Monday, July 26, 2010

China ascendent.

The US is clutching to its tattered financial philosophies as anxiously as grandma clutched her tattered shawl, hoping that Belief will trump reality, that somehow, if Belief is strong enough, it will keep out the howling winds of financial glaciation.

The philosophy I have heard for so long is that private investment will do the job, and business should self-regulate, and the US Government should just reduce taxes and get out of the way.

Despite this talk of free enterprise, it has actually been massive US Government spending that has laid bare new technologies, then developed the manufacturing expertise to reliably translate the technology into a product.

Only when this is complete can US invention take over, using corporate models to exploit the technology in a market-driven environment. No opportunity left unexamined!

Quick examples. Alexander Fleming 'discovered' penicillin in 1928. When America joined WW II, there were about three teaspoons of penicillin in the entire US. The US Government that took over all the patents early in WW2, got the USDA on a heavy-duty R&D bender, and figured out the best technology and manufacturing techniques. As a result, by late 1942, every soldier's ration pack contained penicillin.

US Government expenditures during WW II likewise refined management, design, and manufacturing techniques in every single industry in the US. At the end of WW II, the US had the most efficient manufacturing industry in the world. With Europe in ruins, and all pre-war competition destroyed, it was Spring time for the American economy.

Likewise, huge US Government spending during the race to put a man on the moon in the 1960's spawned the US medical equipment industry (life support systems) and the US micro-computer industry (integrated circuits).

For the past 20 years, US industry has done everything it can to prevent Government investment in new, disruptive technologies, while they aggregated their power, and gobbled up smaller companies. The end result is uncompetitive markets comprised of a few huge players, who deliver services to consumers and industry at inflated prices, while preventing any innovation unless they own it directly.

Over the past 20 years, the Chinese have taken this opportunity to really move ahead. Now, the huge innovator in the world has become the Chinese Government, and the industry it expedites.

The infrastructure that supports any given industry is called "the Commons". The Commons are made up of all the elements that an industry relies on to expedite their business. The most basic Commons are transportation, energy, water, people, and real estate. Then, depending on the industry, there will be other companies that supply raw material, intermediary products, sub-assemblies, security services, and the like.

In the past, US industry has been able to take rapid improvement in the Commons as part of their environment. Much of this improvement has been financed by Government. For example, the US freeway system, started in the 1950's, may have been funded by Government to enable the rapid movement of troops and defense materiel around the US, along the lines of Hitler's autobahns, but the benefit to industry was huge, giving much greater mobility to both freight and people at lower cost, saving both time and money.

In its jump into global wealth, China has focused on its Commons. With heavy Government participation in industry (in most companies, the Chinese Government is a major shareholder), the Government funds the Commons projects, both short- and long-term, that will expedite Chinese industry to the forefront of global industry in the future.

Some examples.

Transportation. China is now building a high speed rail system. To a lot of Americans, this is news. The Chinese and high speed rail? OK, go scare the crap out of yourself and read this current assessment on Wikipedia. 11,000 miles of rail are currently under construction, and 33,000 miles expected to be built by 2020. And they have been working on this since 1993. They have experimented with every practical high speed technology, and are on their fourth generation of train design. their objective is to have the slow trains moving freight at speeds around 165 mph, and passenger trains moving at 225 mph. I compare this to San Francisco Bay Area Rapid Transit, which has no amenities, is incredibly rattly and noisy, and travels at an average speed of 33 mph. America: Fail!
Energy. The Pew Trust published their renewable energy summary for the world in 2009 in March, 2010. Chinese investment in renewable energy was $34.6 billion to the US's $18.6 billion. Even more revealing, China's output, at 52.5 Gigawatts (GW) was only just behind the US's 53.4 GW. In the past 6 months, China has taken the lead in output. China is also positioned to dominate in the global manufacture of both solar and wind technology. If there are going to be jobs, China will scoop up most of them.

And in a further stunning integration of high speed rail and clean energy, China has just brought the largest single photo-voltaic array online.

Raw materials. China is actively pursuing raw material acquisition around the world. They are no longer mixing their financial interests with their political philosophies as their business model. As well, they are aggressively looking to their own resources within their own territories, and have dramatically expanded their iron ore mining in the past year. Tibet also offers a lot of promise for mineral resources. They are entering Africa with a fairly clean slate, and are able to say "Yeah, we were screwed too" when the issue of past Western Imperial mauling gets raised.

Water. China has fresh water problems. The cost of clean freshwater supplies is already recognized as a problem. Although the problem will not become critical for years, it is already being addressed by the Chinese Government as an issue that needs to be addressed now, not when the crisis hits.

Education. China has a huge focus on education. They are graduating about 5 times as many engineers a year as the US.

Labor. Do I really need to say anything here? One point four billion people, people.

Investment. The investment environment encourages those international investors who do not have a political agenda. Right now, with the Chinese economy growing rapidly, international investment is looking at Chinese business opportunities as probably the best in the world.

Manufacturing commons. Suppliers of special services and skills to industry have grown in the crevices of the growing financial success of China. Software, security, sub-assembly manufacturing, and any area where companies have a need that can be better met by outsourcing than direct employment, Chinese business is flourishing.

Summary. Chinese Gross Domestic Product (the total output of all goods and services in the economy) has grown by more than ten times since the 1980's. Currently, China's GDP growth is still above 8% per annum, making it a very attractive place for investment.

Combine this with the Chinese Government's efforts to ease the path for business by creating more efficient infrastructure, and a better trained workforce, it is likely that China is going to continue to be a very desirable place to create new businesses, and will be the lowest cost manufacturer in the world.

Money has no Beliefs. Investment will go where the returns are, and it is likely that China will continue to grow into their new shoes exponentially, partially using capital and expertise from around the world mixed with Chinese Government and industrial investment..

Not moved by the necessity to produce great quarterly financials, the Chinese have their eyes firmly on the long term prizes, and one of them is the reduction in the US' ability to mess in the South China Sea. To get there, they have to pull America's economic teeth, and this final bit of extraction will be achieved when there is a new global reserve currency that replaces the dollar.

The final coup can be achieved by dumping some US treasuries, which China has in their pocket as loose change.

If Europe is waiting for America to right this situation, then they will be looking in the wrong direction when the axe falls.

"The things that kill you are the things you never saw coming" is a phrase I quote frequently. Americans are not aware of the fundamental reasons for their success. Now, their philosophy is blinding them to the reasons for the rise of China.

It is also fairly certain that the Republicans will further paralyze the system if they get the opportunity. The British paper, the Financial Times, published this commentary on their expectations: an American financial winter.

1 comment:

  1. Good, fun article. I like your less-is-more approach, as in: "Labor. Do I really need to say anything here? One point four billion people, people."

    I'm glad my kids are learning to speak Chinese.