Authors: Thomas L. Friedman
One of his first purchases in China was an interest in a company making rubber parts. When he subsequently reached an agreement with his Chinese partner to purchase his shares in the company, the Chinese partner signed a noncompete clause as part of the transaction. As soon as the deal closed, however, the Chinese partner went out and opened a new factory. “Noncompete” did not quite translate into Mandarin. Scratch plan B.
Meanwhile, Perkowski's partnership was hemorrhaging money- Perkowski's tuition for learning how to do business in China-and he found himself owning a string of Chinese auto parts factories. “Around 1997 was the low point,” he said. “Our company as a whole was shrinking and we were not profitable. While some of our companies were doing okay, we were generally in tough shape. Although we had majority ownership and could theoretically put anyone on the field that we wanted, I looked at my [managerial] bench and I had no one to put in the game.” Time for plan C.
“We essentially concluded that, while we liked China, we wanted no part of 'Old China,' and instead wanted to place our bets on 'New China' managers,” said Perkowski. “We began looking for a new breed of Chinese managers who were open-minded and had gotten some form of management training. We were looking for individuals who were experienced at operating in China and yet were familiar with how the rest of the world operated and knew where China had to go. So between 1997 and 1999, we recruited a whole team of'New China' managers, typically mainland Chinese who had worked for multinationals, and as these managers came on board, we began one by one to replace the 'Old China' managers at our companies.”
Once the new generation of Chinese managers, who understood global markets and customers and could be united around a shared company vision-and knew China-was in place, ASIMCO started making a profit. Today ASIMCO has sales of about $350 million a year in auto parts from thirteen Chinese factories in nine provinces. The company sells to customers in the United States, and it also has thirty-six sales offices throughout China servicing automakers in that country too.
From this base, Perkowski made his next big move-taking the profits from offshoring back onshore in America. “In April of 2003, we bought the North American camshaft operations of Federal-Mogul Corporation, an old-line components company that is now in bankruptcy,” said Perkowski. “We bought the business first to get access to its customers, which were primarily the Big Three automakers, plus Caterpillar and Cummins. While we have had long-standing relationships with Cat and Cummins—and this acquisition enhanced our position with them- the camshaft sales to the Big Three were our first. The second reason to make the acquisition was to obtain technology which we could bring back to China. Like most of the technology that goes into modern passenger cars and trucks, people take camshaft technology for granted. However, camshafts [the part of the engine that controls how the pistons go up and down] are highly engineered products which are critical to the performance of the engine. The acquisition of this business essentially gave us the know-how and technology that we could use to become the camshaft leader in China. As a result, we now have the best camshaft technology and a customer base both in China and the U.S.”
This is a very important point, because the general impression is that offshoring is a lose-lose proposition for American workers-something that was here went over there, and that is the end of the story. The reality is more complicated.
Most companies build offshore factories not simply to obtain cheaper labor for products they want to sell in America or Europe. Another motivation is to serve that foreign market without having to worry about trade barriers and to gain a dominant foothold there-particularly a giant market like China's. According to the U.S. Commerce Department, nearly 90 percent of the output from U.S.-owned offshore factories is sold to foreign consumers. But this actually stimulates American exports. There is a variety of studies indicating that every dollar a company invests overseas in an offshore factory yields additional exports for its home country, because roughly one-third of global trade today is within multinational companies. It works the other way as well. Even when production is moved offshore to save on wages, it is usually not all moved offshore. According to a January 26, 2004, study by the Heritage Foundation, Job Creation and the Taxation of Foreign-Source Income, American companies that produce at home and abroad, for both the American market and China's, generate more than 21 percent of U.S. economic output, produce 56 percent of U.S. exports, and employ three-fifths of all manufacturing employees, about 9 million workers. So if General Motors builds a factory offshore in Shanghai, it also ends up creating jobs in America by exporting a lot of goods and services to its own factory in China and benefiting from lower parts costs in China for its factories in America. Finally, America is a beneficiary of the same phenomenon. While much attention is paid to American companies going offshore to China, little attention is paid to the huge amount of offshore investment coming into America every year, because foreigners want access to American markets and labor just like we want access to theirs. On September 25, 2003, DaimlerChrysler celebrated the tenth anniversary of its decision to build the first Mercedes-Benz passenger car factory outside Germany, in Tuscaloosa, Alabama, by announcing a $600 million plant expansion. “In Tuscaloosa we have impressively shown that we can produce a new production series with a new workforce in a new factory, and we have also demonstrated that it is possible to have vehicles successfully 'Made by Mercedes' outside of Germany,” Professor Jiirgen Hub-bert, the DaimlerChrysler Board of Management member responsible for the Mercedes Car Group, announced on the anniversary.
Not surprisingly, ASIMCO will use its new camshaft operation in China to handle the raw material and rough machining operations, exporting semifinished products to its camshaft plant in America, where more skilled American workers can do the finished machining operations, which are most critical to quality. In this way, ASIMCO's American customers receive the benefit of a China supply chain and at the same time have the comfort of dealing with a known, American supplier.
The average wage of a high-skilled machinist in America is $3,000 to $4,000 a month. The average wage for a factory worker in China is about $150 a month. In addition, ASIMCO is required to participate in a Chinese government-sponsored pension plan covering heath care, housing, and retirement benefits. Between 35 and 45 percent of a Chinese worker's monthly wage goes directly to the local labor bureau to cover these benefits. The fact that health insurance in China is so much cheaper-because of lower wages, much more limited health service offerings, and no malpractice suits-“certainly makes China an attractive place to expand and add employees,” explained Perkowski. “Anything which can be done to reduce a U.S. company's liability for medical coverage would be a plus in keeping jobs in the U.S.”
By taking advantage of the flat world to collaborate this way- between onshore and offshore factories, and between high-wage, high-skilled American workers close to their market and low-wage Chinese workers close to theirs-said Perkowski, “we make our American company more competitive, so it is getting more orders and we are actually growing the business. And that is what many in the U.S. are missing when they talk about offshoring. Since the acquisition, for example, we have doubled our business with Cummins, and our business with Caterpillar has grown significantly. All of our customers are exposed to global competition and really need their supply base to the do the right thing as far as cost competitiveness. They want to work with suppliers who understand the flat world. When I went to visit our U.S. customers to explain our strategy for the camshaft business, they were very positive about what we were doing, because they could see that we were aligning our business in a way that was going to enable them to be more competitive.”
This degree of collaboration has been possible only in the last couple of years. “We could not have done what we have done in China in 1983 or 1993,” said Perkowski. “Since 1993, a number of things have come together. For example, people always talk about how much the Internet has benefited the U.S. The point I always make is that China has benefited even more. What has held China back in the past was the inability of people outside China to get information about the country, and the inability of people inside China to get information about the rest of the world. Prior to the Internet, the only way to close that information gap was travel. Now you can stay home and do it with the Internet. You could not operate our global supply chain without it. We now just e-mail blueprints over the Internet-we don't even need FedEx.”
The advantages for manufacturing in China, for certain industries, are becoming overwhelming, added Perkowski, and cannot be ignored. Either you get flat or you'll be flattened by China. “If you are sitting in the U.S. and don't figure out how to get into China,” he said, “in ten or fifteen years from now you will not be a global leader.”
Now that China is in the WTO, a lot of traditional, slow, inefficient, and protected sectors of the Chinese economy are being exposed to some withering global competition-something received as warmly in Canton, China, as in Canton, Ohio. Had the Chinese government put WTO membership to a popular vote, “it never would have passed,” said Pat Powers, who headed the U.S.-China Business Council office in Beijing during the WTO accession. A key reason why China's leadership sought WTO membership was to use it as a club to force China's bureaucracy to modernize and take down internal regulatory walls and pockets for arbitrary decision making. China's leadership “knew that China had to integrate globally and that many of their existing institutions would simply not change and reform, and so they used the WTO as leverage against their own bureaucracy. And for the last two and half years they've been slugging it out.”
Over time, adherence to WTO standards will make China's economy even flatter and more of a flattener globally. But this transition will not be easy, and the chances of a political or economic crackup that disrupts or slows this process are not insignificant. But even if China implements all the WTO reforms, it won't be able to rest. It will soon be reaching a point where its ambitions for economic growth will require more political reform. China will never root out corruption without a free press and active civil society institutions. It can never really become efficient without a more codified rule of law. It will never be able to deal with the inevitable downturns in its economy without a more open political system that allows people to vent their grievances. To put it another way, China will never be truly flat until it gets over that huge speed bump called “political reform.”
It seems to be heading in that direction, but it still has a long way to go. I like the way a U.S. diplomat in China put it to me in the spring of 2004: “China right now is doing titillation, not privatization. Reform here is translucent-and sometimes it is quite titillating, because you can see the shapes moving behind the screen-but it is not transparent. [The government still just gives] the information [about the economy] to a few companies and designated interest groups.” Why only translucent? I asked. He answered, “Because if you are fully transparent, what do you do with the feedback? They don't know how to deal with that question. They cannot deal [yet] with the results of transparency.”
If and when China gets over that political bump in the road, I think it could become not only a bigger platform for offshoring but another free-market version of the United States. While that may seem threatening to some, I think it would be an incredibly positive development for the world. Think about how many new products, ideas, jobs, and consumers arose from Western Europe's and Japan's efforts to become free-market democracies after World War II. The process unleashed an unprecedented period of global prosperity-and the world wasn't even flat then. It had a wall in the middle. If India and China move in that direction, the world will not only become flatter than ever but also, I am convinced, more prosperous than ever. Three United States are better than one, and five would be better than three.
But even as a free-trader, I am worried about the challenge this will pose to wages and benefits of certain workers in the United States, at least in the short run. It is too late for protectionism when it comes to China. Its economy is totally interlinked with those of the developed world, and trying to delink it would cause economic and geopolitical chaos that could devastate the global economy. Americans and Europeans will have to develop new business models that will enable them to get the best out of China and cushion themselves against some of the worst. As BusinessWeek, in its dramatic December 6, 2004, cover story on “The China Price,” put it, “Can China dominate everything? Of course not. America remains the world's biggest manufacturer, producing 75% of what it consumes, though that's down from 90% in the mid-'90s. Industries requiring huge R&D budgets and capital investment, such as aerospace, pharmaceuticals, and cars, still have strong bases in the U.S.... America will surely continue to benefit from China's expansion.” That said, unless America can deal with the long-term industrial challenge posed by the China price in so many areas, “it will suffer a loss of economic power and influence.”
Or, to put it another way, if Americans and Europeans want to benefit from the flattening of the world and the interconnecting of all the markets and knowledge centers, they will all have to run at least as fast as the fastest lion-and I suspect that lion will be China, and I suspect that will be pretty darn fast.
I had never seen what a supply chain looked like in action until I visited Wal-Mart headquarters in Bentonville, Arkansas. My Wal-Mart hosts took me over to the 1.2-million-square-foot distribution center, where we climbed up to a viewing perch and watched the show. On one side of the building, scores of white Wal-Mart trailer trucks were dropping off boxes of merchandise from thousands of different suppliers. Boxes large and small were fed up a conveyor belt at each loading dock. These little conveyor belts fed into a bigger belt, like streams feeding into a powerful river. Twenty-four hours a day, seven days a week, the suppliers' trucks feed the twelve miles of conveyor streams, and the conveyor streams feed into a huge Wal-Mart river of boxed products. But that is just half the show. As the Wal-Mart river flows along, an electric eye reads the bar codes on each box on its way to the other side of the building. There, the river parts again into a hundred streams. Electric arms from each stream reach out and guide the boxes-ordered by particular Wal-Mart stores- off the main river and down its stream, where another conveyor belt sweeps them into a waiting Wal-Mart truck, which will rush these particular products onto the shelves of a particular Wal-Mart store somewhere in the country. There, a consumer will lift one of these products off the shelf, and the cashier will scan it in, and the moment that happens, a signal will be generated. That signal will go out across the Wal-Mart network to the supplier of that product-whether that supplier's factory is in coastal China or coastal Maine. That signal will pop up on the supplier's computer screen and prompt him to make another of that item and ship it via the Wal-Mart supply chain, and the whole cycle will start anew. So no sooner does your arm lift a product off the local Wal-Mart's shelf and onto the checkout counter than another mechanical arm starts making another one somewhere in the world. Call it “the Wal-Mart Symphony” in multiple movements-with no finale. It just plays over and over 24/7/365: delivery, sorting, packing, distribution, buying, manufacturing, reordering, delivery, sorting, packing...