Tag: united states

China goes on the tech offensive

The meeting between US and Chinese leaders later this month could mark the pivot of China’s economy

The most important economic relationship in today’s economy is that between China and the United States, despite bellicose chest thumping by both sides their wealth and well being of their industries is inextricably linked.

Against the backdrop of that chest thumping and a slowing Chinese economy, the Chinese and US Presidents are due to meet in two weeks time where trade and security relations between the two countries are at the top of the agenda.

China’s leaders though plan to emphasise their nation’s tech prowess and its importance to the US’s sector, something the New York Times reports has irritated the Obama administration.

What would almost further irritate the US leadership is that US tech giants including Apple, Facebook, IBM, Google and Uber have been invited to attend a Chinese tech summit hosted by Microsoft and the PRC President will be dining with Bill Gates before flying to Washington to meet Obama.

Redmond gets on board

Microsoft’s role in the China Forum is interesting, the company is extending the hand of friendship not just to nations but also to companies that were fierce rivals in the past, just last week the company announced a partnership with VMWare despite deep rivalry in recent years and CEO Satya Nadella is due to appear at next week’s Salesforce conference.

Coupled with Microsoft’s battle to keep offshore customers’ email records out of the reach of US legal jurisdiction, it’s clear Microsoft are playing a long global game with their business plans so the support of China’s initiatives isn’t surprising.

Given China’s strength as an emerging tech powerhouse and its administration’s ambition to move the economy up the value chain, it’s also not a surprise that other US technology companies are reluctant to join the politicians’ games.

Choosing Seattle

The choice of Seattle is interesting as well, while the city is a major tech centre with companies like Amazon and Microsoft based there, it’s far more integrated with the Pacific Rim economies than San Francisco and Silicon Valley. Again this is a loud message to the US tech community.

For China, the success of showing off their technological strengths is an important in sending a message to its East Asian neighbours and the US that the nation is diversifying and shouldn’t be underestimated, a process that Chinese Premier Li described as “a painful and treacherous process” at a World Economic Forum event in Dalian today.

The meeting between Xi Jinping and Barack Obama in two weeks time, and the associated events in Seattle, could well prove to be the marker of where China moved into the next phase of its economic development and its relationship with the  United States.

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The Internet’s Pax Americana

The US dominates the Internet but will it do so forever?

Tech journalist Kara Swisher has a twenty-five minute interview with President Obama on his relationship with the technology industry and Silicon Valley, it’s an interesting snapshot on how the United States sees its role as custodian of the internet.

In talking about European agencies’ efforts to reign in the power of companies like Google the President is dismissive; “we have owned the Internet. Our companies have created it, expanded it, perfected it, in ways they can’t compete. And oftentimes what is portrayed as high-minded positions on issues sometimes is designed to carve out their commercial interests.”

Obama is absolutely correct to say the Internet currently belongs to the United States, it was the US that developed the technologies and built the initial infrastructure for the global network in a similar way it did for the GPS system.

The internet probably won’t remain the US’s sole domain as China, Indian, Russia and other powers find control of the global communication network resting with the US isn’t in their interests and develop work arounds or rival technologies.

Just as Spain and then the English once dominated the world’s shipping and communications, it may well be the US’s dominance of the Internet is not permanent.

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Rebuilding American Manufacturing

The US textile industry’s recovery is an economic story of our times, it’s also one of our future.

US manufacturing is undergoing a resurgence, just without the jobs reports the New York Times in its story on the textile mills of South Carolina.

The decline and recovery of US manufacturing is a story of our times – the industrialisation of Asia, trade treaties such as NAFTA and China’s joining the World Trade Organisation all saw Western producers move their operations overseas.

A weakness with that business model are the extended global supply chains as goods spend months on ships following long manufacturing and design lead times, the exact opposite of what modern consumers are looking for.

Coupled with domestic manufacturers’ increased investment in automated systems which makes labour costs a smaller factor and the sums start adding up for making things in the United States.

Unfortunately for the workforce, those automated plants don’t require anywhere near the staff older factories employed and the skills required in today’s mills are substantially different from those needed in those of earlier times.

Most industries are encountering the same change and new technologies make the modern factory very different to that of a few decades ago.

The jobs aren’t going to come back in the numbers that were once employed, as the New York Times story illustrates with the decline in the working population.

US-employment-changes-by-industry

Despite the recovery in US manufacturing, today’s industry is very different to what it was last century, something that’s missed by those advocating a return 1950s style government policies to protect jobs in sectors like car manufacturing.

Even if they are successful in rejuvenating local car factories, cotton mills or coal mines, the days of these plants employing tens of thousands of grateful cloth capped workers are over.

Those politicians whose ideology is based on the old model, or businesspeople who want to work in the old ways, are going to find the modern economy very difficult and challenging.

Image of cotton threads on a weaving machine through jbeeby on sxc.hu

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Revolution and disconnected leaders

Revolutions are unexpected, but the causes are often obvious to all. The West shouldn’t be too smug about the economies of other nations.

China expert Patrick Chovanec has a provocative blog post on What Causes Revolutions, building upon the Financial Times’ description of how the Chinese Communist Party is struggling with corruption.

In his article Chovanec quotes Richard Pipes’ Three “Whys” of the Russian Revolution which looked at how the fall of the Tsarist government was largely unexpected.

This is true with the fall of all great regimes, in the late 1980s the idea that the Soviet Union would cease to exist within a decade was unthinkable.

Chavonec quotes a key part of Pipes’ book;

In 1982 [Pipes writes], when I worked in the National Security Council, I was asked to contribute ideas to a major speech that President Reagan was scheduled to deliver in London.  My contribution consisted of a reference to Marx’s dictum that, when there develops a significant disparity between the political form and the socio-economic context, the prospect is revolution.

“A significant disparity between the political form and social-economic context” could be just as applicable to Western democracies.

The Economist article makes a point about the French revolution “the widely accepted theory now is that the French Revolution was one of rising expectations that eventually could not be met.”

As Stratfor’s George Freedman pointed out last week, a generation of Americans have expectations that are not going to be met. The same is true in Europe.

While there’s no doubt the China’s political structures – like those in all totalitarian nations – are more brittle than those in established democracies, it might not be a good idea for those of us in the West to be smug and complacent about our own systems.

Zapata image is courtesy of Ferferfer through SXC.

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Bringing manufacturing home

How GE is reviving its American manufacturing operations

In the 1980s General Electric, like most US companies, sent most of its appliance manufacturing offshore.

Now its coming home.

The Atlantic Magazine looks at how General Electric is resuscitating manufacturing at Kentucky’s Appliance Park as management finds US workers are more skilled and productive than their equivalents in Mexico or China.

An important part of the article is how critcal supply chains are; manufacturing hubs rely upon having a community of skilled service providers and suppliers around the factories while being close to customers improves and simplifies logistics.

In the latter case, it now take hours or days to deliver products to customers’ stores or warehouses rather than the five weeks it takes from China.

The cost of those goods is lower too, the Kansas made GeoSpring heater sells for $1299 while the Chinese product sells for $1599.

What is most notable though is how designers and managers now have a better understanding of the manufacturing process; where under the oustourced model the difficulties in assembly were none of their business, now they are far more deeper and directly involved.

This really goes to the core of what an organisation does – in the 1980s it was fashionable to talk of the “virtual corportation” where everything the business did was outsourced except for the managers who were employed solely to pocket their bonuses.

In the 1990s and early 2000s that “virtual corporation” became a reality as manufacturing and customer support were offshored and logistics was outsourced.

One of the best examples was customer support where looking after the needs of those who buy the company’s products were secondary to the need to cut costs.

This focus on cost cutting over customer service hurt Dell badly in the 2000s and it continues to hurt many organisations – particularly telcos and banks – today.

The weakness in the “virtual corporation” model was the company ended up adding little more value than the brand name and eventually those offshored manufacturers and call centres took control of the business’ goodwill and intellectual property.

Eventually the hidden costs of offshoring became too obvious for even the most craven, KPI driven manager to ignore and suddenly manufacturing in the Western world became competitive again.

Sadly, the fixation on dirt cheap labour has damaged many industries beyond the point where they can be salvaged with too many skilled workers lost and the ecosystem of capable suppliers destroyed. These are costs where tomorrow’s managers will rue the short sighted actions of yesterday’s corporate leaders.

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Misunderstanding Chinese growth

It’s best we get developing economies into perspective.

When I first visited China in the late 1980s, I was amused at all the adverts for Rolex watches and Luis Vuitton handbags lining Shanghai’s Bund and the streets of Guanzhou; “how many Chinese can afford these goods?” I asked.

The response was usually along the lines of there are a billion Chinese and if only one percent can afford these products then that’s a huge market.

Over the years since we’ve seen consumer brands pour into China only to find the markets for Western style consumer goods aren’t what they expected. Many have left with their tails between their legs.

The New York Times looked at this in their weekend story “Come On China, Buy our Stuff.”

What many misunderstand is that while there are some millions of well heeled Chinese who can afford a Rolex, the vast majority simply cannot afford a Western style consumer lifestyle.

The average Chinese income in 2010 was $4,270 per person according to the World Bank. For the United States, average income was over ten times China’s at $47,000. The average across the Europe Union is just over $32,000. India’s was only $1,330.

So any business selling into the PRC expecting to find a consumer society like those of Northern Europe, Japan, the United States or Australia’s is in for a disappointing experience. Chinese households have neither the income or access to the credit lines that drove the Western consumerist societies over the last thirty years.

For economists hoping that Chinese and Indian workers can pick up the world economy’s slack by becoming consumers on a level similar to European and US workers, they are deluded; this is at least a generation away.

According to the Nation Master web site, the US had a similar average income to what China’s current levels in 1900. While there are clearly some differences in measures, we can say today’s Chinese workers are – in wealth terms – around a century behind their US colleagues.

It may take a century for Chinese workers to catch up with Europe and North America, but it won’t happen as quickly as businesses and economists hope.

Those hoping China will take up the slack left from the excesses of the 20th Century credit boom are going to have to look for a plan B. It may be up to the rest of us to find what’s going to drive the world economy for the next twenty years.

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Losing the supply chain

When an entire industry moves offshore it isn’t just a few jobs that are lost

The New York Times’ weekend feature on Why Apple Manufacture iPhones in China focused on the underlying reasons why manufacturing has become concentrated in the PRC.

While much of the commentary on the article has – correctly – focused on how US manufacturing move to China is destroying the economic bases of the American working and middle classes, there’s also another serious consequence of the story; the destruction of the US supply chain.

The story itself emphasised this;

In part, Asia was attractive because the semiskilled workers there were cheaper. But that wasn’t driving Apple. For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies.

While wage costs are important, far more critical are the surrounding supply chains. Without those, even if you want to manufacture in the US or anywhere else you’ll struggle to find suppliers and skilled labour.

The amazing thing with the United States is the world’s most powerful economy has managed to dismantle most of their supply chains that took a century to develop inside twenty years whil China has built up most of theirs since they joined the World Trade Organisation in 2001.

For the United States economy, the effects are more subtle and dramatic than they first appear. The accompanying video to their story illustrates how the multiplier effect, the number of jobs created in the wider economy for each industry worker is as much 4.7 for a manufacturing job, while a service sector worker is less than 1.

That means less employment and less wealth.

For the US, and most the Western world, we were able to avoid the effects of becoming less wealthy over the last decade by spending big on credit cards. Homes that would have been out of reach to the average American – or Australian, Brit or Irishman – were kept accessible by easy, cheap credit.

As that credit dries up with the end of the Twentieth Century debt supercycle, the economic basis of this model is eroding.

For most of us in the Western, developed world it means we are going to become poorer. Chinese and Indian workers might catch up with our living standards, but that standard will be at a lower level that we anticipated a decade or two ago.

The most interesting consequence of the New York Times’ story is what happens to the managerial classes?

Right now they appear to be riding high as their companies’ profits increase and they award themselves trips to the Paris Ritz and receive 50 million dollar payouts when caught cheating on their expenses.

Over time though this cannot continue as the senior managers themselves have become major cost centres which will eventually have to be reduced.

Indeed Apple, the leader in the outsourcing trend, is unique among US companies in that it had a driven, visionary leader and doesn’t have a bloated, self indulgent cohort of bureaucrats managing the business.

With every stage of the deskilling of America and the offshoring of supply chains, there’s been the belief that “it could happen to me” to various groups of workers – we’re now seeing the same process happen in white collar professions like the law are subcontracted to Indian and Philipino service providers.

Senior managers should have no illusions the same will happen to them as the search for cost savings runs out of targets in the rest of organisations.

The biggest problem though is that loss of supply chains and industry knowledge. The question is, can you rebuild that capacity in decade in the way China did?

Supply company image courtesy of Stock Xchange and Andy McMillan.

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