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A friend of mine recommended an good article about sourcing issues (c) in China today. In summary:
1. Both buyers (clients) and the suppliers (manufacturers) share the blame for some of the quality issues.
2. A main driver behind the quality problems is the pressure on lowering prices.
3. Chinese are improving their QA at their own pace.
4. Competitive pressure, trade policy shift and now quality concerns may undermine China’s price advantage

It appears that the article was penned by a Chinese. It is well-written but just the POV is naturally defensive and sympathetic. I am surprised Wharton editors would let it out in verbatim.

A discussion during the International Finance class got me thinking: what are China’s options with so much trade surplus?

We all know that at least 70% of China’s trillion dollar foreign reserves are in dollar denominated assets, mainly in treasury securities which yield around 4-5%. Take out the inflation factor, it is more like “deposit” than “investment”.

What is the alternative? Buying higher-yield securities at the expense of higher risk? It is easy to say but rather difficult to execute. For example, it is not a scaleable solution.

What else? How about buying capital goods from the U.S. (goods used for production) and produce more at home? For example, buying heavy equipments, high-end computers, etc. from the U.S. and produce more domestically. Instead, the Chinese choose to buy financial assets from the U.S., some of which will come back as FDI.

It is as if the Chinese are saying, we may have all the production factors–land, natural resources, labor, infrastructure, etc.–but we don’t know how to use them to generate returns higher than 4%. Therefore, we will give you the money and take just 4%.

It is a strange conclusion but seems to be a logical one. I asked the professor about the difference between buying financial assets and capital goods. I wonder whether it is the same as having the U.S. acting as a financial advisor/asset manager plus entreprenuer. I am not sure whether she got my question or not.

This is a title of a NYT article. The author says,

“The answer, say people who have studied the country’s regulatory system, is a cautious yes. ”

Not mine. My prediction is that any “reform” in food/drug safety, if it ever materialize, will likely come at the expense of the rural poor. In other words, the pursue of a “cleaner life” is only to widen the gap between the rich and the poor.

Here is why: first, China today is not Chicago during the Progressive Era. Second, Chinese leadership is held hostage by the quiet barrons.

When Sinclair Lewis witnessed the carcass floating down Charles River, he could write about it and get his articles published. More importantly, when Teddy Roosevelt decided to act, he did not have to get the consent from the mayor of Chicago.

But today, although the world economies have integrated, the world regulatory agencies have not. Therefore, Americans suffering from poor product safety in China can do little to change the situation. Any American Joe can write about food safety in China, but at the end of the day, FDA can’t bypass the Chinese government to enforce even common-sense rules.

Now that Americans have little leverage over the safety issue, how about the Chinese?

The central government, of course, likes nothing more than a pristine image while its representatives strolling down the hallway of United Nations. However, how much control does the central government have?

It is becoming obvious that the central government is losing control over the nation’s economic life. The Premier may shed tears for deceased coal miners, the central government may chop off the heads of some senior officials, yet the weight of an entire state may not be enough to stop a county bank to lend loans to a doomed business.

In fact, I heard that the very author of this article, Joseph Khan, was once detained in ShenZhen while visiting a factory on a product safety assignment. Even the police could not get him freed. Doesn’t this story tell a bigger truth? The central government certainly wouldn’t like to see Mr. Khan got hurt, yet the state appeared powerless in front of strong local business interest.

One last thing, Khan said,
“… big Chinese cities have already demonstrated that they can do a better job monitoring food and drug safety than less developed counties and rural areas. ”
Sure, big citites don’t manufacture those goods. Therefore, they can afford to behave as Americans do by boycutting certain products. Yet the factories still have to run and the laborers have to be employed. While the production happens in rural area but the cities refuse to buy the products, so who are left to consume those tainted goods? That is what I mean “the pursue of a “cleaner life” is only to widen the gap between the rich and the poor.”

Chinese perspective of why “going out”:
????????
?????????????????????????????????????????????????????????????????????
Comparing outbound FDI with Trade:
????????????????????????????????????????????????????????TCL????????????????IBM????????????????????????????TCL???????????????????IBM???????????????
Tempering the optimism: ??????????????????????????????
1. ????????????
2. 2.??????????????????
3. http://www.studa.net/qiye/060811/1634288.html

??????????????????????????????????????????????????????????????????2?????????????????????????????????????????????????????????????????????????????3????????????“????”????????????????“????”??????????????????????????????????????????????????????????????????????????????4???????????
http://www.studa.net/qiye/060811/1634288-2.html

Extra cash, private equity, financial investment:
real estate, asset appreciation: and Taiwanese investments and developments have flowed into the Northwest in recent years. Taiwanese investors, for example, own and are developing the Eaglemont Golf Course near Mount Vernon, Skagit County. http://www.uscc.gov/hearings/2005hearings/transcripts/05_01_13.pdf

Political show off:
?????????????????????????!???????”%??????????????!??”’ ????????!???”?????!???”(??_???_?????TCL??????.pdf)

Technology acquisition:
Glanz model (??_???_?????TCL??????.pdf)

It is a fair global game, foreign competition, monopoly, industrial competitiveness:
2005??_????????.pdf

Trade barrier:
???????????.pdf
http://www.chinafair.org.cn/chinafair2004/website/china/paper/2005-8-8/p4.htm
Even Haier: ??????.pdf

WanXiang (Universal Joints)
??????????????7??????????????????24???, ?????100?????13000?
2001?8?28????????????????UAI?????????????????????
http://news.xinhuanet.com/employment/2003-04/16/content_835690.htm

“has been buying stakes in small Midwestern companies for several years and now is setting his sights on several other targets, including the distressed assets of auto-parts giant Delphi Corp., ”
Consider the case of Rockford Powertrain Inc., a company that was on the edge of extinction several years ago when Ni and Tom Corcoran, the company’s CEO, decided to join forces.
“We were like a microcosm of the auto industry,” Corcoran said.
(Randy Whelchel, president of UAW Local 803, feels) this was probably the best solution. “The only alternative was to close the doors, and it came close to that,” Whelchel said. “The one good thing is that the 100 who are left have good jobs.”
Powertrain’s Corcoran sums it up this way: “If they weren’t here, there might be no jobs at all.”
http://www.chicagotribune.com/business/chi-0601290433jan29,0,1044842.story?coll=chi-business-utl

Industry already being integrated
Industry figures show world automobile trade volume is expected to hit 1.2 trillion U.S.dollars in 2010, and up to 35 billion U.S. dollars will flow into China for auto part procurement.
http://english.peopledaily.com.cn/200612/27/eng20061227_336072.html

Wanxiang’s U.S. sales are expected to grow 60% to about $400 million in 2004
“Wanxiang has been growing like a weed,” says Gary Wetzel, chief operating officer for Wanxiang America Corp.
His single workshop spawned more than 30 factories and 31,000 employees in China.
Wanxiang’s investments brought close to 1,000 new employees under its umbrella.
Nodding to the machinists behind him, he says: “There are 50 jobs out there that wouldn’t be there otherwise.”
Powertrain is now expecting a 30% increase in 2004 sales — its best result in years.
A 1998 Wanxiang deal in the U.S., to buy a cash-strapped engine-parts maker in Muskegon, Mich., fell apart when its union balked at Wanxiang’s lifeline. The engine-parts company, Guidion Manufacturing Co., went bankrupt, dealing a blow to the Muskegon economy.
http://www.wanxiang.com/wallstreet.html, PETER WONACOTT, WSJ, 11/26/04

Its investment banker: http://www.amherstpartners.com/China.html

Knowledge acquisition: business operation and management.
Sharpening competitiveness: ?????.pdf

Haier:
Haier’s own reason why setting up factories in the U.S.: http://www.haier.com/cn/haier/view.asp?newsid=1559
Haier’s scale and government help compared with WanXiang: see PDF.

Market acquisition and expansion: ??+IBM???????.pdf, ????IBM?????.pdf,CNET article:
Meanwhile, it will give Lenovo the opportunity it has always craved to expand beyond China. In 2002, the company began to slightly expand into Spain and regional European markets but retreated due to market share losses at home.
??????IBM??PC??.pdf
slowing sales and miniscue oversea income: ????IBM PC?_???_?????.pdf

8. Cheap asset: TCL/Thompson (??_IBM PC?????.pdf)?
9. Alternative to outsourcing: ??????IBM??PC??.pdf

*** Government and business:
Lenovo: ????IBM?????.pdf

***. Risk:
1. political objection from US: Committee on Foreign Investment in the United States re: Richard Perle’s comments

Lenovo case:
Financial terms: ???????????.pdf
Concerns Mount Over Lenovo’s IBM Deal:
“That may not be enough to avoid an extended review of the deal by the U.S. Treasury Department’s Committee on Foreign Investment in the United States (CFIUS).”
“Without IBM’s R&D support, it is hard for Lenovo to compete against Dell,”
They should also be prepared to switch vendors if IBM’s responsiveness to their concerns dropped, it said.
“Most customers [in Japan] received the news with anxiety,”
“My nervousness is that the vision of the ThinkPad will get lost in transition,”

2. execution risk: gap in operations: profit gap (??_IBM PC?????.pdf) ??????IBM??PC??.pdf

March 2006 : Chinese-owned computer plant Lenovo in Greenock announces 400 to 500 job losses. Work goes to eastern Europe and China.http://www.tmcnet.com/usubmit/2007/01/12/2242059.htm

According to computer security experts, however, the State Department’s decision shows a lack of understanding about the global nature of PC manufacturing. Most U.S. computer makers use overseas manufacturing plants, notes James Mulvenon, a Chinese computer warfare expert with the Center for Intelligence Research and Analysis. It’s nearly impossible to make a computer without using foreign-made parts.

http://www.cio.com/archive/071506/tl_lenovo.html

The agreement was quickly approved by the U.S Federal Trade Commission. But in January, the CFIUS–which is made up of 11 government agencies, including the departments of Justice and the Treasury–decided to conduct an extended review.
http://news.com.com/Lenovo+buy+gets+green+light+from+Washington/2100-1003_3-5605657.html

The tech bellwether said it plans to add an additional 8,800 workers to its previous forecast of 10,000 new jobs. The majority of the jobs will be in Linux services, grid computing and business transformation services, according to IBM spokesperson Clint Roswell, who added that about two-thirds of the jobs would be in business consulting.
http://www.internetnews.com/bus-news/article.php/3394241

The PC maker Lenovo, which bought IBM’s personal computer business, “is majority- owned by the Chinese Academy of Sciences.” 3 Most of the other companies making global headlines are also part of the decision made by the government some years ago that “30–50 of its best state firms should be built into ‘national champions’ of ‘globally competitive multinationals’ by 2010.” 4
http://www.cato.org/pubs/edb/edb3.html#_edn3

Data/Quant:
1. Market acquisition:
Summarize Yao Yang: ????????????????????????????(85%)????????(51%)????????????(50%)??????????????????39%??????????????http://www.bimba.org/ips/article.asp?articleid=1367

Read this article about IT/BPO outsourcing to China.

Some quotes, data, info:
The Xian High-Tech Industries Development Zone will eventually span 90 square kilometres at a cost of 100 billion yuan ($12 billion).
($12B! Are you sure??)

The market for BPO, …, should be worth another $24 billion by next year,

China …has just $2 billion of the outsourced-services market, What activity there is happens mostly in Dalian,

India used to be cheaper, but salaries for graduates, engineers and programmers have been climbing fast and staff turnover at IT companies can reach 30-40% a year. China, where an entry-level BPO staffer is paid around $300 a month, … chief executive of SAP, one of the world’s biggest software companies, gave warning in January that India was becoming too expensive … China’s big coastal cities are getting more expensive, but prices inland remain keen. Foreign firms are looking beyond Xian at cities such as Chengdu and Wuhan.

Tata Consultancy Services (TCS), Infosys and Wipro (all have operations in China) … Yet China is still five to ten years behind India, say most observers.

Theoretically yes, in practice no: lack of vocational training and few links between business and academia … foreign companies in China are spending a small fortune “subsidising China’s education system”

Based on Nicholas Lardy’s Integrating China into the Global Economy

??????? (wu jinglian)

?????????????????????????????????????????????. ???????????????????????????????????????????????????????????????????????????????????????????????????????????. ???? ???????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????
(http://www.china-week.com/html/02391.htm)

2000-2001 Auto price war in China in anticipation of lowering tariff on imports, consumer behavior:
(????——??????????, ???? 2002.12, ??)

Auto industry: 2nd most profitable, excellent sales in 2004, growth beyond anticipation, generally lowered price and increased competitiveness.
(????????????, GD-HK&Macau Price 2004.06, ???.)

Interview with Long Yongtu (????, China WTO negotiator, “people lived on trading auto quota permit … removing tariff cleans up corruption”
Different view: import grows 20.5%, value gorws 24%, domestic inventory grows from 4.73 w to 11 w
Urging price coordination among domestic textile manufacturers. Domestic price war.
WTO anti-dumping patrol
Chinese setup factories in Mexico.
(”????”?????????????? ?? World Market Journal 2005.01 )

After 3 years of WTO, China has:
Lowered some tariffs more/sooner than promised
Actively improved bilateral trade channels
Enacted many trade laws
WTO’s impact on China:
+ # of large foreign companies in China
+ % of FDI growth
- Trade tensions with the U.S. (# of anti-dumping cases)
- Governmental support
(????wto???????, ???. China Tendering “????” 2005.Z1)

Sat in COMM561 this evening. I knew I’d likely drop the class but had hoped to audit if it mattered. Boy, the class was a anti-globalization guerilla training camp: the students are partisans full of zeal but void of reason. All are eager to fight but none offers any idea how to run things once triumphed.

Not to say they must not be angry, or reason is the only means to achieve progress. But the problem is the debate develops in a closed sphere: a set of unchallengeable premises defines the boundry of the discussion–a feature that is more common among ideologies than science.

The premises are: globalization is a new form of imperialism; globalization is the source of alienation; globalization is a conspiracy. I tried to challenge those assumptions during discussion but didn’t go very far. Apparently, most of them have made the leap of faith and are beyond recall.

After the class, however, I thought of a new question–one that I like to pose to every globalization bashers: if you can do something to benefit one of your fellow country man who is wealthy, or you can do the same to benefit a poor foreigner (e.g. an indigenous Javanese), who would you choose?

If one is to answer the compatriot, then why anti-globalization? If it is the foreigner, doesn’t one take part in a form of globalization oneself?

The key is again, what one choose to identify with? The country one lives in? If not, how can one not call oneself a globalizationist?

The book: In Defense of Globalization by Jagdish Bhagwati

About the author:
Jagdish Bhagwati has a distinguished academic career. On the short list of Nobel Award. He is the teacher of my Econ471 professor, Kar-yiu Wong, in Columbia.

About the book:
Why would any one who profited from Globalization bother to defend it? If he gains legit, why bother? If he profits unorthodoxly, why go public? After all, globalization is not a ponzi scheme like Amway or stock promotion, where the promoter has a personal interest in seeing more people participating. On the contrary, if all your competitors are outsourcing to India, you can’t underbid them anymore.

So who would bother to defend globalization? That is where the discussion is getting interesting. Because Bhawati speaks as if he is paying tribute to globalization on behalf of the folks on the receiving end of it.

Bhagwati was born in a colonized India and spent at least the early part of his career fighting wide spread poverty. In the book, he expresses deep sympathy for the poor. Although he discusses the impact global trade has on culture, women, democracy, wage and environment, inevitably, he circulates back to the subject of poverty. For women, it is about finding a job if she has to “walk out on her husband” (p240). For democracy, it is about gradually building up a substantial middle class (p94). To understand Bhagwati, one has to imagine oneself looking out from an apartment in New Delhi.

But for at least some of the polemicists Bhagwati tries to convert, they are looking out from a library or a Starbucks. Their concern is more likely about the alienating nature of capitalism: the spirited pursuit of material progress that is so essential to any social development in Bhagwati’s world is exactly what is giving them grief. And I would argue that such grief is just as valid as Bhagwati’s conviction, not some surplus sympathy or sentiment.

Recently, a reporter for the Los Angeles Times wrote a book (Enrique’s Journey) about a Central American boy’s journey to search for his illegal immigrant mother in America. His mother left him when he was still a toddler so even in his late teens he had never met his mother. After seven attempts and having endured unspeakable sufferings, he finally located her in North Carolina and settled down nearby. This may likely be another success story in Bhagwati’s account. However, this “all is well that ends well” attitude is rather limited. If one thinks of the boy’s journey as a whole, and as a pixel in the snapshot of humanity today, the irony starts to assert itself: before globalization, a poor child looking for his mother had to travel on foot, but would suffer no harsher humiliation than having to beg for food. Today, a poor child can travel by bus or train. At the same time, however, he must face the possibility of being attacked, robbed, raped and killed. One has to ponder not only the worthiness of such “success” but the value coordinates by which it is measured. Is consumable materialistic gain the only yardstick of man’s welfare? To what degree can we accept the degradation of humanity in exchange for utility improvement?

Having failed to acknowledge this non-material aspect of the globalization debate, Bhagwati is going to have to work extra hard to change the critics’ minds.

A quick and nasty comment on his prose–pompous, pretentious: like a servant becomes a master, schools his servant on how to wait on him then tip gratuitously. Yuk!

Book Review: The Age of Empire, by Eric Hobsbawm

In starting the book with an account of how his parents first met, under the shadow of the Pyramids, in 1913, Eric Hobsbawm confessed his emotional tie to the period that he called The Age of Empire. To him, the years between 1875 and 1914 were an era of unparalleled marvels: mind not only the stunning material achievements, or the great historical figures who lived their formative years, but just feel the restlessness of human energy of the age—the energy of desire, innovation and hope—one cannot but nod in understanding of why Hobsbawm spared no effort trying to capture this segment of history before it finally faded into “twilight zone”.

It is somewhat a strange experience to follow a historian’s guide to a past that he’s professed of such personal attachment. One couldn’t help but wonder when Hobsbawm being critical of the age of empire, was he trying to find the causes or the excuses of its ultimate degeneration into a World War?

Hobsbawm answered this question with dialectic sensitivity. The age of empire, he seemed to argue, was at the same time of an age of progress and an age of crisis.

The momentum of progress was overwhelming. If anyone harbors any exceptionalism sentiment toward the contemporary age, reading Hobsbawm will certainly help to diminish that. To those today who marvel at the exponential rate of growth in China, or at the material excesses an average American have access to, Hobsbawm seems to remind them: history is a great circus show in which the spectacle remains the same. It is only the audiences that are different each time.

Yet signs of crisis were equally abundant. In almost every chapter, Hobsbawm coupled glories with worries: in economy and commerce, net production increase couldn’t eclipse precipitous decline of profits. In political development, the liberation of the mass and the triumph of reason over religiosity were so profound, that they left a vacuum soon filled by anarchism and nationalism. Industrialists hailed the arrival of “scientific management” as a savior, all the while oblivious of its alienation of humanity. The advance of theoretical science, such as math and physics, was such that it lost secular traction and morphed from observable to believable. So were the fine arts, despite a booming vernacular entertainment industry.

In the end, all the crisis culminated in the self-destruction of the ego of this belle époque, the ideology of imperialism itself. The genesis of such an ideology was the product of economic necessity as much as political convenience. The seminal form of imperialism, Hobsbawm told us, was a British creation, in that the conquering was to serve the expansion of commerce: either as new markets for exports, or as outposts to secure trade routes. Soon, however, the innocent urge of capitalist growth took on a life of its own, albeit a political one: it became the symbol of national pride, a convenient instrument for nascent states to consolidate its powers and to coerce its dissidents.

Coupled with such a transformation was its own undoing. Not only the spread of idea of Modernity to the periphery lit the fires of revolution everywhere, but the groundswell of nationalistic sentiments steered the European powers irreversibly towards a catastrophic collision, or shall we say, collisions, that in another 30 years would bury the imperialism de jure for good. The synthesis born after such epic human calamity is today’s particular form of globalization, in which nationalism is considered as obstacle.

Obviously, there is this destructive aspect of nationalism. Hobsbawm described in the chapter “Towards Revolution” the ambiguous feeling Europeans had towards an all-out conflict on the eve of World War I. Some didn’t believe it was coming. Others didn’t think it was necessarily a bad thing. Anyway the consensus was it would be short bloodletting. There is no such illusion today.

Not only nationalism in its most naked form, in agents like Jorg Haider or Jean-Marie Le Pen, is closely monitored and quickly discredited, there is also this newfound vigor against economic nationalism, or mercantilism. It appears the ever sophisticate fight against nationalism reflects a deeper appreciation of peace and harmony.

Or is it? After closing the history not long ago passed but before moving on praising the Free Trade utopia, shall we pause and reflect for a moment: a century ago, who benefited most from a nationalistic world order? Today, who will benefit most from an “anationalist” one?

In fact, one may argue that it is precisely the same dynamic that germinated nationalism during the age of empire that is turning against it today. The global economy, already burgeoning a century ago, has now entered a very different geopolitical reality. Former colonial territories are sovereign nations now. When Peru (or Columbia?) defaulted on its debt in the 19th century, French and German gunboats sealed off its ports until the government agreed to pay back every penny. Today, international creditors cannot do such a thing against Russia or Argentina. Instead, the task is now delegated to regional or global institutions such as WTO or IMF, as exemplified by the intrusive role the latter played during Asian Financial Crisis (AFC).

Even without such a crisis, developing countries today are often presented with a Faustian bargain: eternal subjugation in a thoroughly borderless global economy for a flow of temporal capital. I once thought it was Puncho Villa who lamented “Poor Mexico, so far from God and so close to the United States!” because General Pershing crossed Rio Grande. I was mistaken. It was actually a quote by Porfirio Díaz, the Mexico president under whose watch American businessmen flooded into his country taking over one industry after another. I suppose this is just another proof of Wallerstein’s observation that the downtrodden are often the most acute observers.

I first touched upon the risks and difficulties of International Business in an earlier article.

It was a paper based on the case study of Rolls-Royce. My argument was because RR is doing “infrastructure-class” business, the vendor-customer relationship is inherently “asymmetric”.

Just read an article in NYT that further illustrate my point.

The article mainly discussed corruption and the mess it created after the original corrupt regime was replaced with a new one that is now demanding U.S. to compensate for the State’s lost revenues. This is only made more interesting because after lossing its Uzbek bases, Kyrgyzstan is becoming more important to the U.S.

Some highlights:
Soon after the American invasion of Afghanistan in late 2001, the Pentagon opened an air base in neighboring Kyrgyzstan and made a deal to get jet fuel from the only two suppliers in the country. The companies just happened to be linked to relatives of the country’s president.

Mr. Akayev’s abrupt departure in March has put the Pentagon in an awkward bind. It needs continued access to the base, but the $207 million spent on fuel contracts has created resentment among the country’s new leaders, some of whom contend that the United States knew where the proceeds were going.

The current president, Kurmanbek Bakiyev, is insisting that the United States make retroactive lease payments of $80 million and help recover the contract money …

But Pentagon officials say the demand amounts to asking them to pay twice for use of the base for the last four years. “Any possible misappropriation of funds is an internal Kyrgyz matter,” a Pentagon spokesman, Bryan Whitman, said in a statement.

The fuel deals have become a liability with Kyrgyzstan’s new leaders at a time when the American military needs the base more than ever.