China Rising: An Update for MPIF

On October 28, the Metal Powder Industries Federation (MPIF) invited me to give a virtual presentation on US-China relations to more than 125 business leaders. Here is a summary. 

1.      MPIF: What is the economic impact on China and globally on a Democratic or Conservative government post November 2020? 

James Chan: A Biden presidency will not alter China’s national development plan. China is weaning itself from dependence on America. In 2013, Xi Jinping launched China’s Belt and Road Initiative, a global infrastructure development plan that invests in 70 countries. China’s focus is mostly on wielding greater influence in Asia.

China’s global trade has remained stable, about $2.4 trillion in both 2018 and 2019. China garnered a surplus in merchandise trade with the world at $350 billion in 2018 and $421 billion in 2019. 

China has not suffered any significant relocation of manufacturing activities away from the country. Profits also remain stable. The Beijing government knows that it has a reputation problem with the West. Negative sentiments in the U.S. toward China already began during the Obama years. They got worse during the Trump administration, dropping to the current low of only 22% people who still view China favorably. 

2.      MPIF: Does China expect or is it planning for a change in the manufacturing sector? Do you think manufacturing may return to the U.S.? 

James Chan: China has a three-step plan in its current national manufacturing strategy. When China displaced America in 2010 as the largest manufacturing economy, it was merely ‘large’ but not ‘strong’. Beijing wants to turn the country into a ‘strong’ global manufacturing center by reducing its technological gap with the West. From now till 2025, China hopes to see a few manufacturing industries to become competitive with the West. By 2035, China wants to become a ‘premier’ manufacturing nation. By 2045, China hopes to become a world leader in manufacturing. 

Unless we change our collective mindset, I do not see manufacturing return to the U.S. in any significant way. I asked my clients in the rotating equipment and precision-engineering industries this question. They do not see themselves, their OEM customers, or peers relocating offshored manufacturing back to U.S. soil. 

A new annual survey of 3,000 members of the American Chamber of Commerce (AmCham) in Shanghai shows that only 4% of its members plan to move parts of their operations from China back to the United States. Nearly 92 percent of its members have no plans to leave China. 

Manufacturing employment in the United States reached its peak in 1980 and it has been in decline since. The same is true for manufacturing as a percentage of all U.S. employment. 

3.      MPIF: How will the legal changes in Hong Kong affect global business? 

James Chan: In recent weeks, Beijing has made it officially clear that the “One Country, Two Systems” status in Hong Kong must be upheld. This official affirmation, made after the introduction of the new National Security Law on July 1st, is a stabilizing force in ensuring Hong Kong’s ability to continue to function as a global city. 

The Global Financial Centers Index (GFCI) ranks Hong Kong 3rd among the top 25 financial centers of the world. Not everyone in Hong Kong objects to the introduction of the National Security Law. Some 2.93 million people (39% of Hong Kong’s population or an estimated 60% to 70% of Hong Kong’s adult population) signed up to support the new law. 

From July 1st onward, there has been no major street protest or unrest. I am optimistic about the future of Hong Kong as an important world center of trade, finance, and tourism. 

4.      MPIF: Is China’s view on intellectual property protection changing (really changing vs. publicly indicating it is changing)? 

James Chan: Seriously? No. When I first traveled to China to sell American scientific books and journals in 1982, my good customers in China have been warning me of piracy and illegal duplication of our products. That goes with professional services too. 

To me, there are two ways to compete in the China market in face of intellectual property theft. Exercise extreme caution and keep your technology and trade secrets close to your chest. Secondly, if you are an exporter, find ways to drum into the heads of your customers that your products have superior quality and they are worth paying for.   

5.      MPIF: What is the current percentage of internal combustion engines vs. hybrid and electric in China and what is forecast in the future vs. hybrid and electric? 

James Chan: In August 2019, the Ministry of Industry and Information Technology (MIIT) announced that nearly 90% of all “new energy vehicles” were battery powered. 

In July 2020, China produced 900,000 cars of which 825,000 were gas cars and 108,000 (12%) were electric cars. They include battery-powered and hybrid passenger vehicles such as sedans, SUVs, limos, buses, and others. 

My contact in China estimates that electric car production is increasing at annual rates of 20% to 30%. By 2025, the Chinese government wants 25% of all new cars to be electric. Government statistics and edicts can change abruptly. Take them for reference purpose only. Things in China are protean and can change abruptly. 

Beijing encourages the production and use of electric vehicles. Gas vehicles carry blue-color license plates which can cost US$15,000 each in Shanghai which also sets an annual quota of 100,000. People who buy electric cars (green license plates) pay no fee. 

6.      MPIF: Describe the demographics by age and then comment on the lack of population growth in China and whether this is a concern for the government. 

James Chan: There are fewer younger people in China than in past decades to support a rapidly expanding elderly population. Chinese government slogans in 1985 boasted about how the government could support people in their old age. In recent years, the government has been telling people to save for their old age and not depend on government support. 

7.      MPIF: Based on the current political environment what is the sentiment around U.S. investment in China. In other words, please comment on the amount of U.S. investment for the past 5-10 years and a forecast in the next 5 years. Similarly, what about the reverse China investment in the U.S.? 

James Chan: U.S. direct investment in China increased from $11 billion in 2000 to $116 billion in 2019. Chinese investment in the U.S. fell from a high of $53 billion in 2016 to less than $4 billion in 2019. 

8.      MPIF: What is China’s expected growth rate for the next 5-10 years? 

James Chan: A recent Chinese-language report estimates average annual GDP growth rate from 2020 to 2030 to be 5.5%. The low is estimated at 4.4% and the high is 7.5%. The report forecasts that China will become a higher-income economy by 2030. 

9.      MPIF: What is China’s biggest concern economically and politically today and in the future? 

James Chan: Economically, the concern is the ability to turn China into a middle-class society. Financially, only 200 million Chinese have reached middle-class status. There are 1,200 million more Chinese who find their standards of living wanting. Some 800 million Chinese have not yet had the experience of traveling on an airplane.  On May 8th this year, Chinese Premier Li Keqiang announced that 600 million citizens, mostly in China’s vast rural countryside, earn only 1,000 RMB (US$150) per month. This segment of China has yet to join the market economy. 

Politically, China faces both an external and an internal challenge. Externally, China feels that the West, especially America, continues to meddle in its own affairs. Internally, Beijing is wary of social unrest.   

A Harvard University funded survey in China (eight polls from 2003 to 2016) reported that 93% of Chinese citizens in large cities were satisfied with the central government in 2016. The satisfaction levels dropped to 83% in provincial cities, 74% in county towns, and 70% at the village level. However, even the 70% is far higher than the trust of American citizens toward the federal government. A Gallup poll in January 2020 reported that only 38% of U.S. citizens were satisfied with Washington, DC. 

For 40 years since 1980, the economic well-being of Chinese citizens has improved daily. Per-capita adult income in China grew 4.5% annually from 1978 to 1998 and 8.1% from 1998 to 2015. 

In contrast to China, the purchasing power of the American paycheck has barely budged since 1964, even though its size is bigger.   

10.  MPIF: Are Chinese youth following the Red Army’s leadership or do they want to become more Westernized? 

James Chan: A friend in Shanghai opines that Chinese youth want more to “Easternize” than to “Westernize.” The two Chinese characters he uses are fu xing 复兴 (revival or renaissance). Chinese youth want China to be great again, as China was “great” relative to other world powers for at least four times over its 2,700-year-long recorded history. They were (1) Han Dynasty (206 BC – 220 AD); (2) T’ang Dynasty (618 – 907); (3) Ming Dynasty (1368 – 1644) and the early half of the Ch’ing Dynasty (1644 – 1911). 

In 2018, 600,000 Mainland Chinese students traveled abroad to study. These young people will return to China (an estimated 95% return rate) carrying different world values, not just American or western values.  

A segment of Chinese youth aspires to see the Chinese political system to become less authoritarian. They hope to see a greater separation of powers and more checks and balances than they feel today. 

11.  MPIF: Why must we accept the fact that the China market is unavoidable? 

James Chan: China is avoidable. What you cannot avoid is your competitors using China to compete with you, here in the U.S. or in other global markets. 

Besides, China is the world’s largest manufacturing center. It has a huge and still growing consumer market. How or why would a forward-looking company want to avoid the world’s second largest economy that is likely, one day, to become the world's largest? 

America’s GDP was 9 times bigger than that of China in 1980. Today, it is barely 1.5 times bigger. 

12.  MPIF: How do we turn the COVID-19 adversity into a new business venture? 

James Chan:  Many well-known companies such as GE, GM and Proctor & Gamble started during economic depressions and recessions. The Covid-19 adversity likewise provides similar opportunities. 

Businesses that are not averse to China or international trade benefit from starting new global relationships when others want to stay home. 

Three clients of mine began their China ventures during the recession in the early 1980s. My first trip to China representing American firms was in 1982. At that time, China was poor and technologically backward. Today, these forward-looking companies are well-established in China and Asia. Companies with long-term plans realize that some foreign initiatives do not pan out in the short term, but they are nevertheless of strategic important to their future survival and prosperity. They invest when others cut back. 

13.  MPIF: Why didn’t tariffs work to level the playing field regarding the trade deficit with China? 

James Chan: You are right. Trade tariffs do not work. Our trade deficit globally has increased from - $383 billion in 2000 to - $616 billion in 2019 despite our current trade policies. 

U.S. firms have reduced their imports from China, but they have shifted manufacturing from China to Vietnam, Mexico, and other lower-cost nations. China’s trade surplus with the U.S. in August reached $34 billion, the highest level since November 2018. 

Tariffs do not work because our collective business mindset – at least since the 1970s, has been to maximum profits for the corporation and to increase stockholder value. Outsourcing to Asian countries began even during the 1960s, way before China opened itself to trade with the United States.

Workers feel under siege over the last 50 years. Our embrace of artificial intelligence (AI) and automation will make them feel more threatened. 

In 2019, Moody’s Analytics estimated that America lost 300,000 jobs in waging a trade war with China. 

14.  MPIF: Who will be the major players (countries) in Asia in 5-10 years? Will China ever outsource to other low-wage countries? 

James Chan: Japan, India, South Korea, and ASEAN countries will still be the major Asian players. 

Internationally, China invests in countries with low-cost labor. It forms alliances with overseas Chinese communities. Together, such partnerships build factories and produce products that will be sold in the West and the United States. These products will not bear a made-in-China country of origin marking. 

Within China, entrepreneurs are outsourcing manufacturing in large and coastal cities into interior towns and villages where low-cost labor is still plentiful. Many supply chains originally based in Shenzhen City are relocating to Dongguan City due to rapidly rising real estate values and apartment rentals. Foxconn in Shenzhen offers its employees free apartments if they are willing to relocate from Shenzhen in southern China to Zhengzhou City, Henan Province in central China. 

15.  MPIF: How real are US security threats due to outsourcing to China? 

James Chan: The threat is real. The threat was always there yet enough U.S. companies downplayed the threat. Companies should have had greater restraint years ago. When you build a factory and train workers overseas, you naturally impart know-how, technology and market knowledge to your foreign contractors and suppliers. 

16.  MPIF: What can we do as a country to reduce our dependency on China? Tariffs did not work. Would it have to be a nationalistic approach rather than a monetary approach? 

James Chan:  We need to know what our national vision is for the future or else we will keep spinning our wheels. Lacking a plan and political unity, we simply continue to compete among ourselves. 

According to Kishore Mahbubani, a Singaporean career diplomat and academic, Henry Kissinger lamented that the United States began its contest with China decades ago without a long-term strategy. 

About the author 

James W.K. Chan, Ph.D., founded his Philadelphia-based consulting practice in 1983 to help U.S. firms export American-made products and services to China and Asia. From 1981 to 1983, he was China Area Manager for Academic Press, Inc., a wholly owned subsidiary of Harcourt Brace Jovanovich, a Fortune 500 firm based in New York City. His website is:  www.AsiaMarketingManagement.com. Email: [email protected].