'Chinamerica': Book Excerpt

Excerpted from CHINAMERICA: THE UNEASY PARTNERSHIP THAT WILL CHANGE THE WORLD by Handel Jones, reprinted with permission from McGraw-Hill Professional, 2010.


China's Future Looks Bright

By Handel Jones

Many of China's infrastructure projects and financial goals are planned to be completed by 2020. So 2020 is an important milestone in China. By 2020, most of the current topministers will not be in power. However, the interim until 2020 is brief enough for the period to be meaningful to a high percentage of the population.

The setting of ambitious goals is instrumental in focusing the use of resources and in determining how well the goals are being met. The central government and its agencies are guiding the expansion of the industrial base that will provide employment and help China's exports succeed.

The directions are clear. The key issues will be the country's efficiency in reaching the goals and how equitably the wealth is distributed. If the smartest leaders and businesspeople are given the appropriate opportunities and if the decisions are sensible, then China will achieve its goals. If the system becomes bureaucratic, or if government officials and their families selfishly try to enrich themselves rather than create wealth for the good of society, then the system will falter. China's competitiveness worldwide will decline.

The central government needs to manage the wide differences in wealth between the elite and the common people in China. It also needs to motivate the young who are Internet-savvy and can see what's going on around the world. Both generations have to feel that they are being treated fairly by their country. Both generations need to be pulling in the same direction. The government needs to help the older population provide social benefits to the younger working population, such as taking care of grandchildren, so both parents of the younger population can work. In addition, China's aging population needs to be maintained as a productive asset as opposed to being treated as a liability that is a drain on government spending.

> > Bull or Bear? Vote in Our Poll

The Chinese took great pride in the success of the Olympics. China demonstrated its ability to stage an exciting world event that was efficiently managed. The extensive coverage of the Olympics inside China combined with China's winning 100 medals was a major inspiration for the population to keep working hard for the country. The Olympicgames were a single event, however. The need to motivate the Chinesepeople will remain acute because they will have to make many sacrificesto promote the growth of the economy.

The challenges facing China are extensive, but China is using top-level planning and control actions and a wide range of growth initiatives to deal with them.

The building of the industrial base in China is being funded at the expense of social programs. The philosophy in China is that, if people work, they are paid. Because children and students will be future workers, the cost of their education is being supported. If the people do not work, they are not given money. When people do not have jobs, the burden to support them is on their family. Consumption is not supported in China unless the output of an individual is greater than his or her consumption.

The combination of the centralized planning and decentralized implementationhas been successful in China. China has well-defined top-level goals for many of its industries, and employment is still growing. While the challenges are becoming more rigorous as its industries attempt to compete in markets around the world, China's managementexpertise is also growing.

Strategic Implications of Growth

The Eleventh Five-Year Plan, which was accepted in November 2006 (itgoverns from 2006 through 2010), continues to stress the importanceof the growth of strategic industries.

As industries grow, China will need access to greater amounts of a wide range of raw materials. It will need the political power to ensure access to supplies as well as the financial resources to pay for them. When the leadership of countries that possess certain raw materialsis unstable, China will need to have good relationships with their leaders.

China is becoming more active in the global political environment, but it keeps a low profile and uses a nonthreatening approach in most situations. There are, however, indications that China is starting to flex its political muscle, as seen, for example, in the Chinese government's rejection of the Coca-Cola ( KO) company's bid to buy a Chinese fruit beveragecompany.

Having a strong military can be advantageous in protecting supply chains for raw materials, but the most important factors are political and financial power. It is clear that China is building up its political power base.

The United States and China are the largest consumers of raw materials, but there will also be demand from Europe, Japan, India and other regions. It's likely that future conflicts between the United States and China will result from competition for market share and access to raw materials.

While Chinese corporations do not have the same level of sophistication in managing supply chains as U.S. corporations do, the Chinese government is taking a systematic and long-term approach to ensuring its access to the required resources. One approach is to buy equity in companies that have resources.

The U.S. government is not actively promoting its access to raw materials, other than oil and natural gas. The competition eventually will be between the combination of the Chinese corporations and their government versus the corporations from the Western countries thatwill not be well supported by their governments.

Russia, where the government has gained effective control of raw materials, including oil and gas, exemplifies how strategic capabilities can be turned into positions of power by adroit governments. Meanwhile, the United States depends much more on China than on Russia.It is becoming more necessary than ever to consider and understand the long-term strategic implications of the strengthening of China both economically and politically. China's large manufacturing base will promote its supplying a widening range of products to the United States, and, thus, it will exert an increasing degree of control over the supply of these products to the United States.

The manufacturing base in China will be a major source of strength because countries that do not have such low-cost manufacturing capabilities will opt to import goods from China. When China represented a small percentage of the global supply of products, the leverageof China was low. As China dominates markets, its leverage will increase.

The United States and other countries are underestimating the long-term competitive threat from China in a number of business areas. While it is inevitable that China will become stronger and will increase market share in a range of industries, including electronics andautomobiles, the implications of these trends can be significant if China also controls the supply of raw materials.

China started with industries that were low technology (such as clothing and shoes). Then it progressed to heavy industries (the initial processing of raw materials). Consider what has happened in the steel and aluminum industries.

China has continued to build its steel and aluminum industries, even though there is excess capacity worldwide. China wants self-sufficiency in these vital products. To try to keep its steel and aluminum factories at or near high capacity, the government provides subsidies so the steel and aluminum companies can charge low prices for exports. This breeds increasingresentment in the United States, Japan and Germany.

Competition from low-priced Chinese imports is crippling U.S., Japanese, and German domestic steel and aluminum companies, in some cases forcing factories to close or putting the companies out of business. In response, protective tariffs on the Chinese goods are beingincreased, which leads China to quickly impose or increase tariffs on imports from those countries.

The strategies being demonstrated in the steel and aluminum industriesare harbingers of those that will be utilized in many industries in China in the future. If this is done systematically, industry by industry, the impact can be large over 10 to 20 years.

When China produced a small percentage of the global output of such goods, its export strategies didn't antagonize many corporations in foreign countries. Now that China is producing a high percentage of global capacity -- for example, approximately 48.8% percent of global capacity for steel in July 2009 -- the impact of the Chinese strategies on competitors in other countries can be devastating. Not surprisingly, the competitors in other countries view China's pricing as predatory. But, like it or not, the alliance of Chinese corporations with the adroit support of their government is helping Chinese exports become increasinglycompetitive in foreign markets and gain market share.

As we've seen, its latest initiatives are in high technology, including electronics, automobiles, and aircraft. The strategic threats from the high-technology businesses are much more concern-worthy to the United States than the leverage China had from supplying lo-technology merchandise.

China will become a high-technology society that is a formidablecompetitor in the global market. By having the large local market and competitiveness in manufacturing, the Chinese corporations will be able to gain high market share worldwide. The large market inside China and the methods used to protect this market will result in moreconflict with other countries.

Local Chinese authorities have already been targeting Japanese companies. A few years ago, Zhejiang province publicized its finding that there were many quality defects in Sony ( SNE) digital cameras. Sony had not been criticized for quality problems in other regions, including the United States. The result: Sony has had disappointing sales of camerasin China.

When Japanese companies have competitive strengths, such asToshiba in nuclear-powered electricity generating technologies, theycan establish joint ventures in China.

As its homegrown capabilities rapidly increase, the challenge facingChina is to be viewed as providing open access to outsiders whileprotecting China's local markets.

Many embryonic industries will require support from the governmentfor the next decade and probably longer. However, as its industriesbecome stronger, the amount of the government's direct involvementand support is expected to decrease, but top-level strategic direction willcontinue.

The growth of a large entrepreneurial business class in China is expectedto result in conflicts over the control of the central government.How well the government manages that conflict will be one of the keyfactors that determine the success of industrialization.

The challenges facing China include pressures from competitorsfor worldwide markets (factors from outside China) and problems inthe operations of industry and government (internal factors includinggovernment efficiency and corruption, among others).

Industry in China is strengthening rapidly. While exports accountfor the bulk of the revenues from many products, many exports areproducts of foreign companies, such as Samsung, Toyota ( TM) and HP ( HPQ), thatare using China as a low-cost manufacturing base. The next phase ofthe export market development will be characterized by the inclusionof merchandise designed and developed, as well as manufactured, byChinese companies.

Taiwanese companies are expected to succeed in the Chinese market.Certainly the common language will be an advantage. The finesseChina's government uses in managing the integration of Taiwan willaffect how well its products do and how much they contribute toChina's renaissance.

Consumer preferences have been secondary to the top-level industrializationgoals in China, but that subordination will lessen as the middleclass grows, becomes more cosmopolitan, and has money to spend.Foreign companies are viewed as disposable if they are regarded asnot very useful for the long-term economic goals and initiatives inChina. This perspective applies to a range of industries. It's particularlyapplicable to the automotive industry.

China may view foreign governments as expendable too. In its military history China has shown a willingness to accept a large numberof casualties. In 1949, during the Huai-Hai Battle, 555,0005 people ofthe National Party died, and 110,000 people of the Communist Partydied, figures that dwarf the horrendous battlefield casualties during theAmerican Civil War. These large numbers of casualties show China'swillingness to sacrifice people to achieve its objectives. If China is willingto sacrifice its own people, it will be far more willing to view foreigncompanies or foreign governments as expendable.

The United States as a market for Chinese products is important,especially because the U.S. market is wide open for so many products.So China's policymakers must balance the need for the United Statesas a market with its threat as a competitor for raw materials and otherstrategic resources.

China's leaders also have to balance the use of its resources and rawmaterials for exports versus domestic consumption. As long as resourcesand raw materials are sufficient, the balance is easy to achieve.If shortages of raw materials occur, the decision processes can becomemore difficult. The effect in the short term can be to increase pricessomewhat for exports, but the impact over the long term is that the domesticmarket will be given priority.

As China has been criticized increasingly for its contribution to pollution,it is significant that it is starting to blame the countries that buyits products as being partly responsible.

As the political and financial power of China increases, China maybecome much more assertive and self-justifying about its conduct. Theleaders of China have inherited centuries of strategic thinking. Competitivepositioning and dealing from a position of strength are keyparts of the history of China.

Key Challenges Affecting China's Economic Destiny

Employment and Education

Developing an economy with an employable population that offersevery necessary level of skill, as well as adequate opportunities for employmentand promotion, represents a major challenge in China. Compensationand room for advancement needs to increase both becauseemployees' skills are improving and corporations are expanding.China has not solved this issue, and it is having more trouble recently because of the recession. There were more than 6 million collegeand university graduates in 2009. It is expected that 2 million ofthose graduates will not find jobs in their areas of expertise for a yearor more after graduation. Many will have to resort to subsistencejobs. This is happening even though the GDP is growing 8% to 10%a year.

If unemployment increases in China, it is likely that there could besocial unrest. How disruptive the unrest will be will depend cruciallyon the skill of the Chinese government in managing expectations. Theglobal recession is clearly having an impact on both the number of jobsand also the job expectations in China.

The unrest by some of the minorities in China has been dealt with decisively. The government has established a range of initiatives, includinga Web-based forum by the prime minister, to temper the employmentexpectations of the population. A number of social programsto provide employment for new graduates have been started, and empathyis being expressed for their plight.

More from Emerging Markets

U.S. Considers New Tariffs on Imported Vehicles

U.S. Considers New Tariffs on Imported Vehicles

Video: Here's How Global Stocks Can Boost Your Portfolio

Video: Here's How Global Stocks Can Boost Your Portfolio

Wall Street Looks To Extends Gains After Goldman Earnings Beat, China Data

Wall Street Looks To Extends Gains After Goldman Earnings Beat, China Data

China's President Xi Jinping Tells Boao Forum He Supports Opening Markets

China's President Xi Jinping Tells Boao Forum He Supports Opening Markets

U.S. Stock Futures Steady; Asia Stocks Mostly Lower

U.S. Stock Futures Steady; Asia Stocks Mostly Lower