In response to my post, Corporate Strategy and the Speed of the Supply China, several people commented on their hope that said jobs might one day return to the US and/or they posited the question of why not Mexico rather than China so that goods could be moved into the US more quickly?

If only it were that simple. See this March 3, 2008 WSJ article, US Shoe Factory Finds Supplies are Achilles Heel.

This article beautifully highlights why said jobs, industry and manufacturing left the US and ain’t never coming back. The article discussed how a man with his heart in the right place tried to bring some manufacturing back to the US from China and he set up a shoe manufacturing plant in Florida, he did all that he could to make it work, yet in the end failed.

Why did he fail?

Well, at the end of the day, Chinese labor is cheaper, lots cheaper, than American (and even Mexican) labor, and many just don’t fully understand and appreciate how cheap it is in comparison to these other places. He could just not compete. Perhaps more importantly, the infrastructure needed to make a factory tick no longer exits in the US for most products and industries (and if it does not exist here, it sure does not exist in Mexico in many cases). Note that the term “infrastructure” does not just mean roads and UPS delivery — it also means parts, service professionals for machines, the willingness of a firm’s supporting suppliers to fill smaller orders, etc.

One reason China can offer a more competitive factory “infrastructure” is due to clustering, and we will discuss this in greater detail once we are in the road in China. This is where a number of firms in the same industry set up shop together, or, entire towns in China devote their existence to the production of one product (e.g., sock city, watch city, tie city, etc.). The synergies and efficiencies offered by such clustering are hard to beat.

For a number of products and manufacturing industries … gone baby, gone.

We had some nice blog discussions about China, the Three Gorges dam, environmentalism, economic development and sustainability at the following posts:

• Three Gorges Dam, Current Issues with Historical Context (by Rob Belloni)

• Damn Those Dam Drives (by Prof. Carr)

I always wanted to be an artist, but was never good enough. So, I live vicariously through real artists. While in Beijing a few weeks ago I took a quick side trip and made my annual pilgrimage to check out, at lightning speed due to limited time, some avant garde art at the 798 Art Zone (an old Cold-War weapons factory and buildings that evolved into a SoHo like art district), and I wandered into the Paris-Beijing Photo Gallery and saw an exhibition by Yang Yi.

The promo for his exhibition reads …

In 2009, the Three Gorges Dam will have inundated hundreds of square kilometers in central China. Born in a small town overlooking a tributary of the Yangtze River, Yang Yi will see his hometown being submerged during the last phase of the project.

Striking and haunting him even in his dreams, this bitter assessment left him no choice: He had to capture the remaining specters of the scenery that is soon slated to disappear forever, along with his roots and childhood memories.

Employing mastery of both photography and digital techniques, Yang Yi shows us ghost towns engulfed by water, whose rare inhabitants, fitted out with masks and tubas, go about their daily occupations; they seem like wandering souls having assumed human bodies in order to restore life to their beloved village.

The strength of Yang Yi’s pictures resides in the cult of memories: Soon, bulldozers will destroy what is left, populations will be uprooted and relocated, water will flow everywhere and that small and lively town will become a quiet ruinous field. But still, it will survive forever in their collective memory.

This post is not a political statement. I have no strong feelings about the Three Gorges dam and what feelings I do have about it are mixed. I can see both sides, and in my view they are tough calls. I can appreciate that others may disagree. But the pictures in this exhibition were pretty cool and thought provoking, which is one of the reasons why I admire artists and so wanted to be one (bit failed miserably).   Click HERE to check out some of the photos in this exhibition.

Submitted By: Jesse Dundon

From the Economist, the article “Adding Sugar” was an interesting take on the emerging trend of Japanese offshoring to India. While American and European companies have been outsourcing tech work to India in huge volumes over the past years, the Japanese market is just in its infancy. However, the market is growing not only for service outsourcing from Japan to India, but also manufacturing.

Japan’s tiny share of India’s outsourcing revenue is not only because of heavy taxes levied by the Japanese government, but also because of a distinct language barrier between the two nations. It is easy to appreciate the latter, in that service providers surely need to be able to communicate on a wide scale and Japanese and English are not exactly similar languages. To combat this, many Indian firms are making a point of training their employees to be at least somewhat conversational in the Japanese language and culture. This has benefited some companies, as service contracts are beginning to come in from Japan.

We have learned that China has built a reputation for cheap and effective manufacturing while India has built a reputation for cheap and effective services like IT. Like the rest of the world, the land of the rising sun has been offshoring manufacturing to China for years, but has been late to the game with service outsourcing. However, it has become increasingly wary of China’s growing economic and military power, and as such is actually working with India to develop a huge manufacturing zone for Japanese companies. This is part of a larger Japan-India Economic Partnership Agreement, which in turn is just one facet of a recent set of Economic Partnerships that Japan is brokering with the rest of the world. A summary of these agreements can be found here. The Japan-India EPA has gone through a series of negotiation rounds alternating between Delhi and Tokyo, the latest of which was held in January.

If you look at the summaries of these negotiations and those between Japan and other nations (see Japan’s Ministry of Foreign Affairs website Regional Affairs page) you will notice a conspicuous lack of such an agreement with China. Given the sometimes less-than-civil history between China and Japan, it is not at all surprising to notice this preference of India over China. In fact, Japan has been India’s biggest international benefactor since 1986, which speaks a great deal about the partnership between the two nations. As China continues to grow into an economic giant I would expect to see the partnership between Japan and India strengthen, so that when the giant becomes unruly, its eastern and southern neighbors will have more than a fighting chance to compete on the battlefield or the marketplace.

Submitted By: Chris Kirk

The issues with the upcoming Olympics in Beijing have been well chronicled. Pollution and health concerns about the food that will be provided to athletes are at the top of the list for the USOC which is taking many steps to alleviate these concerns. As we dig deeper into an article that appeared in the San Francisco Chronicle on Sunday however, there are other concerns that are slowly beginning to come to the surface.

Steven Spielberg recently withdrew as an artistic advisor to the opening ceremonies citing that China along with other countries are not doing enough to aid the suffering in Darfur. In addition, a Dutch lawmaker called for a boycott of the opening ceremonies to protest China’s lack of advancement in human rights. Some countries such as Great Brittan have put a specific ban on athletes using the games as a platform for political statements. The United States has taken a different approach:

“The USOC has urged its athletes to come to China well-versed on local customs and on the expectation that the Olympics not be used as a political platform. Much of this has been taught as part of the USOC’s ambassador program that was instituted after the Turin Winter Olympics in the wake of bad behavior from Bode Miller and others in the U.S. delegation.”

The Olympics has long been viewed as the generation of goodwill between nations through competition. However the games have been used in the past to make political statements. These incidents include US boycott of the 1980 Moscow summer Olympics and the Soviets returning the favor in 1984 for the Los Angeles summer Olympics.

Do the Olympics deserve to be used as a political tool? Have we lost sight of the true meaning of the Olympics? The Dutch lawmaker in the article suggests that you can participate in the Olympics without going to the opening ceremony which only serves to glorify the host country. Do you think a boycott of what is being anticipated as the most elaborate opening ceremony in Olympic history might have some effect on China to change its position on human rights? It will be interesting to see what happens in August.

Submitted By: Steve Munio

We’ve all seen the figures verifying China’s economic growth time and time again, they are staggering. These always seem to be accompanied by forecasts of continued growth for decades to come, which are equally spectacular. This is where I have my doubts. I believe there are other significant factors that are not adequately considered in these forecasts, factors that one cannot even begin to estimate or predict.

An interesting article was published in the New York Times which discusses some of the underestimated downfalls of this rapid rise.  This is a country where nearly 500 million lack access to safe drinking water. However, despite what China’s own experts and senior officials describe as “intolerable,” Beijing has shown that it is unwilling and/or unable to make significant changes at this time.

Only 1 percent of China’s urban population of 560 million now breathes air considered safe by the European Union. Yet still, the government insists that it will accept no mandatory limits on its carbon dioxide emissions.

“Indeed, Britain, the United States and Japan polluted their way to prosperity and worried about environmental damage only after their economies matured and their urban middle classes demanded blue skies and safe drinking water. But China is more like a teenage smoker with emphysema. The costs of pollution have mounted well before it is ready to curtail economic development.”

The toll this pollution has taken on human health remains a delicate topic in China. Along with media regulation and free speech silenced by persecution, the leadership has banned publication of data on the subject for fear of inciting social unrest, said scholars involved in the research. But the results of some research provide alarming evidence that the environment has become one of the biggest causes of death.

How confident can we be in these projections of future growth, when we cannot even begin to guess at the devastation to be caused by China’s  disregard for sustainability?

Submitted By: Nic Dominguez

In the March/April issue of the Foreign Affairs periodical Harry Broadman, Economic Adviser for the Africa Region at the World Bank, bring us a new perspective on the relationships between China and India and the developing countries of Africa. Broadman’s article focuses on the trade and investment relationship between the two continents and how it can help develop the African economies but further insight can be found in the trends appearing in the Chinese and Indian imports. We now call China the factory of the world but it is very possible that Africa could be the factory of China 10 years from now.

Exports from Africa to China grew at a rate of 48 percent between 2000 and 2005. That is two and a half times the rate from the United States and four times that of the EU. As you might expect most of the exports are in energy and mineral related natural resources. A hefty 86% of exports are in oil, ore, metals, and raw agricultural commodities. This is expected from the poor, infrastructure barren economies of most African nations, nevertheless light manufactured goods exports are growing too. China and India’s budding middle class are looking to Africa to supply them with new household goods, processed foods, and back-office services. China now buys 10 percent of Africa’s total exports and India 3 percent. This jump in trade volume is not by accident. The Chinese and Indian governments are actively taking steps to improve the environment for trade and foreign direct investment.

Chinese/African relations have been improving dramatically over the last few years. Beijing’s “China’s African Policy” presented by Hu Jintao to 48 African leaders, describes China’s plan to double its assistance to Africa by 2009. It will “provide them with $5 billion in concessional loans and credits, establish a $5billion fund to encourage Chinese investment in Africa, and cancel the interest-free debt it was owed by 33.” The Export-Import Bank of India Focus Africa Program established in 2006 extends a line of credit totaling $558 million half of which is geared toward the development of West Africa. Although assistance is growing tariffs on trade still inhibit growth, but in 2006 Beijing eliminated tariffs on 190 commodities from the 25 least-developed countries. By 2007 this grew to 440 commodities.

This appears to be the same trend that emerged when the U.S. and European middle classes began to demand an increasing volume of consumer goods. It may do be too soon to conclude that the manufacturing heyday of China is coming to an end but recent offshoring of Chinese firms to Indonesia and Vietnam combined with increase trade with Africa could be the first signs of a fundamental change in the Chinese economy. I see India’s service oriented growth as much less susceptible to competition from underdeveloped nations in places such as Africa. The telecommunications infrastructure needed to conduct a service oriented business just hasn’t taken hold in Africa. In any case a stronger trade relationship between the two continents will make for a much more interesting and complicated business environment for future graduates looking into international trade.

If you would like to read the full article in Foreign Affairs and you live in San Luis Obispo I would be more than willing to lend out the article.

Submitted By: Rob Belloni

In America, we take career choice for granted. From an early age we are often asked, “what do you want to be when you grow up.” This article, by Li Yuan at the Wall Street Journal points out that for most teenage Chinese, career choice is determined by their parents.

We also learn that for college age Chinese students, there is an expectation that they will provide for an extended family which may include parents and in-laws. Talk about the opposite of America, where parents are expected to help students all the way through college, and often beyond.

I can see good and bad arising from this societal norm. The good is that the careers advanced by the parents are money makers; careers that will provide benefit to the economy. I can’t recall ever seeing a homeless Chinese person in the US, and I’m sure this is one of the reasons. The bad is that for the individual student, their life may turn in to misery if they are doing something they detest.

In my unscientific opinion, these sort of norms tend to flip-flop between generations, and it will be interesting to see what the next generations of Chinese and Americans decide is appropriate for their children. In talking with my friends in their early 20’s, many of them seem to be floundering around wondering what to do with their lives. They want to do something that makes them happy and makes the money. But the reality is that to get the money, they have to do something undesirable. One trend I see as a result is that this age group is spending more time in school to avoid starting undesirable careers. If things don’t go well for them, when the time comes to leave the nest, they may take a more Chinese approach with their own children.

For the Chinese 21 year-olds just entering the work place and discovering that working 70 hours a week for a consulting firm isn’t all that fun, they may decide to offer their children a little more choice when the time comes. The gentleman interviewed in this article already went this route himself, and seems likely candidate to advocate broad choices for his own children.

In conclusion, I would simply offer that life should be a balance. The “Mr. Rodgers” approach of telling everyone they are special and they can do anything they want to is a one-sided approach that can have detrimental effects. At the same time, offering your child no choice and telling them exactly what they must do is equally one-sided, with accompanying drawbacks. It will be interesting to observe how these two demographics interact when they meet around the water cooler. Something tells me they will learn from each other, and find solutions for life that meet in the middle.

Submitted By: Simeon Trieu

IP remains one of the growing concerns as brands move their productions and/or operations to China. With all the counterfeiting of products on the market, one can only reason that we need to keep our products in the US in order to protect them from Chinese pirates. But are you really safe? Catherine Sun, a partner of Foley and Lardner LLP, debunks 3 of the most common misconceptions of intellectual property law (IP law) in China in a video presentation.

Source Foley and Lardner LLP:

Below is a summarized outline of her points, in short, but I do recommend that you watch her short presentation (2:33):

1. IP is not enforceable in China.
2. If I keep my brands in the US, I will be safe.
3. The counterfeiting products are poor in quality.

The first point is the one I find myself so often telling myself: IP is not enforceable in China. It may be my misconception, but I always get the thought in the back of my mind that “the mountains are high, and Beijing is far away.” How is it possible for the Chinese government to enforce such IP rights? It appears that there are enforcement options in China. For example, the China-Britain Business Council details much of what I wanted to know about IP protection in China. I was surprised by how enforceable IP was, even just based on grounds of samples of pirated products compared to actual products. They actually perform raids based on this evidence in administrative proceedings! That might be unsettling to some. Below is an excerpt detailing IP enforcement in China.

Source China-Britain Business Council:

Enforcement
Once infringement has occurred the question arises, What action should be taken to ensure effective enforcement?

Some companies may prefer to take actions outside China, for example in countries where goods are sold. It is generally more effective to stop the infringement at its source. This is particularly true as judgements of foreign courts are not enforceable in China.

There are ways, however, to enforce rights within China. There is a two-way enforcement system in operation: administrative and judicial. There are advantages and disadvantages to both proceedings and a company’s decision should be made upon the circumstances of the individual case. Taking each in turn:

Administrative proceedings
Administrative proceedings are appropriate for small-scale infringements as they are cheaper and quicker than judicial proceedings. Unlike in judicial proceedings, where the filed complaint has to be supported by substantial evidence, the threshold for administrative actions is much lower and can be based on simple evidence (such as a sample).

Once a complaint submitted to the administration body has been accepted, an inspection on the premises of the suspected infringer will be conducted (a ‘raid’) almost immediately. In case infringing activities are found to take place, the administrative body has the authority instantly to seize or seal infringing goods and to confiscate the machinery used to produce infringing products. It can inspect accounting books in order to ascertain the level of infringement.

The administrative body also has the power to order that all infringing activity cease immediately and to impose a fine based on the profit of the infringer. In practice, however, the fine is often fairly low and has no real impact on the infringer’s motivation to restrain from infringing actions.

Judicial proceedings
Civil and, or, criminal court actions are more common for repeated and serious infringement. In judicial proceedings, the parties also have more scope to present their cases and are therefore more suitable for complex issues.

Judicial proceedings are also advisable for complicated cases such as patent infringements.

As we also know, China’s legal system is still developing. My question to you is: how do you see IP law in China developing? Is it enough to protect our rights on intellectual property? What challenges do you see in the future as IP becomes more important (as it already is)? How would you consider conducting business in China with the current IP protection? Does the current IP law in China make you feel comfortable?