• Friday, July 28, 2017

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

Discussion in 'Americas' started by Aepsilons, Aug 29, 2014.

  1. LeveragedBuyout

    LeveragedBuyout PDF THINK TANK: ANALYST

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    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.
     
    Last edited: Sep 1, 2014
  2. Jlaw

    Jlaw SENIOR MEMBER

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    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.
     
  3. Aepsilons

    Aepsilons PDF THINK TANK: ANALYST

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    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.
     
  4. LeveragedBuyout

    LeveragedBuyout PDF THINK TANK: ANALYST

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    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:

    [​IMG]

    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.
     
  5. Aepsilons

    Aepsilons PDF THINK TANK: ANALYST

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    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
     
  6. gambit

    gambit PROFESSIONAL

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    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.
     
  7. LeveragedBuyout

    LeveragedBuyout PDF THINK TANK: ANALYST

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    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?

    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.
     
    Last edited: Sep 1, 2014
  8. Aepsilons

    Aepsilons PDF THINK TANK: ANALYST

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    Too familiar. Sadly.
     
  9. fallstuff

    fallstuff SENIOR MEMBER

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    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 !!
     
  10. LeveragedBuyout

    LeveragedBuyout PDF THINK TANK: ANALYST

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    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.
     
    Last edited: Sep 1, 2014
  11. tonyget

    tonyget FULL MEMBER

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    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

    Japanese market is even more closed to foreign companies than Chinese market
     
    Last edited: Sep 1, 2014
  12. Aepsilons

    Aepsilons PDF THINK TANK: ANALYST

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    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.
     
  13. FairAndUnbiased

    FairAndUnbiased SENIOR MEMBER

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    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.
     
  14. LeveragedBuyout

    LeveragedBuyout PDF THINK TANK: ANALYST

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    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?
     
  15. gambit

    gambit PROFESSIONAL

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