Category Archives: China

Questions from the Land of the Obvious: Is China’s Rise Sustainable?

Not only do we have Headlines from the Land of D’oh, but we also have Questions from the Land of the Obvious. This one, in my K@W archives from earlier this year, that asks “Is China’s Rise Sustainable” is an obvious example.

Of Course it’s sustainable. Let’s start with some simple facts:

  • over 1.3 Billion People
    that’s almost 1/5th of the planet’s population
  • over 3 Trillion in Currency Reserves
    compare that to the US debt of almost 15 Trillion
  • annual GDP of 6 Trillion
    it’s the 2nd largest GDP and could surpass the US GDP in the 2020s at the current growth rate, and even if it doesn’t, it will come damn close
  • over 160 Cities with 1M+ people
    and this number is expected to exceed 300 before the decade is over as China urbanizes (and surpasses 50% urbanization); North America has around 20 such cities.
  • China is moving from low value assembly to high value add
    Foxconn produces some of the most advanced electronics in the world
  • Significant R&D funding
    By 2010, Innofund alone had invested almost 9 Billion RMB
  • Significant Infrastructure Advancements
    The 12th Five Year Guideline has significant infrastructure investments. The high-speed railway will exceed 45,000 km (which could cross Canada 6 times!), the highway network will exceed 83,000 km, new airports will be built (including one in Beijing), and 36 Million affordable apartments for low income people will be built (which could house the entire population of Canada*)
  • while we spend, they save
    They have money to spend when the time is right to buy.
  • they are Renewable Energy leaders
    They know their rate of fossil fuel consumption is not sustainable and aim to double their rate of renewable energy electricity over the next five years while building 400 nuclear power plants by 2035.
  • the party is Patient
    They realize that long term change takes a long time and that focus on quarterly objectives is STUPID! They know a long term plan is not 3 years, it is 10 years or more!
  • their civilization is truly ancient
    Their written history extends back over 2,600 years, beginning in the Shang Dynasty, and early texts recount oral histories of the Xia Dynasty that go back over 3,000 years. And, with the wisdom of age, they remember the lessons learned over the years. They were the superpower of the world for most of the last two centuries. If they hadn’t closed their borders early last century, and missed out on the Industrial Revolution, they would never have fallen. But they have learned from their error, and are investing heavily in the information revolution and the knowledge economy. Unless something drastic happens, it’s only a matter of time before they not only catch up, but regain their #1 place.

In other words, this was a headline from the land of the obvious. It’s not a matter of if the rise is sustainable, it’s a matter of how fast China is going to rise.

* which is fortunate, because, at the rate they are buying up property in our coastal cities, us Canadians may have to move there

Is Your Organization Serving the Right Market?

If your Supply Management organization is part of a global multi-national, chances are that it is buying from China and selling to the U.S. And, for a few of you (in heavy machinery, luxury goods, etc.), chances are that your Supply Management organization is producing Made in the USA goods and selling these to China. But should it be?

Ignoring the fact that rising costs in transportation and production (due to raw materials and the inevitable rise in labor wages) coupled with the decline of the US dollar often make sourcing close to home (in Mexico) or at home cheaper than off-shoring, especially when quality and risk-related costs are taken into account, the organization might be missing out on a much bigger opportunity — selling in China. As per this recent article in the Harvard Business Review that chronicled “What the West Doesn’t Get About China”, China is the world’s largest consumer of automobiles, motorcycles, mobile phones, luxury goods, and shoes and the world’s second largest consumer of home appliances, consumer electronics, jewelry, and the internet. Thus, if you are in the automotive, electronic, appliance, apparel, or jewelry industries, maybe the organization should be producing in China for China.

China, which is the world’s second largest economy, has over 1.3 Billion people and an emerging middle class flocking to urban areas. The Asian Development bank classifies over 60% of China as middle class. That’s almost twice the population of North America! And half of them have internet access, with most of them having broadband access in their densely populated urban centers. In fact, China now has about 90 cities with a middle-class population of 250K or more. The US and Canada combined have less than 70 such cities. And the projections expect this number to quadruple over the next 10 years. Plus, annual growth in some markets is as high as 60%.

In other words, if the organization is producing in China, then it should probably be producing for the local market (as well).

Is Your Supply Management Organization About to Move to Asia?

As per this recent article over on the McKinsey Quarterly on “Translating Innovation into US Growth: An Advanced-Industries Perspective”, the US is posed for a future in which the elements of economic leadership are moving abroad. The US might still be the global leader in R&D spending overall, but in order to maintain its competitive edge, it has to be able to devise innovations the world wants and needs and translate those into economic leadership.

Economic leadership requires more than a capital market system that encourages (and rewards) risk taking and entrepreneurship, more than simply attracting top students and teachers globally, and more than bulk spending. As per the article, it also requires cutting-edge technology, demand, talent, and entrepreneurial spirit. And, right now, the US is falling behind on each of these.

Cutting-Edge Technology
In leading industrial technologies — such as advanced batteries, high-speed rail, hybrid automobiles, solar modules, offshore wind turbines, and machine tools — the United States finds itself competing against, or even catching up, with foreign companies and engineers. Furthermore, as the article notes, the US is now relying on Japan, Russian, and Western Europe to launch its satellites — an industry it used to pretty much own globally. If the US can’t even compete in green energy, it’s in for trouble.

Demand
More than 50% of the global middle class now lives outside North America and the demand for many next-generation products is now coming from Asia, Latin Ameria, and the Middle East. These customers are creating new markets and dictating preferences. US products for the US market are no longer profitable on their own in many industries.

Talent
Scientific and engineering talent is now building up outside the US while one-third of US manufacturing companies are suffering from skills shortages. Cutting edge research is moving to India and China as well as accelerating in Japan and Germany.

Entrepreneurial Spirit
Once a mainstay of the private sector, risk aversion to new vetures is increasing across the board in the US. At the same time, the “new” India is becoming much more entrepreneurial and risk taking. It’s not a good combination.

Then, when you also consider:

Cost
Many emerging countries have labour and overall operating costs that are still only a third of labour and operational costs in North America or Europe.

Success
A number of global multinationals, including IBM, have proved that you can move global Financial, Services, and Supply Management organizations to China and India and still be a world-class organization.

it becomes impossible not to ask if your supply management organization is about to move to Asia.

Do You Know What Disaster Will Strike You Next?

Of course you don’t, but you can calculate the risks of one disaster vs. another and one site vs. another with some simple research into natural disasters.

Earthquakes
Earthquakes are more likely near the edges of tectonic plates than they are in the interior, especially if the plates are moving together and pushing on each other (and there is a history of earthquakes and activity). You can quickly identify areas at high risk by looking at a tectonic map, such as the one over on ThinkQuest. One quickly sees that high risk areas are the west coast of North and South America, South East Asia, Japan, and the island domains north of Australia, as per the Global Seismic Hazard Map over on Countdown.org.

Volcanos
You can get a list of volcano activity reports from the Smithsonian Institute which maintains a USGS Weekly Volcanic Activity Report. Most are usually in the Ring of Fire, which encompasses the high-risk earthquake zone around the Pacific. GeoCodeZip.com Google maps them for easy viewing.

Tsunamis
Coastal areas near sesimic hazard (earthquake) zones in the oceans are at the greatest risk of Tsunamis, which tend to build up in power and force as they approach shallow water and land. This says that some of the riskiest areas are on the Ring of Fire in western North and South America, Japan, and south-east Eurasia in the island domains North of Australia. More information on Tsunami Risk Zones can be found over on the International Tsunami Information Center.

Hurricanes
The greatest risk centers for hurricanes are coastal areas near the equator where hurricanes are normally a problem. The east coast of the US is particularly susceptible to hurricanes. The Global Weather Oscillations site specializes in in hurricane risk probability zone forecasts for the US and the risk zones for the coming year can be found on the Global Weather Cycles web site. The National Weather Service tracks the 10 global hot zones over on the National Hurricane Center site and a review of historical data will tell you how risky a certain area is.

Tornados
Tornados can occur anywhere in the world (including Antarctica, although this is the one continent where a tornado has not been documented) when the atmospheric conditions are exactly right. However, the most at risk zones are the middle latitudes between about 30 degrees and 50 degrees North or South where cold polar air meets warmer subtropical air and generates convective precipitation along the collision boundaries. As a result, taking weather patterns into account, the most at risk areas are the United States, western Europe, South Africa, the eastern and western coasts of Australia, New Zealand, the eastern and western borders of China, the eastern coast of Argentina, Japan, South Korea, and the Philippines. Good information on tornado climatology as well as a great map of global risk zones is found over on the National Climatic Data Center site.

Ice Storms
Blizzards can be bad, but generally don’t do much in the way of lasting damage. Ice storms, on the other hand, can do severe damage to infrastructure on a wide scale by downing power lines, and grids, damaging structures from the sheer weight of the ice, and even taking down trees. The most at risk areas tend to be Canada, the US, the UK, and most of Northern Europe and Russia.

Floods
Floods are not limited to the coastal variety, and can happen anytime the water level rises too quickly. Thus, in addition to worrying about flooding in coastal areas as a result of a tropical storm, hurricane, tsunami, or storm surge (tropical cyclone), flooding inland can occur from intense thunderstorms, sustained rainfall, or rapid snow melt. Thus, all of the coastal areas identified in your hurricane and tsunami risk lists are at risk at flooding plus any area with a history of flash floods, sustained rainfall (like they get in India during Monsoon season), or rapid snow melt (in Northern Canada) are at risk of floods.

Wild Fires
Wild Fires can occur on any continent at any time whenever the conditions are right and are likely to follow heat waves, droughts, and cyclical climate changes (such as El Nino) and high-pressure ridges. They are most common in climates that are sufficiently moist to allow regular vegetation growth but where extended dry, hot periods are also present. This keep parts of Africa, South America, South Eastern Eurasia, and Eastern Europe at high risk, but parts of the Southern US, Mexico, India, and Australia also enter the high risk zone on a regular basis.

In other words, there’s no excuse for not knowing which suppliers are at risk of which natural disasters and how great that risk is. (Some historical research will give you frequency of disasters in the area and a local climate institute likely has probabilities of occurrence for the event, such as once every twenty years.) So while it may be hard to say how risky your supply chain is from a holistic perspective (as some financial or political risks may not be identifiable until the last minute), it should not be hard to say how risky it is from a natural disaster perspective.

Is China Hampering Its Own Growth?

A recent article over on SupplyManagement.com on how “US firms [are] criticising ‘unclear’ Chinese purchasing rules”, just like their “EU counterparts did last month”, had a fairly shocking number: the EU states that inconsistent and poorly implemented legislation caused China to miss out on 1 Trillion of new Business. In other words, it missed out on business equal to 20% of its GDP! For a country that is obviously seeking to regain global dominance, that’s a lot to lose out on.

The blame is being placed on government procurement policies that favour domestic or “indigenous innvation” and the need for foreign firms to transfer IP, licenses, or technology to domestic firms to win business, a requirement looked upon very unfavourably by western firms. And while China may argue strongly for the “protectionist rule”, just like certain American politicians argue strongly for the Buy American provisions in the recent stimulus bill and the Buy American Act passed in 1933, there is a price to be paid. Every dollar of foreign investment that is deterred to another country in the BRIC keeps them one step further from GDP dominance and every opportunity missed to use a foreign firm makes it that much harder for them to get their hands on leading innovations from around the world.

It’s their country, their choice, and a tough call either way with two thirds of their country still considered poor by global (world bank) standards.