The China Price

A massive shift in economic power is under way. A tenfold surge in high-quality Chinese imports at below US manufacturing costs is changing the landscape. In the US, the message is loud and clear - cut your price at least 30% or lose your customers.

There has been fierce competition in the past, but the new Chinese competition is dramatically different - they are about half the price. This has been a big factor in the loss of 2.7 million manufacturing jobs since 2000. Meanwhile, America's deficit with China keeps soaring to new records. It's likely to be more than $150 billion this year, and almost 10% of that through the world's biggest retailer: Wal-Mart.

A new book, "The Chinese Century" has a clear message: "If you still make anything labor intensive, get out now rather than bleed to death. Shaving 5% here and there won't work. You need an entirely new business model to compete."

America has survived import waves before, and it has lived with China for decades. But something very different is happening. The assumption has always been that the US and other industrialized nations will keep leading in knowledge-intensive industries while developing nations focus on lower skills and lower labor costs. That's now changed. What is stunning about China is that, for the first time, a huge country can compete both with very low wages and high tech. Combine the two, and America has a problem.

How much of a problem? On one side, the benefits of the relationship with China are enormous. After years of struggling to crack the Chinese market, US multinationals like General Motors, Procter & Gamble and Motorola are finally reaping rich profits. They're making cell phones, shampoo, autos, and PCs in China and selling them to the Chinese middle class - about 100 million people, a group that should more than double in size by 2010.

Also, by outsourcing components and hardware from China, US companies have sharply boosted profits and return on capital. China's surging demand for raw materials and commodities has driven prices up worldwide, creating a windfall for US steelmakers, miners, and lumber companies. The cheap cost of Chinese goods has kept inflation low in the US and fueled a consumer boom that helped America weather a recession.

But there's a huge cost to the China relationship. First there is the huge US trade deficit - China is the largest and fastest-growing part. While US consumers binge on Chinese-made goods, the US deficit is a record 6% of GDP. The trade shortfall - coupled with the US budget deficit - is driving the dollar ever downward, raising fears that cracks will appear in the global financial system. By keeping its currency pegged to the $ at an undervalued level, China amplifies the problem.

In the meantime, America's industrial base has eroded to a dangerous level, not only in the old segments, but in more advanced tech-industries. China is adding state-of-the-art capacity in cars, specialty steel, petrochemicals, and microchips. These plants are aimed at meeting seemingly insatiable demand in China. But if China's growth stalls, the resulting glut will turn into another export wave and disrupt American industry.

Meanwhile, US companies are no longer investing in much new capacity and the ranks of US engineers are thinning. By contrast, the number of Chinese engineers is growing by 350,000 annually, young workers and managers willing to put in 12-hour days and work weekends, an unparalleled component and material base in electronics and light industry, and an entrepreneurial zeal to do whatever it takes to please big retailers such as Wal-Mart.

And Chinese producers are hardly standing still. In a recent survey of Chinese and US manufacturers by Industry Week, 54% of Chinese companies cited innovation as one of their top objectives, while only 26% of U.S. respondents did. Chinese companies spend more on worker training and enterprise-management software. And 91% of U.S. plants are more than a decade old, vs. 54% in China.

More innovation. Better goods. Lower prices. Newer plants. America will surely continue to benefit from China's expansion. But unless it can deal with the industrial challenge, it will suffer a loss of economic power and influence. Can America afford the China price? In the US, that's the question we urgently need to ask.

More about modern slavery

Why would slavery exist in the modern world? The polarization of wealth and poverty stimulates the practice, and indeed, makes it worse. Capitalism has always accepted the exploitation of labor to increase profits. And our system seems content to accept the exploitation of slave labor. With an abundance of people living in abject poverty, it seems reasonable to utilize their labor, rather than allow them to starve.

Interesting story: My company (I was CEO of Action Instruments, an electronic instrument manufacturer) was considering acquisition of a small transformer manufacturer in Mexico (just over the border from San Diego, 40 miles door-to-door). We used a lot of transformers in our products (at least one in every ACTION PAK) and significant cost-savings could be achieved through low cost labor.

We visited the business and saw good people, working in very poor facilities, at very low wages (even allowing for different wage standards). The people in Action were not only paid much better, but had a LOT of perks - cafeteria, communications, medical insurance, employee-ownership, bonus, holidays, three weeks vacation, etc. By our calculations, the cost improvements would be eliminated if these benefits were extended to the Mexican employees.

Question: How could we "own" Action Mexico, and allow such differences in working standards and benefits? Why would we treat our employees so differently, just an hour away? Does location matter?

Answer: We decided NOT to do the acquisition. Instead, we stopped buying transformers from that company (the business was only enriching the absentee ownership). We continued to buy transformers from US suppliers with competitive pricing achieved through automation.

The only real response to global problems like slave-wages is global solutions. We should stop pretending that the resources do not exist to solve this form of exploitation. The resources do exist, but are simply utilized elsewhere. Change can only be accomplished by education, and concerted action.

We should recognize too that slavery is not something that exists in a remote, far-away place. Some 45,000 to 50,000 people are trafficked annually through the US. Most of the victims are women and children. Some are duped, answering advertisements to work in a new country and finding themselves virtual prisoners once they arrive. Others are coerced by criminals or are sold into a modern form of slavery by families or friends. According to a UN report, victims worldwide "are subjected to threats against their person and family, violence, horrific living conditions and dangerous workplaces." They end up working as cheap labor, some on construction sites, others in fruit-picking or clothing factories and many in brothels.

Half the world is living, if one can call it that, on less than $2 a day, and one-fifth is barely surviving on half of that. Inequality is exploding both within and among nations, and millions of people are "living" as slaves. By a conservative estimate, there are 27 million people working under various forms of slavery in the world today, and the number is growing. Unlike 19th century slavery, today's slaves go un-noticed and are seldom reported in the national media.

Don't just shrug it off. Get involved!

Peter Drucker on Leadership

• Don't do what you want - do what needs to be done:
  Work only on things that would make a difference, pick the ones you're good at and delegate the others to people who are good at those things.
• Check your performance against goals:
  Find out whether you picked the truly important things to do. Keep re-establishing your own priorities.
• Be mission driven - communicate what you're doing:
  Don't do the popular things. Don't do too many things. Focus on the primary mission.
• Creative Abandonment:
  Don't get stuck on old near-success, trying to push it to succeed. Move on to new success.
• 21st Century Organization:
  The Internet and video-conferencing allows global communications. Don't organize around localities - organize around customers. Don't travel too much. Organize your travel.
• Prisoner of Your Own Organization:
  When you're in the office, you're swamped. Have a secret office elsewhere, to do the important things.
• Character Development:
  Don't think only about executive development - work also on character development.

Keith Nosbusch now the boss at Rockwell Automation

This leaves Keith Nosbusch in charge as Chairman and CEO. Nosbusch, 53, is a lanky (6-foot-2) electrical engineer and former co-captain of the University of Wisconsin football team. He began his career at Allen-Bradley, and stayed on after Rockwell International bought the privately held company for $1.6 billion in 1985. He was in charge of the Controls Division before becoming CEO last year.

Now that Keith Nosbusch has moved out from under the wing if Don Davis, it remains to be seen what his impact will be on Rockwell. The Rockwell weblog reports a key perception problem - Keith Nosbusch is a detail-driven workaholic, while Don Davis seems to spend all his time with Wall Street analysts. So now, will Nosbusch step up to the plate and initiate some much-needed change?

Will Keith bump his own salary up to the $2m level (which Don Davis was collecting), or will he make up the difference in performance incentives? Employees, who have been hit hard by many cutbacks over the past couple of years, are waiting to experience the Nosbusch factor.

Invensys poem - 'Twas the night before Christmas

Poems have a powerful way of expressing ideas and opinions. This one, written by a 20-year Invensys employee, arrived on the Invensys weblog. I thought it was delightful, and decided to give our eNews readers a sample. To read the whole poem, use the weblink below.

'Twas the Night Before Christmas

'Twas the night before Christmas, when all through the house
Not a creature was stirring, cause I was thoroughly soused;
The pink slips were hung by the chimney with care,
In knowing that St. Rick soon would be there;

Our children were nestled all snug in their bed,
Not knowing that unemployment was directly ahead;
My stock now was worthless and my pension was crap,
So we all settled down for a long winter's nap.


Whilst on the stock market there arose such a clatter,
I sprang from the bed to see what was the matter.
Away to my PDA, I flew like a flash,
To see where Rick went, with all of my cash.

More....

eFeedback

"Having worked on the Schneider/Opto22 case as an expert witness (for Opto22), I believe that software cannot be patented in the traditional sense. The problem is that it is too easy to copy form and function without violating copyright protection and methods can be reverse engineered from the object code. However, patenting is just wrong - the way it has been applied in the US Patent and Trademark Office (USPTO). They are allowing patents of the "idea" behind the implementation. Opto22 was being sued for patent violation even though they were using a totally different method to implement a similar (not the same) idea.

"The Solaia suits against exclusively Rockwell customers for using Rockwell Software based on OPC is clearly wrong. Again, based on Schneider patents acquired by Solaia, Rockwell is accomplishing a similar idea in a way not described by any of the patents. In effect, Solaia is blackmailing the end users of Rockwell products to settle for less than defending themselves in Federal court.

"The problem is that the USPTO allows overly broad claims in these patents that would never be allowed in a device patent. This is the equivalent of granting a patent on a laser can-opener, and allowing it to be applied to a laser device used for opening any container. Wrong. So far, Solaia has yet to lose a court case. All have been settled out of court. Rockwell does have a countersuit pending to prevent further Solaia lawsuits over these patents. I am not working on this case, but I clearly support the end user's right to use OPC for any application free from harassment by Solaia.

"I feel the same about the USPTO support of business methods patents, but these have not yet affected our profession."

"I think, you don't have to buy Chinese goods in Wal-Mart to get the connection with the output of paid or unpaid slavery.

"I recently saw a program on a TV station (collaboration of the French and German public TV-stations) about the operations of American companies in Mexico. It was a guided tour for a group of people, showing them the conditions - no taxes paid, spilled poison all about, heavy metals in the air and ground, twelve hours of work per day, forced pregnancy tests for women (in Germany even the question according pregnancy is illegal - a woman is allowed to lie to that question), and supposedly low life span for workers in certain jobs, and many things more...

"Correlated with the topic of "extending our lifespan" I might say that we, the people in the rich countries, pay for our higher life span in some sense with the forced lower life span in the poorer areas of the world. Not ONLY that, for sure, but certainly in some kind of way.

"Differences will always exist in such a big world community (the 6th billion human was born in Bosnia-Hercegovina some years ago) - but the development seems to go in always the same direction for most people. It's like Monopoly: in the end the winners has piled up everything, the loser ends with nothing, deeply depressed or angry (according to their personality).

"Maybe in the future we will face some serious backlash from those who have no possibilities to make their life better. The usual American thinking of dish-washer-to-millionaire is a fata morgana that hits people too little.

"I see no real solutions for breeding/feeding/making lucky of all that masses of people. But I think that the standards of conduct in too many companies is too low. And, using cheap foreign labor (of course, this is not only the American companies in Mexico; there are many such things going on in many other parts of the world)."

"I enjoyed reading Dave Rapley's 'post-election ramblings". I liked his comments about energy. It was only a year ago that we seriously began talking about energy.

"A recent report says the Arctic is warming twice as fast as the rest of the planet and that the North Pole could be ice-free in northern hemisphere summer by 2100, threatening indigenous cultures and perhaps wiping out creatures like polar bears. The report, by 250 scientists and funded by the US, Canada, Russia, Sweden, Finland, Norway, Denmark and Iceland, puts most of the blame on a build-up of heat-trapping gases from human use of fossil fuels like coal and oil. So there is another major reason to find energy alternatives.

"I think the US needs to quickly follow France's lead on nuclear energy - France generates 75% of it's energy needs with nuclear reactors. Nuclear energy technology is safe NOW. The current generation III nuclear reactors are safe and cost competitive with coal and natural gas. We need to move in this direction, and quickly!"