Of course, with the benefit of 20/20 hindsight, the power of the then industrialised West and the chaos of Chinese society, broken up into various geographical areas and dominated by War Lords, it is easy to see how groundless such fears were in reality. However, to European citizens of the time, legends about the mystical powers of such creations as the evil Dr Fu Manchu were easy to accept by the naive.
However, these prophets of doom were simply too early and had the wrong focus, perhaps.
World War IV
It is my belief that the World at present, is engaged in World War IV.
World War III was probably the battle against Communism, particularly fought on various bases by the USA and Western Europe.
World War IV, however is a wholly different beast. It is simply, the battle for capital, power and above all else diminishing global resources, particularly oil and gas. From WWII on the Asian economy has steadily marched toward economic supremacy and China is poised to come out on top.
China’s Economy – Already advanced in the 70’s, accelerating through the 90’s
In the late 1970s, I was the Finance Director of a trading house, based in London. I was approached by one of my rather wonderful collection of esoteric and exotic contacts, who believed that my company could assist one of his clients with a project.
It eventually became a most fascinating matter.
His client, Bill Riley, was the Grandson of the founder of Riley Cars, a prestige automotive manufacturer, who started his business in the early 20th Cent. Sadly, Riley Cars were taken over by what was then British Motor Corporation, which eventually became British Leyland and yet another grand marque had vanished forever.
Bill was a brilliant automotive engineer and acted as a consultant to a number of manufacturers and racing teams. He had been approached by a company in Hong Kong, who themselves represented the Chinese government.
China was then producing most of its vehicles, under old license deals with Russia and the engineering was to say the least agricultural.
They had flown Bill Riley to what we then called Peking, to go all over the factory and make his suggestions. A particular vehicle of note, was an ungainly cross country utility, originally designed by Gaz, in Soviet Russia. This was called the Peking Jeep.
Now, having spent much of my early life working in the automotive industry, I could immediately see some potential. At this time, Japanese imports were destroying the UK motor industry and setting about doing the same to Detroit.
However, the Japanese cost-base was already rising, it was obvious to me, then, that eventually, China would usurp Japan’s growing dominance.
In the final event, the Chairman of our holding company (who were deeply involved in heavy goods vehicles and were probably the largest distributor of trucks in Northern England), lacked the vision to see the opportunities offered by the future.
We did stop the traffic in Kingsway, right in the centre of London, when we imported one vehicle and it was brought to the office! It looked a bit like a backwards Hummer.
For me, however, it started my mind on a certain track. Shortly after, another Director of an associated company, involved in the petro-chemical industry, gave me a report prepared by Petroleum Intelligence Weekly, the leading source of market analysis.
I was staggered to discover how far advanced the Chinese were already by the late 70s! Huge investment in Ethylene plants, for example, represented the critical feedstock for plastics manufacturer. Joint-ventures with French and German corporations were already proceeding.
What was more, the Chinese had excellent reserves of crude and gas, albeit much of this was in climatically challenging areas, in the North.
Developments in the North Sea and later Alaska, would later solve the dynamic problems of recovery in hostile environments.
Economically, I had become a Sinophile!
In the 1980s, as I was following the fortunes of various Asian companies, I was writing and warning complacent British businesses, about the growing threats posed by Asian manufacturing and technology.
In the late 90s, I was closely tracking China’s rapid expansion and forecast that they would in all probability, become the largest global economy by circa 2015.
Once again, I was greeted with complacent incredulity. I was told that “Their infrastructure could not support large economic expansion: that their political system was flawed and highly unstable.” Yet, I had been told precisely the same sort of thing back in the 80s as I was tracking Asian technology.
So, where are we now?
As the Walrus said to the Carpenter, “Let’s start at the beginning!” always a useful place to begin.
Japan: From cheap, post-war knockoffs to Kyritsu: Seeds of growth and decline
After World War Two, Japan was devastated; socially, economically and politically.
George Marshall’s aid plan was intended to provide a stable social and economic platform, by investing in industry, which would create jobs and avoid the sort of socio-political unrest which had caused the War.
Those of us old enough to recall, will remember that Japanese goods, early on, tended to be Knock Offs of Western branded names, such as lighters, fountain pens and so on. Amusingly, often dummy screws were moulded into cases, to appear like the real thing!
The descriptor, “Made in Japan” indicated a cheap, shoddy and pretty poorly manufactured item. How things changed: and rapidly.
To support Japan’s industrial re-emergence, Western companies, were persuaded to offer sub-contracts to young Japanese companies and older corporations, whose manufacturing capacity had been wrecked. The US (mainly) would provide capital and designs and Japanese companies would manufacture, firstly, component parts and later full assemblies.
Rapidly, Japanese companies garnered two things: capital and technological know-how. At first, they lacked marketing smarts and tended to grant franchises to larger Western corporations, more skilled at selling and promoting.
I founded a small communications company in 1980: it sold various items of emerging technology to British firms. Amongst these were answering machines.
One of the best sellers, was a machine originally developed and made in California. To start with, circuit boards were made in Japan: then the whole machine, then the boxes and expanded foam “Stuffers”, then the instruction manual and even an approved (British) mains plug!
About a year later, Panasonic, amongst others, introduced their answering machines, which knocked spots of the US offering, in terms of specification, finish and above all else, price.
In analysis, what had happened, is that Japanese industry had assembled two things from US aid and help: firstly, capital and secondly, rapidly increasing technological skills.
What has to be remembered, was that as the Japanese industrial behemoth swung into action, it had to import virtually everything: oil, rubber, iron ore, coking coal for blast furnaces, bauxite for aluminium.
People in the West had the vision of vast shining factories, churning out cars by the million. This was not true: what was happening, was that large parts of the manufacturing process were being sub-contracted to Mom and Pop businesses, where small factories (often in backyards) were stamping out light housings and so on.
One of the greatest strengths of Japanese industrial activity (which later proved a fundamental weakness, by the way) was the rise of the Kyritsu: the conglomerate, which encompassed banking, heavy industry, iron and steel, shipping, light industry, insurance, etc. This spawned such major corporations as Mitsubushi, Matsui, Hitachi., Marubeni et al.
Additionally, Japanese industry set out to dominate certain global markets: mainly automotive and consumer electronics. Co-ordinated by MITI (The Japanese Ministry of International Trade and Industry), university campuses worked closely with industry to achieve technology breakthroughs. A sobering study is probably the ubiquitous VCR. The technology was originally invented by the BBC in London: their VERA (Video Editing and Recording Apparatus) was an early wide tape technology. Westrex and Ampex were the first to commercialise this technology for Television broadcasting.
A forgotten small electronics company in Phoenix, Arizona made the first VCR. Telefunken in Germany and Philips in Holland made the first commercially available VCRs, using the Philips standard. Sony tried to go it alone with Betamax (an unusual misstep) and a consortium of Japanese electronics manufacturers developed VHS, which rapidly became the global standard.
Hong Kong leads in contract manufacturing
Hong Kong was amongst the first to offer contract manufacturing for the West and one of my own products, an answering machine, designed specially for the UK market was produced in Hong Kong, in what we called then Hi Rise factories!
They were hi rise, since floor after floor was taken up with busy workers soldering boards and components. One day they would work for one company: the next day another.
Then Taiwan emerged as a growing force in both plastics and contract manufacture.
Next came Korea, then in a sort of rush, Singapore, Malaysia, Thailand and Indonesia followed.
Korea – as a case study
Korea is an interesting case study, of itself.
Only 50 years ago, the country was roiled by a savage war. Once peace broke out, North Korea had all the docks, mines and industry: South Korea was mainly paddy fields.
Today, South Korean corporations such as Samsung are global leaders. Indeed, at present they are beating the mighty Intel in flash memory sales, globally. Samsung have invested heavily in design and enjoy huge success in global consumer markets.
The first time I heard of one Korean company was in 1957. I was sitting in a barber shop, awaiting my turn and picked up an old American magazine. I read about this small Korean company, Lucky Gold Star Corporation Ltd. Now know as LG, they have come a long way.
Only a few years ago, workers in South Korea suffered a 6 1/2 day week and no holidays.
Now, they enjoy an excellent consumer driven society, the largest access to broadband in the World and a rapidly rising standard of living.
And all this in 50 years, whilst the giant USA has been slumbering in a sort of complacent arrogance.
China reaps the economic rewards
A friend of mine in the early 90s, was Logistics Director for a major UK consumer electronics company of the time, Amstrad. Even by then, Korea had become too expensive and they were moving production to mainland China.
What had happened, in essence, was that as each Asian country had established a technological manufacturing base, it had rapidly up-skilled and focused on higher and higher and more demanding levels of technology. The cost-base thus increased and the bottom-end work went elsewhere.
Taiwan is probably the best example. Taiwan Semi Conductor are the World’s largest silicon foundry, with many 8 inch fabs and now 12 inch fabs. What this means is simply the pure silicon used as the base of a “Chip” is made into rods. The bigger the diameter of the rod, the more micro-circuits can be deposited on each “Wafer” and the greater the scale cost advantage.
Taiwan is also the World’s largest manufacturer of PCs and laptops. With few exceptions (Dell are amongst them) PCs sold by the likes of HP and IBM are “Badged”, as are laptops.
Taiwan also invested heavily in plastics and lead the World in certain moulding techniques. Originally and not too many years ago, all they produced were tacky plastic “Cracker Toys” which fell out of your Xmas cracker and broke soon afterwards.
A few years back, even the mighty British Aerospace (BAE Systems) were seeking a Taiwanese partner in joint venture to build a new airliner, as BAE couldn’t go it alone!
Perhaps two factors are common to most of these Asian success stories: firstly, by driving exports at the early expense of local consumerism, they rapidly built-up huge reserves of foreign tradable currency: mainly US dollars. Second, they re-invested and re-invested in industry. There is one further factor which must be taken into account: workers were encouraged to save and save and by ploughing back their savings, vicariously, into industrial activities, organic growth was possible without being in hock to foreign banks. Taiwan sits on huge US$ surpluses, as does Japan.
Scary to realise that throughout its own fiscal, political and economic problems, Japan has still achieved record export surpluses, year on year, and its pile of US dollar investments simply grows and grows: well, until they realign the Yen and start dumping US securities in favour of Euros, perhaps!
The so called Asian Flu, a financial meltdown, mainly affected later players, such as Singapore, Thailand and Indonesia, who had borrowed from abroad and ramped-up their economies far too quickly. Korea had its own pain, by trying to grow too quickly, and emulating Japan by assembling multi-faceted industrial and financial monoliths, but most of the resultant over-capacity has now been absorbed, restructured and re-focused, which is why Korean cars are selling so well in the USA.
The two new players on the block, China and India have not followed the route of other Asian success stories. And herein lies the huge danger to the West!
Unlike Japan, for example, China since it joined the World Trade Organisation (WTO) is a more open economy, encouraging inwards and joint venture investment. This reality, prevents states like the USA creating sanctions by raising tariff barriers.
Many US companies are investing in Chinese industry, in order to take advantage of the low cost-base. However, whilst this might be great for their balance sheets, it is not good for the US/Chinese trade deficit. Worse, by outsourcing manufacturing jobs to China, it is losing even more US jobs. So this must be seen as a short tem gain for the corporate world, but a long term potential disaster for the overall US economy.
India garners technology and China delivers the goods
The most worrying component of Indian and Chinese technology, is that increasingly, it is able to compete with the West. Additionally, China is booming up its local consumer markets, a phenomenon which was late occurring in Japan, Korea et al.
Finally, both India and China are investing hugely in aligned higher education, such as computer science, math and physics.
The normal text book prescriptive for competition on low-end manufacturing, is to focus the defending economy on high-end, high added-value activities.
Problem here, is that China is already focused on such areas!
In an earlier article, I suggested that there are sobering parallels between the USA, today and the UK probably 25 years ago. Then the UK would outsource much of its manufacturing and concentrate on so called “Service Industries”. I never accepted this concept, for various reasons, above all, to me, the very term “Service Industry” was and is an oxymoron.
What happened to the UK, was over time, greedy companies then started exporting service jobs. Once this took hold, then the escalation became significant.
The UK is now left stripped of any independent manufacturing industry of note, such as there is, mainly foreign owned: the last British automotive manufacturer, Rover is now finalising a joint-venture with – China.
In terms of technology, the UK enjoys not one PC manufacturer. In silicon engineering, whilst ARM in Cambridge carry out leading-edge design very successfully for many major players, the UK has only two wafer facilities. Both are restricted to 4 inch and thus totally uncompetitive, other than for small run highly specialised low volume work.
Thus strategically, the UK is totally reliant on the continuing commercial goodwill of other states. A dangerous position to be in, where the World is ever more tech-centric.
India, which was the grateful recipient of outsourced jobs, had been for years, quietly building up its technology base. Corporations such as National Cash Register have had research facilities there for quite a few years. On the back of capital success, Indian tech companies are now camping out in Silicon Valley and offering high-end services such as IT consulting. More worrying, they are developing their own silicon design facilities.
It is calculated that to be competitive, US manufacturers need to cut their prices by 30%. In many cases, China can deliver goods at beneath US manufacturing cost.
Sure, if the Chinese re-value their currency, much of this advantage would vanish, but not all, since the direct comparison of wage costs between the USA and China means that even where skilled US workers were paid at minimum wage levels, they would still be too expensive.
So after 26 years of tracking the Chinese economy, I stand by my earlier forecast: China will be the largest and most dominant global economy by latest 2015.
Perhaps the most surreal aspect of all, is that Japan itself, is also investing heavily in China, introducing both capital and technology. A sort of deja vu?
It’s time for US workers to start worrying.
This article originally appeared in http://axisoflogic.com in 2004.
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