By Vicki Matranga, Design Programs Coordinator
John Manzella is a world-recognized speaker on global business, competitive strategies and the latest economic trends. His op-eds have been nationally syndicated and his views have appeared in The Wall Street Journal, New York Times and other major media. He is president of Manzella Trade Communications, a strategic communications, publishing and consulting firm, and editor-in-chief of the ManzellaReport.com, the premier source for global business and economic news and analysis.
Manzella began by outlining how economic conditions and political concerns impact understanding how to contract and sell to China. He proceeded to offer detailed information on current changes in the country.
Economic Conditions
Since 2007 China’s growth rate in real GDP has declined from 14% to below 7% today. Many Chinese have confused a rising stock market with a healthy one. State-owned enterprises are less productive and use capital less efficiently.
Political Concerns
Checks and balances are to the political order what competition is to capitalism. Chinese state capitalism is not free market capitalism.
Leadership is concerned about social unrest, providing jobs and maintaining stability. China walks a precarious line between economic and political liberties as China tries not to duplicate Soviet mistakes.
As China considers shifting from a state-managed economic system to a market-oriented system, goals shift from developing an export and investment-driven economy based on manufacturing and assembly to a consumer-driven economy. Chinese exports have declined. Consumer spending represents only 35% of GDP; consumer spending in the U.S. represents 70% of the economy. Moving from an economy based on manufacturing and assembly to stimulating significant consumer spending is difficult due to the lack of safety nets for savings and retirement.
Trade Deficits
The U.S.-China trade deficit, $343 billion in 2014, continues to add tension in Washington, D.C. But as supply chain patterns shift; the deficit no longer reflects reality. The portion of the U.S. trade deficit with the Pacific Rim fell from 75% in 1998 to 57% in 2014. U.S. media, which is often critical of Chinese imports, doesn’t understand that deficits subsidize the American standard of living, make U.S. products more competitive and help keep inflation low. And the general public has little understanding of these matters.
China’s Currency Volatility
The value of the Chinese Yuan Renminbi (RMB) per U.S. dollar has fallen since 2005. Lost exports and increases in labor and factory costs have hurt China. Many U.S. companies are automating to bring back production or take the work to other countries.
China may be allowing market forces to play a greater role in determining the yuan’s value, as part of a larger effort toward economic reform. Banks cut interest rates to stimulate borrowing to invest and reduced bank requirements to allow more investment. The currency volatility has encouraged capital flight and discouraged investment and consumer spending. Transition from a state to free market economy is a bumpy road.
Demographics and Labor Concerns
The unintended consequences of the one-child policy forecasts indicate that each Chinese generation will shrink by 25% and that fewer workers must support a large aging population. The relaxed one-child policy now will take generations to balance.
Labor shortages were reported in coastal areas, but are now less severe due to reduced production. Relocating production to the country’s interior is difficult due to lack of infrastructure.
Wages increased by double digits in past years with high turnover. They have now stabilized and turnover has decreased. Chinese wage growth has far outstripped productivity growth. The U.S. labor force is 1/6 the size of China’s yet U.S. GDP is twice as high.
Energy Concerns and Trade Agreements
Manzella presented facts and forecasts about U.S. and Chinese energy reserves and needs. He offered detailed positions on U.S. Free Trade Agreements (FTAs) with its partners and import tariffs. Trade supports one in five U.S. jobs. He identified goals for the Trans-Pacific Partnership agreement as: 1) the elimination of tariffs/non-tariff barriers in goods, services and agriculture and 2) the establishment of enforceable rules on IP, investment and e-commerce.
Impact for Housewares
Many housewares products continue to require abundant inexpensive labor in China. Import duties are still high for reimporting parts to assemble here. Social unrest due to lower growth has result in greater governmental restrictions on social freedoms, media, lawyers and nonprofits.
Assess Risks
Are your production facilities/suppliers all located in China? Consider diversifying sourcing to other countries.
Are Chinese suppliers cutting corners without your knowledge? Be careful and stay on top of it. Social media may alert you.
Are your intellectual property and designs likely to be stolen or copied? Transfer of technology is often demanded. Larger companies may have protections in place, smaller companies will find it difficult to prevent theft.
Are you the victim of cyber espionage? Assume everyone is.
Are you subject to unfair treatment as China creates its own national champions and protects certain industries?
Are your costs guaranteed for shorter periods? Do suppliers want payment faster?
Understand that your Chinese competitors are subsidized with artificially low energy costs, bank loans and land costs.
Summary
China is undergoing a complicated and risky economic transformation. Leadership fears unrest; 50% of population lives in urban areas. The government will do what is necessary to maintain order and power. We have an interest in maintaining stability.
Manzella took questions from the audience about diversifying production to other countries in Asia, Mexico and Central America, and the strength of the U.S. dollar vs. the RMB. He also addressed the potential for Chinese and U.S. presidential negotiations, intellectual property protection and cyber-espionage, Chinese immigration to varied countries, and political influences for the Trans-Pacific Partnership trade agreements.
To learn more about John Manzella, see www.JohnManzella.com.
