Viewpoint -- Don't Put All Your Eggs In China's Basket

Nov. 7, 2005
I suggest removing the blinders that focus exclusively on China and open one's eyes to the other 5 billion people on our planet.

As an international freight forwarder, I recently was asked to speak at a Trans-Pacific Air Cargo Conference in Los Angeles. When I strode up to the lectern and announced the topic of my talk, "don't put all your eggs in China's basket," I was practically booed off the stage. My audience did not want to hear any kind of talk that was negative, derogatory or dismissive of the "booming" Chinese economy. My listeners were economic counterparts of religious evangelists; nothing could counter their almost mystical faith in the supposed relentless power and growth of the Chinese economy.

I bow to no one in my admiration of the Chinese people. Within a few generations, they have transformed a primarily rural, backward nation into an economic colossus. Their feat is unparalleled in modern times. I believe, however, that some clay is forming around the feet of this colossus. Amber lights are starting to flash, providing early warnings of an economy that is turning from white hot to red hot to red.

The signs are plain to see, if people are willing to look at reality and not engage in fantasy. A few facts suggest a harbinger of a slowdown in the Chinese economy.

Foreign investment in China during the first half of 2005 is level with last year; the first period of no growth in capital investment in almost a decade. Exports, key to the Chinese economy, have slowed. Today, in my business of air freight, a shipment can be placed on the next flight out at any airport in China. A year ago, cargo shipments were backlogged for days and even weeks. Embargoed cargo literally sat on tarmacs at the Hong Kong and Chinese airports waiting their turn to be loaded onto already full aircraft. China's domestic economy also has cooled. Sales of cars, particularly luxury models, have collapsed. Purchases of electronic products for home and factory have dropped appreciably. And housing prices, always a sensitive barometer of economic health, or lack of it, has leveled off. In areas around many of the big cities in China, housing construction actually has declined with softened prices. The U.S. is not the only nation facing a housing bubble.

In addition to an economy that is inevitably slowing, China has an often overlooked Achilles heel. Its weak spot; China relies to an almost total extent on the production of goods to the specifications of others. It does almost no manufacturing, shipping or marketing of products in its own right. As the Wall Street Journal recently commented, "the toughest challenge to China is how to transition from low cost, often no-name manufacturers to respected global brands."

China's contrast with Japan is striking. After World War II, Japan, Inc., the informal name given to the partnership between the Japanese government and private industry, was determined to become a maker of quality goods. No more shoddy stuff that was the hallmark of Japanese manufacturing in the nineteen twenties and thirties. They generally have succeeded. Toyota makes great cars and soon will surpass General Motors as the largest automaker in the world. Sony sells the best laptops of any manufacturer. Canon produces the best photocopiers. Bridgestone Tires are market leaders.

Can anyone name one indigenous, home grown Chinese product? No. Chinese factories seem to be content to churn out lingerie for Victoria's Secret, computers for Hewlett Packard, toys for Mattel plus literally thousands of other products for end users in the U.S. and Europe. Making bids for international oil companies hardly will solve the utter lack of brand identification in the West.

In my view, China is not immune to what I call the "maquiladora" syndrome. Maquiladora plants sprung up about thirty years ago along the U.S.-Mexican border to produce a wide variety of low cost components and finished products for American companies. For a number of years, these factories flourished with labor often working 24-hour shifts. Then came the great sucking sound from China. U.S. manufacturers, always alert to find new cheap sources of production, move en masse to China. Today, many of the maquiladora plants have closed. Some 75,000 Mexican workers living in border cities either have lost their jobs or are working part time shifts. Many of the communities are ghost towns.

Will China suffer a similar fate? Not completely, because Chinese industry is far more diverse than Mexico, as well as other parts of Asia where outsourcing is under siege from lower cost competitors. I believe, however, that during the next few years at least a start in a disengagement of companies now rushing into China for the first time, like Yellow Roadway to create a trucking network or expansion by an already located American company like UPS to establish a huge sorting facility in Shanghai, have missed the boat.

Who will take the production reins from China?

My bet is on the East European nations. Those nations formerly under communist rule. They are good little capitalists now and hungry for work. They have skilled and experienced yet low cost labor forces. They offer substantial tax benefits. They provide subsidies to train workers with other inducements for the establishment of production and distribution facilities by U.S. and West European companies. An intangible yet equally important advantage is the similar cultural, political and social heritage shared by these nations and the west.

I suggest removing the blinders that focus exclusively on China and open one's eyes to the other 5 billion people on our planet.

By Julian Keeling, CEO of Consolidated International, Inc.

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