, Producer Price Index (PPI) for manufactured goods decreased 2.7 percent year-on-year, and decreased 0.5 percent month-on-month. The purchasing price index for manufactured goods went down by 3.2 percent year-on-year, and decreased 0.7 percent month-on-month. On average from January to November, the PPI decreased 1.8 percent year-on-year, the purchasing price index for manufactured goods went down by 2.0 percent year-on-year.
Year-on-Year Changes of Prices of Different Categories
The year-on-year change of producer prices for means of production decreased 3.5 percent, meaning 2.7 percentage points decrease in the overall price level. Of which, producer prices for mining and quarrying industry decreased 10.7 percent; that of raw materials industry decreased 4.7 percent; that of manufacturing and processing industry decreased 2.3 percent. Producer prices for consumer goods went down by 0.1 percent year-on-year. Of which, producer prices for foodstuff decreased 0.2 percent, that of clothing increased 0.5 percent, that of commodities went up by 0.1 percent, while that of durable consumer goods dropped 0.7 percent.
The year-on-year purchaser price indices for ferrous metal materials decreased 7.7 percent, fuel and power decreased 5.2 percent, non-ferrous metal materials and wires fell 2.5 percent, chemical raw materials went down by 2.3 percent.
According to estimation, in the -2.7 percent decreases in November, the carryover effect of last year’s prices changing was 0, while new prices rising factors in this year accounted for -2.7 percentage points.
Is the “China price” back? After years of hearing about rising wages ending the era of the China price when cheap exports lowered the prices of global manufactured goods, it seems that China has a surprise for the world. Deflation, that is, falling prices, is an issue for the world’s second biggest economy, just as it is for many others.
That was the topic on this weekend’s In the Balance on the World Service. It certainly resonated with me as I presented the programme from Tokyo. After its early 1990s crash, Japan has struggled with deflation for 15 years and has not yet been able to turn it around.
In China, there’s deflation in factory prices, which have fallen continually for two and a half years, and the increase in the consumer price index (CPI) has slowed to 1.4%, the lowest since the 2009 global recession.
My guests, who are well-known experts on China – George Magnus, Michael Pettis, and Patrick Chovanec – joined me from London, Beijing, and New York, respectively, and we discussed what was driving the deflation trend and why it matters for the rest of the world.
The panel debated the various causes of deflation: domestic versus international, as well as whether it was cyclical or structural.
Some of the reasons mentioned included falling global commodity prices and over-capacity in Chinese industry. Patrick Chovanec pointed to the spare capacity in a variety of businesses that could contribute to lower producer prices.
And structurally, China’s growth is slowing down as it matures and changes from an investment-led to a consumer-led economy.
As China shifts gear, that implies slower price rises, so any deflation would reflect more of a structural change in the economy.
Any transition can be difficult, and China’s structural transformation is on a scale never seen before.
The panellists were sanguine that it was possible and happening already. Indeed, one of the indicators of the re-balancing of the Chinese economy is the growth of the services sector versus manufacturing.
I’ve written before about how last year was the first time in which the services was a larger part of the economy than manufacturing. And it still has some room to grow.
So, that brings us back to whether the lower prices from China are here to stay. Slower economic growth, but on a more sound footing, would imply lower inflation.
Michael Pettis sees economic growth slowing to 3-4% by the end of President Xi Jinping’s decade in office, but household incomes growing more rapidly, just as they did in Japan.
The slowing of prices, though, isn’t just due to domestic factors. As I mentioned earlier, globally, falling commodity prices are pushing down prices.
As one of the biggest energy importers in the world, China’s prices are affected by oil, gas and of course hard commodities like iron ore.
So, taken together, it looks like the downward pressure on prices in China isn’t another cyclical blip similar to when China experienced a couple of years of outright deflation after the Asian financial crisis.
There are structural issues underlying the change in prices that is shifting along with China’s growth model.
Michael Pettis sees China exporting its deflation worldwide. Will it mean, though, that the China price will return? Not necessarily.
Deflation and inflation measure the change in prices. Once prices settle at a level, then it’s possible to have minimal change but at a lower or higher level.
Ultimately, the cost of Chinese goods and services will be determined by the equilibrium the economy settles at. That will have a lot to do with productivity, wages, costs, etc.
In other words, China’s competitiveness is yet to be determined.
Until then, however, the rest of the world will be affected by the prices of the world’s biggest trader. It’s just more uncertain than what we have been used to when the US was the main setter of global market prices.
And that will be the state of the world economy that we’ll need to get used to: being affected by the two biggest economies in the world, although one of them is still in a state of development and transition.
That’s the China effect on the world economy that will be felt in a variety of ways for years to come.
Source: BBC NEWS
Author: Linda Yueh
As the $133b Hong Kong-Zhuhai-Macau Bridge inches towards completion amid mixed opinions and rising costs, Oswald Tsang explores the potential pitfalls and benefits of the giant structure.
The envision of the Bridge
Can 50km of concrete, steel and tarmac bring greater integration within the Pearl River Delta region, revive Hong Kong’s flagging economy and spur the city on to greater financial heights? That’s the question most people have asked about the Hong Kong-Zhuhai-Macau Bridge, which is scheduled for a grand opening in 2016. After all, advocates for the project have for many years now championed the structure as an economic saviour, a tourism booster and the most effective connection in the Pearl River Delta region.
Earlier this month, the government announced that it is seeking an additional $5 billion in funding for an artificial island off eastern Lantau, which would form part of the bridge’s road network. That’s on top of the $83b that Hong Kong is already contributing to the $132.9b project. And, with this news, comes more speculation. Indeed, there’s now a greater need to reflect on whether the benefits of the bridge will ultimately outweigh the costs, especially as the money is coming from public coffers.
There’s also a need to look at whether Hong Kong as a city is set to get the best out of this colossal piece of infrastructure. It’s only fair to examine whether or not the newbridge will fail as a white elephant or herald the start of a beautiful relationship between the three cities that it links together.
The Render of the clearance terminal in the Lantau artificial island
An actual footage of the bridge cosntruction
Supporters of the project cite the economic benefits alongside the expected increase in tourists and the revitalisation of the city’s property market as positive reasons for the bridge’s existence. Anti-bridge proponents focus more on the potential environmental damage, saying that it’s simply a vanity project. While both sides rant on, though, it’s ultimately the rising cost of the whole project that has provoked fresh debate in the past few weeks. “There’s certainly no economic justification in building a bridge,” says Bob McKercher, professor of tourism management at Hong Kong Polytechnic University. “When you look at the numbers, it’s a complete white elephant. It will never pay for itself. And, right now, the traffic flow will only ever go one way – and that’s from Hong Kong to Zhuhai and Macau. There just isn’t enough of a population to have traffic flowing the other way. And the only real beneficiaries of the bridge will perhaps be Disney, the airport and Ngong Ping. I can’t see anybody else in Hong Kong benefitting from it.”
In response to claims that the bridge will boost Hong Kong’s tourism industry, McKercher explains: “People in Zhuhai are not going to come to Hong Kong because they can get everything they need from Macau. The studies that I’ve looked at indicate that there was a huge demand initially, but other studies have indicated that the bridge would never pay for itself. To me, this is just another unnecessary piece of infrastructure that has been justified by the god of tourism, by people who just don’t understand tourism.
Critics have also pointed out the bridge’s contribution to air pollution and destruction of marine habitats, particularly in relation to the endangered pink dolphins living within the vicinity of the construction site. “The Environmental Impact Assessment only took into account the issue of piledriving for underwater noise reports,” says Gary Stokes, director of non-profit organisation Sea Shepherd Asia. “What they didn’t do is to consider the terrible everyday ongoing construction noise. Dolphins communicate and navigate through sound, so in human terms it’d be like being constantly blinded by a big, strong light. They wouldn’t be able to find their way around.”
It’s not all doom and gloom, though. Many pro-bridgers have a brighter perspective. Stephen Townsend, director of urban design at architectural firm Gensler Asia, proposes a more holistic view when it comes to the bridge’s pros and cons beyond Hong Kong. “I think that real estate prices are going to skyrocket in Zhuhai because of the bridge, like in Shenzhen 20 years ago,” he says. “It brings services and spontaneous informal access directly from Hong Kong that we didn’t have before. Now I can have a house in Zhuhai at a third of the price and three times the space, and actually work in Hong Kong.”
Townsend continues: “I think the developers who own shopping centres in Hong Kong are going to be very happy once that bridge opens. And if you own property on Lantau Island, I think you’re also going to be happy that there’s now a marketplace that has direct access to the property market. I think the emphasis for growth in Hong Kong, considering the population will grow another two million in the next 15 years, will be around the Lantau, Tuen Mun and Sheung Wan areas. And a lot of that will depend on that connection to provide a balance of services, people and industry going back and forth.”
“The bridge is beneficial in terms of trade, logistics and tourism by facilitating people and goods movements in the region,” says Allen Ha, chairman of the Lantau Development Alliance. “It will also be beneficial for our airport in terms of connectivity with the rest of the world. But, right now, if we just build the bridge, the tourists may still just go and stay at the traditional places [like Tsim Sha Tsui]. Our proposal then is to increase our receiving capacity in Lantau by building new hotels, which can help alleviate some of the tourist overflow in Hong Kong. Ultimately, we’re looking at a bigger area than Macau, Zhuhai and Hong Kong. We’re talking about the population in the whole Pearl River Delta, and allowing people to travel to a new place within an hour.” The Highways Department has also informed Time Out that ‘the journey time between Hong Kong International Airport and Zhuhai will be reduced from its current four hours or so to about 45 minutes’.
Despite all the conflicting viewpoints, the failure to integrate a rail link option as a form of public transportation is being viewed by both pro and anti-bridgers as a major oversight. “While [a rail link] would have probably raised the cost of the bridge considerably, it would have been fortuitous to have one, even if it just went to the immigration island between Zhuhai and Macau,” says Townsend. McKercher goes even further on the subject: “In light of concerns over air pollution, why the hell
are they building a bridge to put in more vehicular traffic? Why didn’t they also include a rail link to move people efficiently from border to border?”
Whether or not the Hong Kong-Zhuhai-Macau Bridge brings any or all of its predicted benefits remains to be seen. And whether it affects the environment as much as some expect it to also hangs in the balance. But either way, the city is paying for it right now in hard cash. Like a car on the hard shoulder of the bridge, there’s no turning back. “It’s too late – we’re already building it,” says Townsend. “We can’t fight it. As a community, of course we can complain about it all we can. But I think we now need to figure out how we can make it work and how we can protect the areas of Hong Kong that we love from overspeculation and overexploitation.”
Find out about more at: www.hzmb.hk
How Manufacturing in china can give you and your business a competitive advantage
When China opened itself up to the world twenty years ago, many realized how its huge market of almost 1.3 billion consumers could impact the biggest manufacturers and retailers in the world. Few anticipated, however, that China’s large population base would also provide competitive advantages against the most dominant players in the outsourcing industry.
China’s current outsourcing market is growing an estimated 30 percent annually, and many countries have relocated their headquarters to China to establish businesses. Manufacturing in China opens a world of possibility to create a wide range of products and innovations. In addition, bringing product manufacturing to China allows you to create a higher volume of product for reasonable cost. With a little research and sourcing, you can build a partnership to manufacture your latest product invention. If your competitors successfully outsource manufacturing in China, they can offer prices to your customers that are 30 percent to 50 percent less than they are currently paying.
The most important lesson: there is no shortcut to success in working with Chinese business partners. China is a country where anything is possible — but nothing is easy. Understanding the business culture, getting all your business disciplines intimately involved in your manufacturing operations there, and mastering the details are the prongs of a winning approach.
Here are four key points to consider:
1. Business Culture: Face the Differences
Despite the fact that China has modernized a great deal over the last 25 years, it can still be difficult to understand for an American doing business there for the first time. The same fundamental differences between American and Chinese business culture still exist. Understanding and accommodating those cultural differences is essential. One example is that business in China is based on relationships — as opposed to the US where business is a transaction based and primarily focuses on economics. That doesn’t mean that economics aren’t important. It means that collaborating closely with a Chinese partner like a factory owner on the details of a mutually beneficial business model can come only after the other party knows and trusts you.
Another example is that entertaining is a critical part of the overall business culture, and it is very important that you be prepared to spend time developing your personal relationship with the factory owner — often at his luxurious home that is located within the walls of the factory.
A final example: communication style. Americans tend to be outspoken, looking to cut to the chase and look for resolution. They style of many Chinese business people is to be quiet and reserved in meetings, so that you need multiple sessions with them to get the information you seek.
2. Make the Time Commitment
Companies sourcing product from China can control their own destiny if they commit to establishing and nurturing deep working relationships. Whether you establish your own organization in China or you use third-party providers, it is critical that the Chinese manufacturer believes you are “all in” at all levels in your company, particularly at the highest level. If they sense you aren’t all in, they will not maintain the high level of scrutiny on quality control, safety issues, and performance needed to prevent mistakes and drive quality and on-time production. That will cost you money and potential harm to your company’s reputation.
3. Sweat the Details with Your Partner
Producing in China proves the old saying “The squeaky wheel gets the grease.” Chinese factories pay the most attention to customers who spend the most time working closely with them — on issues ranging from sample making, purchase order placement, production planning and scheduling, quality control, and shipping performance.
Best practices would indicate that having a team of at least three people working directly with the factory on a daily basis produce the best results:
A logistics person focusing on purchase orders and shipments.
A product person focused on the design of the product and packaging requirements.
A quality control person making sure that the product was being produced to proper standards.
If you get your top team closely involved, you will be much more in control, and you won’t be inclined to blame the factory when the finished product isn’t on the retailers’ shelves. As far as your customer is concerned, you are the factory.
4. Overcoming Problems
Even with all the cultural understanding and time and financial commitment, there will be problems to be dealt with. Long-term relationships and a group of dedicated factory partners are critical to building and maintain a successful outsourcing operation.
The bottom line is: your sincere commitment to work respectfully with your Chinese suppliers as a trusted partner — not as a disposable source of low-cost labor — will help you identify and solve problems. Remember, in China anything is possible but nothing is easy.
Author: Michael Evans
This year, the International Monetary Fund (IMF) has repeatedly lowered its expectations of world economic growth, mirroring the slowdown in world economic development.
The IMF predicts that the world economy will grow at 3.3% this year. The prediction indicates that the world economy is recovering but that overall global demand is limited and the international financial system is unsteady. If this prediction finally comes true, global economies have to be repositioned.
Generally speaking, new emerging economies are booming, propping up the world economy. It is estimated that the average economic growth of emerging economies and developing economies will reach 4.4%, higher than the global average. Asian economies are predicted to grow at 5.5%. Such rapid growth is attributed to increasing exports, investment and domestic demand.
The IMF has also predicted that China’s economic growth will stand at 7.4% this year, and 7.1% next year. The main causes for the slower growth: first, the government is beginning to control spiraling credit and local debt, leading to mobility and therefore slowing down economic growth; second, the fall in investment in property has a negative impact on economic growth.
Since the government has taken effective measures to control its spiraling debt, there is no need to worry about its potential debt crisis. Furthermore, the government has also taken steps to advance infrastructure construction and promote employment growth. China, the second largest economy, plays a vital role in the world economy.
This article was edited and translated from 《中国稳健增长对世界很重要》,
Source: People’s Daily,
Author: Zhu Min
Can the US, in fact, be the new rising star in manufacturing?
“We are hands down more competitive than Europeans both because of energy costs and because of lower labour costs,” says Kati Suominen, professor of global economics and management at the UCLA Anderson School of Management. Indeed, according to a 2014 study by the Boston Consulting Group (BCG), manufacturing costs in the EU have risen by up to 10% relative to the US over the last decade.
“We should, if projections of the direction of Chinese labour costs are right, be more competitive than China right about now—even if we, too, will have some wage inflation coming as slack in the economy decreases,” says Ms Suominen. In fact, and according to the same BCG study, China’s advantage over the US in manufacturing costs has gone from 15% in 2004 to less than 5% in a decade.
Ms Suominen cautions that labour costs may, in the near future, become less of an issue than the availability of technologies such as 3D printing and factory automation as cost drivers for manufacturing. Even so, she says, “What I’d conclude at this point is that, yes, the United States is well-placed to be the global leader in manufacturing.”
Not so fast, says Willy Shih, professor of management practice at the Harvard School of Business. Although he agrees that labour costs are currently relatively low in the US and that lower energy costs do give the country competitive advantages—notably in petrochemicals and other products that depend on oil and gas feedstocks—he cautions that manufacturers that left the US for cheaper shores may not be so easy to get back.
One problem, he notes, is that the US “industrial commons” has atrophied—the supplier base, workforce skills and other elements needed to support a resurgence in manufacturing may not be up to the job.
Mr Shih also believes that the US manufacturing boom is nuanced, with some sectors ripe for reshoring and others that most likely will never come back. Smaller items, such as consumer electronics, will probably continue to be manufactured in Asia, he maintains. “China has captured the electronics supply chain, so it just doesn’t make that much sense to bring stuff back. The cost to pack all the components and ship them to the US for assembly is more than if you just assemble the thing over in Asia.”
That’s a problem, says Mr Shih, that doesn’t apply so much to larger items, including the products made at Appliance Park. With a greater volume and, hence, a relatively lower value density than for an item such as a mobile phone, it makes more sense to bring the manufacture of, for example, a refrigerator or a car back to the US. “Honda this year is going to export more cars that are made in the US than it will import to the US from Japan,” says Mr Shih. In other words, large manufacturing such as autos, airplanes or appliances should continue to do well in the US.
As for an atrophied manufacturing infrastructure, that’s a challenge that Appliance Park, for one, doesn’t seem to have. GE invested $800m in upgrading the facility between 2009 and 2012 and announced its intention to invest another $277m in the near term even as it finalised the deal with Electrolux.
Since the deal for Electrolux to acquire GE Appliances won’t be concluded until mid-2015 at the earliest, it’s too soon to tell what the future holds for Appliance Park. But as the European appliance maker completes its largest acquisition, it seems to be betting big that manufacturing in the US will continue to remain competitive.
This post first appeared on GE LookAhead
Author: Michael Belfiore is a writer for GE LookAhead.
China is big. It’s complex. But can you understand it in just one hour?
That’s what Jeff Towson and Jonathan Woetzel argue in “The One Hour China Book” in which they describe the six megatrends shaping China today in just six short stories.In this podcast, Nick Leung chats with the authors about why they wrote the book, and how the megatrends they describe are reshaping business and society in China. Jeff is managing partner of Towson Capital, a private equity firm. Jonathan is a Director in McKinsey’s Shanghai office. They both teach at Peking University’s Guanghua School of Management. Nick is Managing Partner of McKinsey’s Greater China Practice.