Friday, November 1, 2019

China's "State Driven" Business Model Tailored To Exploit

As trade talks continue, it could be said that people are naive if they do not recognize the distinct advantage state-driven economy initially has over free enterprise. Its record of success over the long run is debatable in that political corruption coupled with it being unresponsive to consumer demand tends to derail it over time. We should not forget is that in China, the state is involved in everything. This means much of its economy is driven by politics. The notion of expanding GDP by building bridges to nowhere is solidly entrenched in the Chinese economy.

Well entrenched within the Chinese system is a strong vein of "communist crony capitalism" that has its own special set of characteristics. This results in a system that tends to be predatory and geared to quickly exploit the weaknesses of its competitors. Such systems also fail to react accordingly to market change thus squandering their resources. This feeds into China's One Road One Belt (OBOR) initiative and could seriously jeopardize its potential. The crux of this article is to underline the importance of recognizing China is a state-run economy. It is based on a business model that is geared to expand by crushing the competition. The state subsidizes those companies working within its system in a multitude of ways that helps it achieve this goal.

For years China has been a place were corruption has flourished, partly fueled because any appearance of growth has been rewarded. Also, the rules protect the politically connected.  Donald Trump recognized this and rallied those Americans that have been harmed and most affected by globalization and the "China effect" to put him in office. Trump's so-called base is made up of supporters many of which have lost their jobs or seen wages stagnate over the years. This sometimes referred to as the hollowing out of America is something that has occurred across a broad swath of the country as greedy companies have exploited the concept of "free trade" by having the products they sell in America manufactured in China using cheap Chinese labor.

Now Airborne The C919 Will Be A Major Player
Several articles that appeared on this site over the years support my argument that China is not our friend and that we had better be on our toes. One explored how China was ramping up its fledgling aviation industry and how when it hits its stride we can expect cutthroat competition. The article warns that as China's aviation industry takes flight over the next decade it could pose a major threat to Boeing's dominance. America may be saying say goodbye to a big chunk of its exports in this field. The Chinese manufacturer claims the twin-engine, narrow-body design of the C919 is superior to its competition the Boeing 737, the best-selling jetliner in the world, and its competitor, the Airbus A320. COMAC (Commercial Aircraft Corp. of China) also says it can bring the C919 in at a price lower than the $50 million range that Boeing and Airbus charge for each of their planes.

On Chinese President Xi Jinping's first state visit to the USA, he made a couple of deals said to help foster relations between the two countries. One was to order 300 Boeing aircraft for $38 billion, this was tied to Boeing building the first "aircraft completion plant" in China, it was to be Boeing's first non-U.S. plant. Considering China's knack, or shall we say, history, of taking advantage of sucking production ideas from manufacturers this move was a watershed event to many industry watchers. As noted above China is now in a far better position to realize its dreams to develop this industry because part suppliers such as GE, Pratt & Whitney, and other firms are eager to supply the engines and other key components. The politics of globalization a few years ago have paved the way forward and makes China's effort to produce planes far more likely to succeed. With China's experience of building cities from scratch, why build just one factory when you can build twenty? This means we should not expect this industry to grow organically but to expect its growth to be engineered by an aggressive government with a mission.  

Chinese-Bullet-Trains On Display
Another article deals with the company formed in a recent merger of China’s two largest train makers. This means the production of railway locomotives, bullet trains, passenger trains, and metro vehicles. It points out that no effort is being made to deny that the impetus for the merger of China CNR Corp and CSR Corp in 2015 was the quest for a deeper push into overseas markets. Proof of its ability to compete is that it has been able to win by a wide margin nine-figure contracts, such as the supply of metro cars to Boston and LA. It should also be noted that CRRC recently formed a consortium with Bombardier that allows it to compete for the renewal of the New York subways where it appears they are currently in the lead to win the contract that should amount to around $1.5 billion dollars.

The third article warns that when you closely examine America's trade deficit with Mexico it becomes even more disturbing.  When following the money the United States huge trade deficits you begin to understand the money eventually ends up in China.  When you start thinking about all the money and jobs we shift into Mexico each year you would think by now Mexico would be rolling in cash, however, a bit of research quickly confirms that the money Mexico receives by way of trading with America quickly passes through its lands and flows to Asia. It could be argued that when all is said and done we are still transferring our wealth to the far east only by the scenic route and each year the numbers are huge. The United States ran a shocking $419 billion goods deficit with China in 2018. This is before considering how much American money flows into China through our other trading partners.

It does not take a great deal of foresight to realize that America is on the verge of giving up its role as an economic leader if it continues on its current path. Those who surrender to the idea America is too small to remain a world leader based on its smaller population numbers do not understand that quality beats quantity hands down. Whether driven by greed or suffering from being short-sighted, buyers of the many products we import each year should resist giving up their futures so that we can buy the latest fancy flat-screen television or set of patio furniture made in China for far less than one made in America.

Countries that export goods at slightly below cost in exchange for manufacturing jobs are not stupid they are predatory and we in America are their prey. Sadly, history has shown that trade agreements with low wage nations are not the great job creators we have been told. The "so-called" free trade movement is often driven by greed and the desire of mega-companies to expand their markets. This makes it very important that we generate a solid effort to understand our adversary in this economic struggle. Baked into the Chinese system is a lack of respect for intellectual property and the notion they have the right to steal and copy the products of foreign companies at a lower cost. This makes it crucial we recognize the truth behind what drives the Chinese business model and find ways to level the playing field.

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Footnote; This link is to an interesting YouTube video that delves into the Chinese form of crony capitalism and its characteristics. It features Chang-Tai Hsieh, Professor Of Economics, Chicago Booth School of Business.

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