Generally, we make money from specific, local knowledge, not from “big picture” stuff.
For example, the person who runs a gardening service and knows more about the community and how to reach it; has a superior understanding of lawn mowing efficiency; and a better pipeline to good workers will beat his competitors whether or not he knows the proverbial “price of tea in China.”
That being said, it doesn’t hurt to occasionally open the shutters of your mind and learn a little about the big moves that are taking place in the world.
I’ve been interested in China since I was in high school and studied Chinese martial arts in the late 70s in New York City. In college, I took courses in Chinese culture and history and I had friends who were among the first westerners to live and travel in the country when it opened up after years of self-imposed isolation. But in the last ten or so years, other than reading headlines, I’ve haven’t paid too much attention.
But this much I’ve always known…China is a treasure trove of human resources.
First, when you have over 1 billion people, the law of large numbers says that some spectacular performers in all fields are going to emerge. Second, China has a very long, deep and mostly unbroken tradition of valuing education, hard work and enterprise.
In the last 100 years, it would have been very easy to discount the country. First it was ganged up on by militarily superior western powers and Japan and ruthlessly exploited and then it was repeatedly plunged into chaos by its Communist overlords. But anyone who counted China, and most importantly the Chinese people, out was making a huge mistake.
Now China, in a very short period of time, has become one of the top consumers of the “stuff” that makes modern life: cement, steel, oil and commodities of all sorts. If you’re a Canadian or Russian or Australian, you’ve seen the value of your currency appreciate accordingly as China goes on one of the biggest raw material shopping sprees in history.
What exactly is going on in China?
For the answer, I heartily recommend Jame Kynge’s book China Shakes the World.
I’m grateful to him for bringing me up to date on China and letting me in on what exactly is happening there today. To make a long story short, China is on track to become one of the dominant manufacturing powers on earth. In fact they already are in countless categories, but while many analysts thought they’d only master manufacturing low and mid-range products, they’re quickly building the infrastructure to build highly sophisticated products like machine tools, high end textiles, and automobiles.
Kynge’s book documents how the Chinese have already gutted the high end textile manufacturing business which used to be dominated by Italy and the machine tool manufacturing business which used to be dominated by the US and Germany. It’s very scary stuff for anyone involved in manufacturing and, as a matter of fact, for many of of us, because we’re all involved in manufacturing if only indirectly. For example, if any of your customers make their livings working in or managing factories in the US and western Europe, your customers are going to have less and less buying power as the years roll on.
Why is China so formidable?
First, culture. For centuries the Chinese have cultivated respect for hard work, diligence, and learning, three qualities that are at the core of any successful enterprise.
Second, China is enjoying a kind of “perfect storm” of historic lucky breaks. Specifically:
1. China is entering the manufacturing arena with the benefit of 21st century technology which means their workers are tremendously efficient compared to the how the west got started when the dominant form of power was the water wheel and then the wood and coal fueled steam engine.
2. Using its huge internal market skillfully as a bargaining chip, China has won stunning concessions in technology transfer from its western partners. And when it hasn’t received know-how infusions as a part of negotiated deals, through hard work and diligence (those two words again) and sometimes through chicanery, it’s proven to be a master of “reverse engineering.” What this means is that technical know-how that cost the west hundreds of billions of dollars to develop has washed up on China’s shores essentially for free.
3. China’s labor pool is stunning.
Over 1 billion people, many of whom have eked out only the barest of livings under brutal working conditions in depleted, overcrowded rural areas now have the chance to receive a living, if modest, wage. Twelve, sixteen, eighteen hour days are nothing to such people. And the cost of Chinese labor? Even today, in 2007, it cost less to hire a Chinese worker than it did to employ a worker in the early days of industrialization in 19th century Europe adjusted for inflation.
But China’s current advantages don’t stop there:
1. Manufacturing is not much fun unless you have markets to sell into and, with the US, China has the mother of all consumer markets for its goods.
Wal-Mart, if whose shares were combined would make the Waltons exponentially richer than Bill Gates, has essentially gone into business as China Inc’s. retail outlet. And Wal-Mart is hardly the only company to so do. Why? Take the “everyday, low prices” at Wal-Mart and cut them by 90%. That’s what Wal-Mart pays China for its goods.
2. To grow, you need financing and we are living (for the time being at least) in the biggest credit bubble in human history. Never has there been more money sloshing around the world economy and never has it been easier or cheaper to borrow.
Take China’s positive cultural traits add to that its vast, low cost labor pool; its canniness in acquiring know-how; the existence of a mega-market (the US) to sell into; and the current easy-goingness of the financial world; and you’ve got a juggernaut of historical proportions.
What does all this mean?
In short:
1. China will impact your life directly (in fact it already has) and the size of this impact will grow with each passing year.
2. If some of your wealth comes directly or indirectly from manufacturing, you’re in serious need of a Plan B.
3. China is raising the bar on the need for hard work and diligence to make it in today’s economy.
Most serious entrepreneurs have these traits to a degree, but quite frankly until you read Kynge’s China Shakes the World and read the stories he tells of Chinese entrepreneurs literally raising themselves up from rags and semi-starvation to building multi-million dollar enterprises, you may not fully grasp what hard work and diligence really mean. I have to confess the book was a wake up call for me.
– Ken McCarthy
P.S. For over 25 years I’ve been sharing the simple but powerful things that matter in business with my clients.
If you’d like direction for your business that will work today, tomorrow and twenty years from now, visit us at the System Club.
It is an earth shaking book.
For another excellent review of it, I suggest you check out Peking Duck’s review here:
http://www.pekingduck.org/archives/004690.php
Thanks.
One of the most astonishing parts of the China story is that unless someone makes a focused attempt to dig out the facts, the mass media, including the business media, is not telling the story.
And don’t get me started on our pathetic politicians, Democrat and Republican. Economically speaking, our manufacturing base is burning to the ground and like Nero of old, they’re fiddling.
There is fear and resentment among anti-capitalists who protest against Wal-Mart opening a new store, etc. They say that Wal Mart will put the mom and pop businesses out of business. What they dont’ realize is that Wal Mart is a mom and pop business that is smarter and more motivated. Anyone can start a Wal Mart or a Starbucks which is also a local one store company that was just more motivated to succeed than others. The same is true of this China phenomenon. I see it as a tremedous opportunity to sell products in China and to sell Chinese products in other parts of the world. A free market will always balance itself according to supply and demand. What a great opportunity to outsource manufacturing to China! The purpose of manufacturing is not to provide high paid jobs it is to make profit for the business owner. And anyone who works in manufacturing is free to start their own manufacturing company and outsource it to China instead of whining about not having a job.
Well that’s an interesting theory.
But assuming you want to remain an American living in America and you don’t want to live among neighbors who dress in rags and get their dinner out of a garbage can, it behooves Americans to think about what’s going on and where we’re headed.
Make no mistake, the Chinese GOVERNMENT is extremely focused on doing whatever it takes to make China competitive.
This is not a matter of individual bootstrap entrepreneurs going head to head.
Yes, I’m sure anyone who reads this blog knows how to take care of their own narrow, personal interests. That’s not the point. Patriotism calls us to care about the future of the country. If you don’t care, hey there are plenty of nice places you can live in the world. Me, I prefer to live here and contribute to my country.
Our government?
It’s taking our tax dollars and flushing them down the toilet. The bridge collapse in Minnesota this week and the failure of the levees in New Orleans in 2005 seem to me to be the loudest of all possible wake up calls.
Sane governments invest in infrastructure that make business easier (ex. the Erie Canal).
I don’t see our government doing that. If we’re going to be competitive as a nation, we better wake up to the challenges we’re facing and respond to them.
We won World Wat II and maintained our military posture based on our industrial infrastructure. It won’t be a laughing matter when all the core industries we need to provide for our defense are outsourced.
Oddly, you’d think the Pentagon with its trillions would care about this, but as Kynge documents in his book, they’ve been as clueless as the politicians.
No one says you have to care about the future of your country, but the answer to China is NOT “everyone is free to start their own successful business.”
Coming from a military background sworn to protect and defend our Constitution, I must say Ken’s observation is spot on.
China looks very voracious to me, which can be a wonderful economic opportunity but make no mistake: China is interested in China. It’s military build up is a concern to many nations.
There are several components to a great civilization but economic capacity and solid infrastructure are foundational. A country with a strong infrastructure and industrial capacity is not only a healthy nation but has the capacity to defend its national interests. For the present, the USA is in that position. China is fast growing in that position.
The question is, what are China’s national interests?
Thanks for your keen obsevations, Ken.
When are you going to run for public office?
Tom,
I’m a black and white kind of guy.
And I have so much trouble just navigating the politics of the Internet marketing world, I can’t imagine how I’d even begin to deal with professional politicians.
That being said…
I think the core problem is somehow the dollar has become the only good, more important even than national survival. That may work fine for multi-national corporations, but it’s just not a sound position to take for anyone who actually cares about the country’s future.
If a person really doesn’t care what happens to America and the values we represent and puts the dollar above all else, fine, but they should understand the implications of what they’re advocating.
Washington, Adams, Jefferson et. al. were all well aware of Adam Smith and his “free market uber alles” philosophy and they specifically did not write it into the Constitution.
Actually “free” market back then – and today – is code for: “whoever holds the upper hand gets to make the rules and declare it the natural order of things.”
In 1776, we asserted our rights against an imperial system that was designed to keep us poor by controlling our banking
system and preventing us from manufacturing finished goods.
The best free market thinking of the day dictated that we’d provide England with cheap raw materials and buy expensive finished goods from them. And when we borrowed money, we’d borrow it from British banks. It was only “natural.”
Great deal for the Brits. Very bad deal for us.
We had to shed blood to change it.
1776 was about getting a better deal and men put their lives and wealth on the line to get it for themselves – and for us.
Today, over 200 years later, we’re now voluntarily deeply in debt to other nations and voluntarily allowing our manufacturing infrastructure to fall to pieces.
There’s just no way that’s a good thing for the nation. I don’t care how it’s sugarcoated. In the long run, if you’re a debtor and you can’t make your own stuff, you’re in trouble.
Now, our big corporate “citizens” are doing very well for themselves in the short term by greasing the skids for what’s happening.
The frustrating thing for me is that somehow they’ve succeeded in persuading many Americans that all this is a good and noble thing, that faith in the abstract idea of a free market, Adam Smith’s “invisible hand,” is more important than the common sense of doing whatever it takes to make sure we maintain a modern manufacturing infrastructure in this country.
I wish these folks would just come clean and say: “Look. Our horizon begins and ends with us and we don’t give a damn what happens to future generations of Americans.”
Because whether they know it or not, that’s what they’re advocating when the put the ideal of a “free” market above national survival.
To put it bluntly, when we have a need to put men and now women on the battlefield, we better have a whole bunch of people back home who can make better weapons than the enemy can. That can’t be reliably done through outsourcing. You’d think that simple observation would be obvious, but I guess it’s not.
Now I’m going to say something that will piss a lot of people off and maybe even lose me some customers. So be it…One of the biggest peddlers of the junk “free” market philosophy is Fox News and Fox News is owned by an Australian, not an American.
What does he care if we bury ourselves through short-sightedness as long as his clients, multi-national corporations, are happy with the job he’s doing for them?
Well Ken and Tom,
For guys who are involved in Internet Marketing, your thinking is a little backwards.
Estimating the worth of a country based on its manufacturing infrastructure is very 19th century.
In the 21st century, the worth of a nation is measured by its ability to innovate and create. Creativity is not measured by one’s ability to manufacture hardware. Cases in point: Microsoft, Yahoo, Google.
In the 1980s, the US took a whipping from Japan but then Andy Grove, Bill Gates, Steve Jobs, Michael Dell and others created the personal computer industry, which brought the US back on top. More specifically, Microsoft that built its business with minimal hardware. Intel and AMD do most of their manufacturing overseas but the engineering and R&D is done stateside, albeit mostly by foreigners on visas. But that’s not a problem, it’s not who does the grunt work it’s who owns the company.
Most forward thinking companies today are the brainchild of US entrepreneurs. The American way of life fosters and promotes entrepreneurs who are innovative and bold. Other nations either thwart free thinking, thus killing the entrepreneurial spirit in the womb, or only allow traditional entrepreneurs with limited innovative thinking such as real estate developers, manufacturers of traditional physical products, or outsourcers for hi-tech us companies.
As long as the US keeps its creative edge, it does not have to fear the loss of its current supremacy.
But, in order to keep its creative edge, the US needs to heavily rely on foreigners who are better educated to perform the tasks required of them by Innovative, Imaginative, and Creative Entrepreneurs (IICE).
The entire inventory of US colleges and universities cannot produce enough talented American students to supply the needs of the IICE so outsourcing is key. By picking up the best out of a 6.5 billion world population basin, the chances of finding talent is much better than the rather limited 300M US basin.
Creativity is key, not manufacturing infrastructure. Creativity resides in the brain and all the physical infrastructures to manifest the end product of the creative thought can be located anywhere on the planet, it doesn’t matter. For all I care, the manufacturing could be made right in the middle of the ocean, in international waters, by robots, with no country or no nationals being able to claim ownership of the manufacturing process.
As for your concern over military buildup of China and the fear that the US would not be able to defend itself and so on. China does not need super duper military weapons, all it needs is for the 1.1 B to cross the pacific on bamboo boats, each with a bag filled with 100 stones. Americans would be helpless with 110,000,000,000 stones raining down on them. Hi-tech weaponry is worthless, case in point Irak: The most sophisticated weapons in history vs Rashid barreling down the street in a beat up Lada with a dozen pipe bombs strapped around his chest.
The best way to avoid a conflict with China is to keep China happy, they want to raise their quality of life to be like every American. And, like every human beings, they should be allowed to do so. Let them do it. A happy China won’t be belligerent. Only paranoid Americans become belligerent when they fear the loss of their supremacy by seeing other nations trying to raise their standards of living. Why should only Americans live “the American dream†. The whole planet should have live it too! (That plus free health care 😉 )
China is where Japan was about forty years ago. Wages are already climbing and soon, they will be at par with Taiwan or Japan, which means that they will lose their ability to manufacture cheaply. With nowhere else to outsource for cheap labor, robots will take over the manufacturing. Robots will cost the same to own and operate the world over. Manufacturing will be spread evenly across the planet according to needs and all kinds of goods will be manufacturable anywhere since robots are able to transfer their abilities instantly — no such thing as “skilled workers†or the need to apprentice, a robot learns as fast as its software upgrade loads up in memory.
For centuries, humans have strived to free themselves form hard, repetitive, manual labor, first by using beasts of burden, then by using slaves and then, by having paid workers (and making them work like slaves 😉 )
Now, we are entering an era where we have created machines for the specific purpose of being our “slaves†no need to exploit living creatures (humans or not) which should make PETA and Human Rights groups very happy. Even if machines develop sentience, they will know why they were created and accept the fact that they exist to serve humanity. No humans were created to be subservient to humans but machines, yes.
According to this website http://www.workingforamerica.org/documents/manuupdate.htm there are currently only about 10% of US jobs in the manufacturing sector. If that drops to 1%, that won’t mean that unemployment will raise by 9%. There were 80% of jobs related to agriculture in 1900, now there are less than 4%, that doesn’t mean that at one point there was 76% unemployment, that means that jobs migrated to other sectors, most notably services.
All is required for Americans is to stop dozing off and keep on learning in order to switch from jobs in the manufacturing sectors to jobs in sectors of growth that will undoubtedly be more rewarding, and, most importantly, keep the creative spirit alive.
No problem with China growing and keeping it’s people happy. It’s their right as human beings.
I’ve got no problem with China – or any other part of the world – growing and thriving. It’s their right as human beings and it’s a good thing.
The problem is letting essential, irreplaceable parts of our infrastructure like our machine tool industry get gutted.
The plants, the equipment, the know-how, the experienced workers…You can’t just can’t turn stuff like that on and off like a water faucet. When it’s gone, it’s gone.
Machine tools are not a 19th century relic.
They’re the backbone of 21st century industry. Our machine tool industry is gone. We let China eat it during a downturn.
Dumb! Tragically dumb.
During a brief downturn in steel prices, the Germans let a Chinese firm buy, cut up and move the biggest steel plant in Europe to China. Thousands of people out of work, a major strategic asset gone forever – and now steel prices are soaring again. The plant would be making money today – in Germany.
This “the market knows all” philosophy is really a bad joke.
The market knows what conditions are this quarter, what prices are today. It has no strategic sense. Zero! In fact, less than zero.
That’s why you could buy all the gold you wanted for less than $350 an ounce just four years ago. I remember all the “informed” analysts saying that gold was “so 19th century.” Uh huh.
When oil was temporarily down to $10 a barrel just nine years ago (it’s now $70 plus), I remember all the pundits back then attributed it to “improved technology.” No question that the oil extraction technology of 2007 is awesome, but as you can see, it didn’t hold the price back.
I have to wonder about this statement:
“The secret to dealing with China is to give it what it wants.”
Holy smokes! I respectfully submit that can’t run a business, let alone a country, with a philosophy like this for very long.
Seriously, either we’re a nation under one flag or we’re a band of individual pirates who don’t give a hoot about the future or our fellow citizens.
Let’s just be honest about it. Or at least let’s think through the neo-liberal free market philosophy Kool-Aid everyone is drinking for the free keg over at Fox and elsewhere.
Big multi-nationals are a neccesary evil.
They make and do things that we as small entrepreneurs can’t do, but they need to be watched like known shoplifters in a department store.
They love the neo-liberal free market song and dance because it frees them to do whatever they want and if that includes setting the nation up for failure in the long term, so be it. They’ll just move their money and set up shop elsewhere.
This nation used to invest in its infrastructure.
The Erie Canal *made* NYC into the powerhouse it is today. The interstate highway system cut tens of trillions off transportation costs. Our once-excellent public school system (which once included near free public colleges) trained generations of sharp engineers and managers that made America hum.
For the long term, economies need to be balanced, like a portfolio – you need to be able to grow your own food, make most of the stuff you need, keep people productively occupied and able to buy. That’s what the Chinese are focusing on and it’s working.
Not everyone is, can be or should be an innovator. You need people who do all the unglamorous stuff that keeps the clockwork running and those people need some security.
To use a military analogy, not everyone can be a Ranger. Not everyone is cut our to be dropped from a plane at night behind enemy lines and create massive mayhem with just their brains and what they can carry on their back.
You need people behind the lines who can fix trucks and ship ammunition. Otherwise, even a Ranger is going to find himself coming up short eventually.
Opportunity seekers flock to the US because our infrastructure is still pretty good, we’ve got a huge internal market, and skilled workers can be found in pretty good supply.
These conditions didn’t grow on a tree and they are not a “birthright.” If a country is careless for long enough and fails to think and act strategically, even the biggest lead can be lost.
And to bring this full circle, because we’ve neglected our manufacturing – high tech and low – China is eating our lunch and the chow down is only just getting started.
(Loving this discussion. Thanks for all the thoughtful posts. We all get smarter this way.)