Wednesday, January 11, 2012
The competition between China and the United States
Protectionism and isolationist mentality are once again gaining popularity and momentum in the U.S. as the long drawn out recession and high unemployment rate continue to weigh on the U.S. households. It warrants some careful examination of the hypothesis that Chinese firms compete against American firms in a near zero sum game.
The Sino-American Value Chain
If we take a closer look at Chinese firms and American firms, what we are likely to discover is that they have a symbiotic relationship instead of a competitive relationship. Generally, they occupy two distinct areas in the same value chain. The Chinese firms are specialists in low cost mass production, while American firms specialize in design and distribution. Together, the Chinese and American firms form a global ecosystem which specializes in delivering products to American consumers.
When Dell, HP and Apple report record Christmas sales, the factories in China also book record profits. Similarly, when the RMB comes under pressure to appreciate or when domestic inflation pushes up Chinese wages, American firms also experience cost increase, which impacts margin. Most importantly, both American and Chinese firms are at the mercy of Western consumers. The reduction in American and European consumer spending recently has meant bleak earnings growth for the ecosystem of American distributors and Chinese manufacturers.
In reality, Chinese firms collaborate and support American firms but compete fiercely against Korean, Singaporean and Japanese firms. The notion of American firms vs. Chinese firms is often blown out of proportion given the reality of the competitive landscape.
The “real” competition between China and America
However, there is a very real and very significant competition between China and America that is yet unseen to the casual observer. While there are plenty of positives associated with the rise of China as a global economic power, there is one unavoidable consequence that Americans must take notice. Surprisingly, it is the one factor that has thus far been ignored by scholars, policy makers and the media.
The rise of China necessarily means a rise in the income for the 1.5 billion Chinese consumers, which predicts the creation of a middle and an upper class that outnumbers collectively the middle and upper class families in the U.S. These new consumers will be competing for global goods and, indirectly, for the consumption of global labor supply and raw resources.
In many ways, the competition between global consumers is far simpler to analyze—the consumer with the greatest wealth and credit line wins the consumption war at the end of the day. The simplicity of this competition gives us some very stark predictions about prices and consumptions in the future.
Low savings rate and, in many cases, negative savings rate have resulted in significant household debt. American households have begun a long road of de-leveraging, which reduces their ability to consume and their willingness to pay high prices. The Chinese households are facing the opposite situation. As more and more Chinese continue to join the rank of global consumers and, in the process, bidding up prices for goods, global producers will increasingly cater to this consumer group, which is increasing in numbers as well as purchasing power. Due to the enormous trade surplus which China runs against the U.S., the RMB must ultimately appreciate to restore trade balance and to reduce the high U.S. labor costs in international trade competition. This further increases the purchasing power of the Chinese households.
The combination of poor household balance sheet and declining real wealth due to weakening dollar means that U.S. households will be increasingly less competitive as consumers for goods and services. Indirectly, this means global labor, capital and raw resources will increasingly be reconfigured to supply the consumption needs of the Chinese households.
Serving the consumers of tomorrow!
Any business, any worker can only succeed by delivering value to the end consumers. The composition of the consumers of the future is shifting to one which speaks Chinese, eats wok stir-fries with rice and is raised on a mixture of Confucianism, Buddhism and Taoism. The ecosystem of American/Chinese firms and workers, which thus far has specialized in delivering products and services to the Anglo Saxon consumers, will face tremendous headwind as its primary consumer group begins to age and decline in purchasing power. Firms and workers must think deeply about how to acquire new skills, which are valued by the consumers of tomorrow and transform their core competence to align with the needs of these new consumers.
by jason c hsu