In China’s Shadow How Americans Can Respond to Asian Competition

1. In China’s ShadowHow Americans Can Respond to Asian Competition Reed Hundt

3. The challenge …

5. China: The world’s manufacturer • Largest exporter of apparel • In 2006 China will manufacture 400 million mobile handsets (more than 60% increase from 2005) • China is the Number 1 producer of pork • Global center of consumer electronics and telecom equipment • China is producing three times as much as it did 10 years ago; losing manufacturing jobs as it increases manufacturing productivity

6. China the technology innovator • Mobile Internet (China Mobile, Tom Online, Super Girl) • Online gaming (Netease) • Comprehensive messaging (Tencent) • Clicks plus bricks (Ctrip) • Bridging old media and new media (Hunan Satellite TV) • 3G (TD-SCDMA) (Datang, ZTE, TD Tech, Putian) • IPTV (UTStarcom, ZTE) • PC monitor manufacturing (TPV) Source: Morgan Stanley Research

7. China the information society • No. 1 in mobile users • No. 1 in Internet users under the age of 30 (70% of Chinese Internet users under the age of 30) • Urban areas have 5x more Internet users than rural areas • 60% of them are the only children of family • 30% of Chinese Internet users have college degrees Source: CNNIC; World Bank; Morgan Stanley Research

8. China the consumer market • Annual growth • Size • Internet users: • Broadband users: • Mobile users: • Mobile services: • Online gaming: • Online brand advertising: • 111 m • 64.3 m • 393 m • $963 m • $570 m • $281 m • 18% • 50% • 17% • 24% • 46% • 28% Source: CNNIC; Morgan Stanley Research

9. China the urban consumer market • Urban Chinese consumers will grow from 42% of the total population today to more than 69% by 2025 Source: McKinsey Global Institute

10. China the hotbed of firm creation

11. Firms out of China will compete like Japan in 80s • But China does not need: • --- to place manufacturing facilities in the United States • --or maintain security protection from the United States • --or export into the United States to obtain access to a large market for economies of scale

12. Chinese firms --Will obtain economies of scale in China --Compete vigorously in Chinese growth markets to become strong --And challenge American firms for global leadership --China is more important as a source of firm rivalry than worker competition

13. China: 12 million firms, vs.America: 6 million firmsbut 1/10th of 1% are the big winners in each country…they generate a third of national income

14. Employers (firms with payroll) – 5,541,918 • Firms • Employment • Employment size • Employer firms covered in Statistics of U.S. Business • 5,657,774 • 115,061,184 • 2,500 employees or more • 3,634 • 43,877,243 Source: U.S. Census Bureau

15. World Trade: A contact sport

16. Every American firm in trade will have one or many competitors from China The CD from Chinese carmaker Geely

17. Advantages for Chinese firms • High skills • Low wages • Favorable currency for export • Access to savings • Huge foreign investment • Vigorous local competition • Ineffective regulation • Few barriers to starting firms • Wide open markets • No litigation • Little taxation • Culture of entrepreneurship

18. China produces about 350,000 engineers with a bachelor’s degree per year, while the United States annually produces 135,000 Source: Duke University “Framing the Engineering Outsourcing Debate”

19. Increasingly competitive: 2.25 million more companies in China will buy a PC in next two years Source: Intel

20. The cost advantage • Average hourly compensation for the overall Chinese manufacturing sector in 2002 was $0.57 – compared to U.S. hourly pay rate of $21.40 that same year Source: Morgan Stanley

21. China’s state-owned enterprise sector has reduced headcount by over 60 million workers since 1997, creating an enormous pool of unemployed workers that are seeking gainful re-employment in China’s new economy Source: Morgan Stanley

22. Foreign investment produced nearly 90% of China’s high-tech exports in 2005 Source: Wall Street Journal

23. Back in the USA… • While American firms investing abroad, they are • investing less in their homeland

24. If firms don’t invest in America, they may invest in job creation in other countries • “In the United States, nonresidential fixed investment as a percentage of GDP fell to 11.56% in 2005 from 12.55% in 2000” Source: New York Times

25. For 50 years, Americans have made 20% of the world’s goods • While numbering only 5% of the world’s workforce

26. As a result, as the world economy grew • Americans created and captured more wealth • Employees make more money only if their firms win in domestic and global competition • You can’t earn a rising income at a falling firm

27. The more you make • The more you take • The 5:20 slice of a bigger pie

28. American per capita GDP has soared for nearly 200 years • 1990 international dollars • United States • China Source: Maddison (2001)

29. Americans did especially well in the 90’s: • Between the beginning of 1995 and the semi-official NBER business cycle peak in March 2001, U.S. real GDP grew at a pace of 4.21% per year Source: Brad DeLong

30. Those were golden years

31. At the end of the Golden 90’s American growth peaked: from 1998 to 2003 United States provided 98% of global economic growth

32. And so what if the 21st century belonged to China?

33. China’s growth need not be America’s loss … • Rising tide lifts all boats • Bigger pie means more can eat at same table • More money in China means more sales to Chinese • More competition means more productivity • More productivity means more wealth

34. Yet nations can lose for centuries • China came up with many inventions before Europe: Power-driving spinning, wheelbarrow, stirrup, rigid horse collar, compass, paper, printing, gunpowder • But “Chinese technology stopped progressing” • (David Landes)

35. Qianlong Emperor, 1793 "We have never valued ingenious articles, nor do we have the slightest need of your country's manufactures."

36. What to do?

37. If Americans retain their 20% share of the world’s production China’s growth makes Americans better off • But if Americans’ share of global product drops fast enough Americans will earn less even if the global economy grows

38. Americans should • Aim to keep keep the 5:20 proportion goingfor another 50 years

39. The citizens of any country need to work at firms that win in global markets

40. Americans will be better off if the firms they work for win in 6 or 7 out of every 10 global markets

41. For American workers to earn more • Americans need American firms to win big in global markets

42. Americans want existing American firms to invest overseas, butthey also need new firms to create new jobs and new markets at home

43. The big winners have to come from competition … • America needs existing firms to face competitive challenge • America needs open markets in all goods and services • Open to homegrown competition as well as Chinese competition

44. “Innovation in Schumpeter’s famous phrase is also ‘creative destruction’. It makes obsolete yesterday’s capital equipment and capital investment.” Source: Peter Drucker

45. “Long-run growth requires…creative destruction, in which new corporate giants continually rise up to overthrow old leviathans.” Source: Fogel, Morck, Yeung

46. “Economies with less persistently dominant large businesses grow faster …This reflects faster productivity growth…the waning of large old private sector businesses drives the result.” Source: Fogel, Morck, Yeung

47. Americans need to work in global winners that are about to be born

48. In the U.S., 10% of firms are born and 10% die every year

49. In the 90s, births > deaths by 1-2% ...

50. …and not surprisingly • Before the Golden 90s and • the Distraught 00s • The death rate exceeded the birth rate