The End of Chinese Manufacturing and Rebirth of U.S. Industry

[LeveragedBuyout]

Bringing back industry to the United States would help develop greater job opportunities for Americans as well as help to spur greater opportunity in robotics companies in the United States. The underlying point of the article is that it would keep the capital within the United States. I would also like to point out a concept in Economics known as The Multiplier Effect, which states that each new manufacturing job will lead to about three more jobs around it , thus creating even more opportunity in American communities.

The solution to the United States' situation is to fill the middle class with more jobs and one of the besty ways to do that is through revitalization of American manufacturing. The United States cannot remain purely a service-oriented economy, it needs to make things.

I can't think of a successful example in history of an economy built solely on services. Let’s say I work in a restaurant and you work at a movie theater. I pay to see a movie in your theater, and that gives you money to come eat dinner in my restaurant. And that can go on for a while. But if one day you decide to eat in ... then I can’t go to the movies ... and the whole thing collapses.

We’re just staring at each other. And in some ways, that’s what’s happening right now. But if we make things, then we add value and change the equation. When a manufacturer makes something as basic as a light bulb, then the employees can afford a night out—to eat at a restaurant and go see a movie ... .and make their way to the middle class.

But I want to be very clear: I’m not saying we should turn inward or move business away from other places.This is not about our country versus other countries. We have a global economy, and the factories abroad will keep humming along, driven in part by a rising middle class around the world. But as you’ve heard today the next generation of production will need to be built closer to its consumption. And that creates an opportunity for all of us. With our global role, as America does better, the rest of the world will too.



Best Regards,
@Nihonjin1051

I agree with the essence of what you're saying, but it's a little bit more complicated, in that the US can manufacture components that China then assembles, and both are counted as manufacturing. The US can even manufacture in China, and the profits from the sale of the products will belong to the American company that contracted out the product. The way it works in a world where IP is respected, this relationship can work very well, and has. That's a win-win situation: the US company profits, and the Chinese get jobs.

The problem with China's case, in particular, is that the IP is not respected, so the subcontractor simply copies the product and applies his own brand, thus keeping all of the profit for himself without having expended anything on R&D.

When this happens, manufacturers pull back from manufacturing in China, because no manufacturing cost is low enough to have your product stolen and used against you. In that case, one absorbs the higher cost of manufacturing elsewhere, and then it's a lose-lose proposition: lost profits for the US company, lost jobs for the Chinese economy. This is also the case when dealing with the value chain completely within China: Company A does the R&D, then hires Company B as a subcontractor to manufacture. Since Company B can then just steal the designs, which are already in its hands, and then sell the product under Company B's brand, Company A is destroyed.

This creates a vicious circle that discourages R&D in China, and discourages high-value manufacturing in China. How can China progress to the next stage of development, when by definition, the strength of developed countries is in R&D and high-value manufacturing? Either China will change, and start respecting IP, or China won't progress.

The pressure that China is now facing has to do with the automation component that you discussed by introducing the article. Now China's labor advantage dissipates, and a company can choose to manufacture using robots in the US, or robots in China. Why would the company choose Chinese robots for manufacture, and risk its IP being stolen, when it can safeguard its IP by choosing US robots? Add in cheaper energy costs, and the US starts to appear to have the outright advantage when it comes to choosing a location to manufacture.

To address your comment about the multiplier effect, what this means in the age of robotic manufacture is that jobs move up the value chain. Instead of assembling on the factory floor, now workers must do the programming for the robots, engineer the design of the robots, and manufacture the robots themselves. Meanwhile, the company's profit margin increases, and it thus pays more taxes, enabling the government to direct resources to retraining the workforce to meet these new labor demands.

It's not perfect, but it's essentially how every other economic transition has happened. Some will not be able to make the transition, and lose out, but many will. Some will start new businesses, enabling employment in as of yet unthinkable ways. That is the magic of Joseph Schumpeter's creative destruction, and the dynamism enabled by capitalism.

 

[Jlaw]

I agree with the essence of what you're saying, but it's a little bit more complicated, in that the US can manufacture components that China then assembles, and both are counted as manufacturing. The US can even manufacture in China, and the profits from the sale of the products will belong to the American company that contracted out the product. The way it works in a world where IP is respected, this relationship can work very well, and has. That's a win-win situation: the US company profits, and the Chinese get jobs.

The problem with China's case, in particular, is that the IP is not respected, so the subcontractor simply copies the product and applies his own brand, thus keeping all of the profit for himself without having expended anything on R&D.

When this happens, manufacturers pull back from manufacturing in China, because no manufacturing cost is low enough to have your product stolen and used against you. In that case, one absorbs the higher cost of manufacturing elsewhere, and then it's a lose-lose proposition: lost profits for the US company, lost jobs for the Chinese economy. This is also the case when dealing with the value chain completely within China: Company A does the R&D, then hires Company B as a subcontractor to manufacture. Since Company B can then just steal the designs, which are already in its hands, and then sell the product under Company B's brand, Company A is destroyed.

This creates a vicious circle that discourages R&D in China, and discourages high-value manufacturing in China. How can China progress to the next stage of development, when by definition, the strength of developed countries is in R&D and high-value manufacturing? Either China will change, and start respecting IP, or China won't progress.

The pressure that China is now facing has to do with the automation component that you discussed by introducing the article. Now China's labor advantage dissipates, and a company can choose to manufacture using robots in the US, or robots in China. Why would the company choose Chinese robots for manufacture, and risk its IP being stolen, when it can safeguard its IP by choosing US robots? Add in cheaper energy costs, and the US starts to appear to have the outright advantage when it comes to choosing a location to manufacture.

To address your comment about the multiplier effect, what this means in the age of robotic manufacture is that jobs move up the value chain. Instead of assembling on the factory floor, now workers must do the programming for the robots, engineer the design of the robots, and manufacture the robots themselves. Meanwhile, the company's profit margin increases, and it thus pays more taxes, enabling the government to direct resources to retraining the workforce to meet these new labor demands.

It's not perfect, but it's essentially how ever other economic transition has happened. Some will not be able to make the transition, and lose out, but many will. Some will start new businesses, enabling employment in as of yet unthinkable ways. That is the magic of Joseph Schumpeter's creative destruction, and the dynamism enabled by capitalism.

If what you're saying is true, that IP is not respected, why are multinationals not pulling out and why is China still have $30b FDI coming in each month? Why the west still want to invest in China?

It seems strange that after 35 years of opening up, the ip issue is coming out now. Of course the true reason is not about ip, but ip is just a deflection for failed policies on both the democrats and republicans for decades.

 

[Aepsilons]

I agree with the essence of what you're saying, but it's a little bit more complicated, in that the US can manufacture components that China then assembles, and both are counted as manufacturing. The US can even manufacture in China, and the profits from the sale of the products will belong to the American company that contracted out the product. The way it works in a world where IP is respected, this relationship can work very well, and has. That's a win-win situation: the US company profits, and the Chinese get jobs.

The problem with China's case, in particular, is that the IP is not respected, so the subcontractor simply copies the product and applies his own brand, thus keeping all of the profit for himself without having expended anything on R&D.

When this happens, manufacturers pull back from manufacturing in China, because no manufacturing cost is low enough to have your product stolen and used against you. In that case, one absorbs the higher cost of manufacturing elsewhere, and then it's a lose-lose proposition: lost profits for the US company, lost jobs for the Chinese economy. This is also the case when dealing with the value chain completely within China: Company A does the R&D, then hires Company B as a subcontractor to manufacture. Since Company B can then just steal the designs, which are already in its hands, and then sell the product under Company B's brand, Company A is destroyed.

This creates a vicious circle that discourages R&D in China, and discourages high-value manufacturing in China. How can China progress to the next stage of development, when by definition, the strength of developed countries is in R&D and high-value manufacturing? Either China will change, and start respecting IP, or China won't progress.

The pressure that China is now facing has to do with the automation component that you discussed by introducing the article. Now China's labor advantage dissipates, and a company can choose to manufacture using robots in the US, or robots in China. Why would the company choose Chinese robots for manufacture, and risk its IP being stolen, when it can safeguard its IP by choosing US robots? Add in cheaper energy costs, and the US starts to appear to have the outright advantage when it comes to choosing a location to manufacture.

To address your comment about the multiplier effect, what this means in the age of robotic manufacture is that jobs move up the value chain. Instead of assembling on the factory floor, now workers must do the programming for the robots, engineer the design of the robots, and manufacture the robots themselves. Meanwhile, the company's profit margin increases, and it thus pays more taxes, enabling the government to direct resources to retraining the workforce to meet these new labor demands.

It's not perfect, but it's essentially how ever other economic transition has happened. Some will not be able to make the transition, and lose out, but many will. Some will start new businesses, enabling employment in as of yet unthinkable ways. That is the magic of Joseph Schumpeter's creative destruction, and the dynamism enabled by capitalism.

Good Evening @LeveragedBuyout ,

China’s government has always made life difficult for firms in some sectors—it has restricted market access for foreign banks and brokerage houses and blocked internet firms, including Facebook and Twitter—but the tough treatment seems to be spreading. Hardware firms such as Cisco, IBM and Qualcomm are facing a post-Snowden backlash; GlaxoSmithKline, a drugmaker, is ensnared in a corruption probe; Apple was forced into a humiliating apology last year for offering inadequate warranties; and Starbucks has been accused by state media of price-gouging. A sweeping consumer-protection law which came into effect in March, possibly providing a fresh line of attack on multinationals.

Don't get me wrong, China is still a prize, but growth is tapped. Nowadays, as what many Japanese businesses are finding out in China, is greater emphasis on increasing productivity. It is inevitable that a transitioning will occur. But with these issues arising , and the issue of R&D mishaps , it does decrease confidence on the dependability of partners in China. Perhaps I am wrong, perhaps the Chinese will cease instances of outright stealing R&D. But that remains to be seen.

 

[LeveragedBuyout]

Good Evening @LeveragedBuyout ,

China’s government has always made life difficult for firms in some sectors—it has restricted market access for foreign banks and brokerage houses and blocked internet firms, including Facebook and Twitter—but the tough treatment seems to be spreading. Hardware firms such as Cisco, IBM and Qualcomm are facing a post-Snowden backlash; GlaxoSmithKline, a drugmaker, is ensnared in a corruption probe; Apple was forced into a humiliating apology last year for offering inadequate warranties; and Starbucks has been accused by state media of price-gouging. A sweeping consumer-protection law which came into effect in March, possibly providing a fresh line of attack on multinationals.

Don't get me wrong, China is still a prize, but growth is tapped. Nowadays, as what many Japanese businesses are finding out in China, is greater emphasis on increasing productivity. It is inevitable that a transitioning will occur. But with these issues arising , and the issue of R&D mishaps , it does decrease confidence on the dependability of partners in China. Perhaps I am wrong, perhaps the Chinese will cease instances of outright stealing R&D. But that remains to be seen.

I completely agree. Now the clock is ticking, and I think that's why the CCP is pushing for reforms. Contrary to popular opinion, I don't think time is on China's side.

Here's the lesson that Japan provides, which so few have learned:

That's a growth rate of 7.1% in 1988, falling to 0.2% by 1993, and then sluggish growth thereafter. How fast the world can change.

Everyone sees China's amazing growth, and extrapolates a straight line into infinity. All it takes is one crisis to dramatically change everything. We discussed the bank NPL problem already--could that be the trigger? We won't know until after it happens, but those who think that there is no urgency in China's reform program could be in for a surprise. The Chinese are rightly proud of their accomplishments over the last 30 years, but now is not the time for triumphalism.

I suspect the CCP leadership knows something that the rest of the world doesn't. That could be why it is attempting to distract by targeting foreign firms, and increasing tensions in the SCS. The threat to China's manufacturing base will only aggravate the problem.

Let's hope China finds a way to get through this, or G-d help us all.

 

[Aepsilons]

I completely agree. Now the clock is ticking, and I think that's why the CCP is pushing for reforms. Contrary to popular opinion, I don't think time is on China's side.

Here's the lesson that Japan provides, which so few have learned:

That's a growth rate of 7.1% in 1988, falling to 0.2% by 1993, and then sluggish growth thereafter. How fast the world can change.

Everyone sees China's amazing growth, and extrapolates a straight line into infinity. All it takes is one crisis to dramatically change everything. We discussed the bank NPL problem already--could that be the trigger? We won't know until after it happens, but those who think that there is no urgency in China's reform program could be in for a surprise. The Chinese are rightly proud of their accomplishments over the last 30 years, but now is not the time for triumphalism.

I suspect the CCP leadership knows something that the rest of the world doesn't. That could be why it is attempting to distract by targeting foreign firms, and increasing tensions in the SCS. The threat to China's manufacturing base will only aggravate the problem.

Let's hope China finds a way to get through this, or G-d help us all.

A very good example , indeed. Now I do not doubt the persistence of Chinese professionals, their hard work is testament to the Confucian work ethic, however, what I am rather curious about is the level of corporate debt. Interestingly enough, the Chinese are higher in that regard than the United States. That and their Government's (which happens to own many enterprises in China) have been borrowing money abroad for cheap and well --- the hens come home to roost.


Please refer,

Yuan Takes Chinese Corporate Profits Down With It - WSJ

 

[gambit]

If what you're saying is true, that IP is not respected, why are multinationals not pulling out and why is China still have $30b FDI coming in each month? Why the west still want to invest in China?

It seems strange that after 35 years of opening up, the ip issue is coming out now. Of course the true reason is not about ip, but ip is just a deflection for failed policies on both the democrats and republicans for decades.

You should update your information...

http://online.wsj.com/articles/foreign-direct-investment-in-china-declines-1402980999

China's Ministry of Commerce said on Tuesday that foreign direct investment totaled $8.6 billion in May, down 6.7% from a year earlier and also below April's $8.7 billion figure. FDI in the first five months of the year was still up 2.8% year-over-year, at $48.91 billion.

A survey published last month by the European Union Chamber of Commerce in China found that European companies were becoming more cautious about investing in the world's second-largest economy. Only one in five said China was their top destination for new investments, down from one in three a year earlier.

Among the complaints cited by foreign companies, arbitrary law enforcement and rising labor costs were high on the list. Another concern is the perception that China is set for a long-term economic slowdown.

Along with weaker FDI growth, the last few months have seen a withdrawal of more volatile "hot money" flows from China. Data released by the central bank on Monday suggested capital flows turned negative in May. Economists attributed the outflow to the recent weakness of China's currency, which has made the country a riskier bet for investors.

Take my industry -- semiconductor -- for example.

This is an industry that demand high and constant intellectual property protection, which China's government does not respect. Design, R/D, and front end manufacturing of new products generally do NOT have China in consideration by any of the major semicon players, lead by Intel. But then back end testing and assembly of established semicon products, the types that either near or passed their IP protection value, such as the ubiquitous USB flash drives that everyone have in their pockets, are attractive for China because of low labor costs, low demand for workers' technical knowledge, and ease of their training to mass produce these common devices. Right now these companies are working on memory designs and products that will surpass the tried-and-true NAND design in terms of speed and capacity and China WILL be left out of this.

There is no 'if China does not IP rights'. China simply does not respect those rights. No debate about it.

 

[LeveragedBuyout]

A very good example , indeed. Now I do not doubt the persistence of Chinese professionals, their hard work is testament to the Confucian work ethic, however, what I am rather curious about is the level of corporate debt. Interestingly enough, the Chinese are higher in that regard than the United States. That and their Government's (which happens to own many enterprises in China) have been borrowing money abroad for cheap and well --- the hens come home to roost.


Please refer,

Yuan Takes Chinese Corporate Profits Down With It - WSJ

Wow, good find. In trying to look for more information on this, I came across this Bloomberg article:

China’s Property Slump Leads to Record Loans to Builders - Bloomberg

The terrifying thing about this is that now foreign banks are participating in the NPL problem, and a financial crisis in China will now have a direct effect on foreign banks, instead of just an indirect effect by damaging foreign economies. Sound familiar?

If what you're saying is true, that IP is not respected, why are multinationals not pulling out and why is China still have $30b FDI coming in each month? Why the west still want to invest in China?

It seems strange that after 35 years of opening up, the ip issue is coming out now. Of course the true reason is not about ip, but ip is just a deflection for failed policies on both the democrats and republicans for decades.

IP has been an issue for over a decade, ever since China forced foreign companies to form JVs with locals in order to sell in the Chinese market. This is not a new issue to us, although perhaps it is a new issue to you. The major difference now is that China is still growing, and we are not. China is, or will soon be, the largest economy in the world, so no more excuses about how it is still developing. Much like US-Japan tensions in the 1980s, this is not an overnight phenomenon, but the result of years of pressure.

 

[Aepsilons]

Sound familiar?

Too familiar. Sadly.

 

[fallstuff]

There is great concern about China’s real-estate and infrastructure bubbles. But these are just short-term challenges that China may be able to spend its way out of. The real threat to China’s economy is bigger and longer term: its manufacturing bubble.

By offering subsidies, cheap labor, and lax regulations and rigging its currency, China was able to seduce American companies to relocate their manufacturing operations there. Millions of American jobs moved to China, and manufacturing became the underpinning of China’s growth and prosperity. But rising labor costs, concerns over government-sponsored I.P. theft, and production time lags are already causing companies such as Dow Chemicals, Caterpillar, GE, and Ford to start moving some manufacturing back to the U.S. from China. Google recently announced that its Nexus Q streaming media player would be made in the U.S., and this put pressure on Apple to start following suit.

But rising costs and political pressure aren’t what’s going to rapidly change the equation. The disruption will come from a set of technologies that are advancing at exponential rates and converging.

These technologies include robotics, artificial intelligence (AI), 3D printing, and nanotechnology. These have been moving slowly so far, but are now beginning to advance exponentially just as computing does. Witness how computing has advanced to the point at which the smart phones we carry in our pockets have more processing power than the super computers of the ’60s—and how the Internet, which also has its origins in the ’60s, went on an exponential growth path about 15 years ago and rapidly changed the way we work, shop, and communicate. That’s what lies ahead for these new technologies.

The robots of today aren’t the Androids or Cylons that we used to see in science-fiction movies, but specialized electro-mechanical devices that are controlled by software and remote controls. As computers become more powerful, so do the abilities of these devices. Robots are now capable of performing surgery, milking cows, doing military reconnaissance and combat, and flying fighter jets. And DIY’ers are lending a helping hand. There are dozens of startups, such as Willow Garage, iRobot, and 9th Sense, selling robot-development kits for university students and open-source communities. They are creating ever more-sophisticated robots and new applications for these. Watch this video of the autonomous flying robots that University of Pennsylvania professor Vijay Kumar created with his students, for example.

The factory assembly that the Chinese are performing is child’s play for the next generation of robots—which will soon become cheaper than human labor. Indeed, one of China’s largest manufacturers, Taiwan-based Foxconn Technology Group, announced last August that it plans to install one million robots within three years to do the work that its workers in China presently do. It found Chinese labor to be too expensive and demanding. The world’s most advanced car, the Tesla Model S, is also being manufactured in Silicon Valley, which is one of the most expensive places in the country. Tesla can afford this because it is using robots to do the assembly.

Then there is artificial intelligence (AI)—software that makes computers do things that, if humans did them, we would call intelligent. We left AI for dead after the hype it created in the ‘80s, but it is alive and kicking—and advancing rapidly. It is powering all sorts of technologies. This is the technology that IBM’s Deep Blue computer used in beating chess grandmaster Garry Kasparov in 1997and that enabled IBM’s Watson to beat TV-show Jeopardy champions in 2011. AI is making it possible to develop self-driving cars, voice-recognition systems such as Apple’s Siri, and the face-recognition software Facebook recently acquired. AI technologies are also finding their way into manufacturing and will allow us to design our own products at home with the aid of AI-powered design assistants.

How will we turn these designs into products? By “printing” them at home or at modern-day Kinko’s: shared public manufacturing facilities such as TechShop, a membership-based manufacturing workshop, using new manufacturing technologies that are now on the horizon.

A type of manufacturing called “additive manufacturing” is making it possible to cost-effectively “print” products. In conventional manufacturing, parts are produced by humans using power-driven machine tools, such as saws, lathes, milling machines, and drill presses, to physically remove material to obtain the shape desired. This is a cumbersome process that becomes more difficult and time-consuming with increasing complexity. In other words, the more complex the product you want to create, the more labor is required and the greater the effort.

In additive manufacturing, parts are produced by melting successive layers of materials based on 3D models—adding materials rather than subtracting them. The “3D printers” that produce these use powered metal, droplets of plastic, and other materials—much like the toner cartridges that go into laser printers. This allows the creation of objects without any sort of tools or fixtures. The process doesn’t produce any waste material, and there is no additional cost for complexity. Just as, in using laser printers, a page filled with graphics doesn’t cost much more than one with text, in using a 3D printer, we can print sophisticated 3D structures for about the cost of a brick.

3D printers can already create physical mechanical devices, medical implants, jewelry, and even clothing. The cheapest 3D printers, which print rudimentary objects, currently sell for between $500 and $1000. Soon, we will have printers for this price that can print toys and household goods. By the end of this decade, we will see 3D printers doing the small-scale production of previously labor-intensive crafts and goods. It is entirely conceivable that in the next decade we start 3D-printing buildings and electronics.

In the next decade, we will see further advances. Engineers and scientists are today developing new types of materials, such as carbon nanotubes, ceramic-matrix nanocomposites, and new carbon fibers. These new materials make it possible to create products that are stronger, lighter, more energy-efficient, and more durable than existing manufactured goods. A new field—molecular manufacturing—will take this one step further and make it possible to program molecules inexpensively, with atomic precision. The materials we use for manufacturing and techniques for production will be nothing like the assembly-based processes that exist in China—and the U.S.—today.

Even if the Chinese automate their factories with AI-powered robots and manufacture 3D printers, it will no longer make sense to ship raw materials all the way to China to have them assembled into finished products and shipped back to the U.S. Manufacturing will once again become a local industry with products being manufactured near raw materials or markets.

So China has many reasons to worry, and manufacturing will undoubtedly return to the U.S.—if not in this decade then early in the next. But the same jobs that left the U.S. won’t come back: they won’t exist. What will the new jobs be? We can only guess. Autodesk CEO Carl Bass says that just as we have created new, higher-paying jobs in every other industrial transition, we will create a new set of industries and professions in this one. Look at the new types of jobs and multi-billion dollar businesses that the Internet and mobile industries created—these came out of nowhere and changed our lives, Bass says.

Carl Bass is one of the leading authorities on 3D printing and digital manufacturing, and I share his optimism that we will create an era of abundance. But I worry if we will create the new jobs fast enough and distribute the prosperity. Carl and I discussed this at Singularity University a few months ago. And I also discussed China manufacturing with The Economist China bureau chief, Vijay Vaitheeswaran. You can find these videos below.

The End of Chinese Manufacturing and Rebirth of U.S. Industry - Forbes

The article is just jingoistic devoid of facts. Almost all the 3D printers are made in China. 3D has huge potentials. The author is conveniently very vague in explaining how all these will play out or has has no clue about what he is talking about.

This reminds me of a statement by someone around 2003-4 that " In USA we are witnessing a new kind of economy, cheap jobs will go to China or some other like destinations, high value jobs will remain and continue to be created at an accelerated pace."

I would not be surprised if that same idiot came up with this piece !!

 

[LeveragedBuyout]

The article is just jingoistic devoid of facts. Almost all the 3D printers are made in China. 3D has huge potentials. The author is conveniently very vague in explaining how all these will play out or has has no clue about what he is talking about.

This reminds me of a statement by someone around 2003-4 that " In USA we are witnessing a new kind of economy, cheap jobs will go to China or some other like destinations, high value jobs will remain and continue to be created at an accelerated pace."

I would not be surprised if that same idiot came up with this piece !!

Can you please provide a source for this claim? I am trying to search for more current information, but as of 2012:

3-D printing adds new dimension to startups- Business- China Daily Asia

But the level of development of China's 3-D printing sector is still low, and the global market share for Chinese systems is small. Less than 5 percent of the world's 3-D printing systems were manufactured by Chinese producers in 2012, according to Wohlers Associates. US companies occupied 73 percent of the global market share, and European firms claimed about 10 percent.

It makes sense that the United States is currently the world leader in 3D printing, since 3D printing was invented here.

Edit: The best I can do seems to be from this ZDNet article, published August 1, 2014:

Korean government's 3D printing blueprint targets 15 percent of global market | ZDNet

According to 3D printing analyst Wohlers Associates, South Korea's market share of worldwide 3D printing is 2 percent. That's far behind the US (77 percent), Germany (11 percent), and Japan (3.7 percent). The US, the world's leading 3D printing nation, has more than 1,800 patents. Wohlers expects this year's 3D printing market to be worth $2.8 billion.

That means the US is becoming more dominant in this field, not less.

 

[tonyget]

You should update your information...

http://online.wsj.com/articles/foreign-direct-investment-in-china-declines-1402980999

Take my industry -- semiconductor -- for example.

This is an industry that demand high and constant intellectual property protection, which China's government does not respect. Design, R/D, and front end manufacturing of new products generally do NOT have China in consideration by any of the major semicon players, lead by Intel. But then back end testing and assembly of established semicon products, the types that either near or passed their IP protection value, such as the ubiquitous USB flash drives that everyone have in their pockets, are attractive for China because of low labor costs, low demand for workers' technical knowledge, and ease of their training to mass produce these common devices. Right now these companies are working on memory designs and products that will surpass the tried-and-true NAND design in terms of speed and capacity and China WILL be left out of this.

There is no 'if China does not IP rights'. China simply does not respect those rights. No debate about it.

Qualcomm make 50% of their profit from Chinese market, and now they are under investigation for monopoly, that's exactly because Chinese phone venders pay too much royalty to Qualcomm. If China doesn't respect IP, why would those venders even bother to pay Qualcomm at all ?

PS. Intel,Ti,Samsung etc, they all have fabs in China

Good Evening @LeveragedBuyout ,

China’s government has always made life difficult for firms in some sectors—it has restricted market access for foreign banks and brokerage houses and blocked internet firms, including Facebook and Twitter—but the tough treatment seems to be spreading.

Japanese market is even more closed to foreign companies than Chinese market

 

[Aepsilons]

Japanese market is even more closed to foreign companies than Chinese market

That is slowly changing , actually. And we are not known for R&D theft, in fact, Japan is one of the leading forces in R&D , as with the United States and other powerful Western states.

Japan and Japanese value , to highest esteem, the importance of innovation and creativity. It is spirited by our Kaizen culture.

 

[FairAndUnbiased]

The problem with China's case, in particular, is that the IP is not respected, so the subcontractor simply copies the product and applies his own brand, thus keeping all of the profit for himself without having expended anything on R&D.

When this happens, manufacturers pull back from manufacturing in China, because no manufacturing cost is low enough to have your product stolen and used against you. In that case, one absorbs the higher cost of manufacturing elsewhere, and then it's a lose-lose proposition: lost profits for the US company, lost jobs for the Chinese economy. This is also the case when dealing with the value chain completely within China: Company A does the R&D, then hires Company B as a subcontractor to manufacture. Since Company B can then just steal the designs, which are already in its hands, and then sell the product under Company B's brand, Company A is destroyed.

This creates a vicious circle that discourages R&D in China, and discourages high-value manufacturing in China. How can China progress to the next stage of development, when by definition, the strength of developed countries is in R&D and high-value manufacturing? Either China will change, and start respecting IP, or China won't progress.

That is a good theory, what about reality? For physical scientists and engineers, when reality contradicts their theory, the theory is wrong. For economics and social scientists, when reality contradicts their theory, it is reality that is wrong.

The reality is, every year there number of WIPO patents, scientific papers, startup numbers, profits from tech companies, etc. are increasing exponentially while no laws have changed. If your theory was true, then the number of papers, patents, startups, profits, etc. should all be declining. Chinese science should be in retreat. No new sectors such as quantum optics, nanotechnology, semiconductor, etc. should be explored. Startup numbers should be decreasing.

So why is your theory not coming true? Is it reality's problem?

The reason companies don't blindly copy, even for products that are off-patent, is because they don't have the ability to in terms of equipment, talent, organization, budget, etc. Look at Tesla; they opened all their patents for the public to use, without royalty, and they're not scared one bit of losing profits. They know that even with a blueprint, the vast majority of companies don't have any chance to compete with them, and established competitors will find that changing tools, etc. is more expensive than the added revenue (if any). This is why some countries are literally handed the blueprints to aircraft, yet cannot replicate them.

 

[LeveragedBuyout]

Qualcomm make 50% of their profit from Chinese market, and now they are under investigation for monopoly, that's exactly because Chinese phone venders pay too much royalty to Qualcomm. If China doesn't respect IP, why would those venders even bother to pay Qualcomm at all ?

PS. Intel,Ti,Samsung etc, they all have fabs in China

Good points. If China consistently failed to respect IP, it would be subject to widespread retaliation. By unevenly applying the law, instead of ignoring it outright, Chinese companies are able to fend off this retaliation. They provide just enough profit to the company in question to make the company think twice about suing or cutting off its bad-actor customer. But in aggregate, this is reaching a tipping point.

As far as the semiconductor fabs in China, I'm no expert, but aren't the Intel fabs intentionally kept 1-2 generations behind in technology, precisely because of this fear of IP theft?

 

[gambit]

Qualcomm make 50% of their profit from Chinese market, and now they are under investigation for monopoly, that's exactly because Chinese phone venders pay too much royalty to Qualcomm. If China doesn't respect IP, why would those venders even bother to pay Qualcomm at all ?

PS. Intel,Ti,Samsung etc, they all have fabs in China

Which part of 'back end' do you not understand ?