Taking the fast boat to China

Sept. 18, 2003
Looking for a way to cut costs and increase profits, U.S. companies head to China.

-, Associate Editor

It's an issue no one wants to discuss but which makes headlines. U.S. companies are moving manufacturing and engineering resources to China in significant numbers. Over 400 of the world's Fortune 500 companies are now invested in China, according to a report from the U.S. Congress' China Security Review Commission. Eighty U.S.-based corporations have recently shifted production to China with an estimated job loss of 34,900. Nevertheless, there seems to be a code of silence when it comes to Chinese operations. None of the manufacturers we contacted for this article would comment about their experience there.

China's entry into the World Trade Organization (WTO) in 2001 announced clearly to the world that China needs foreign investment. According to the Commission report, the U.S. is a major contributor to China's rise as an economic power, helping that country become an increasingly important center for research and development. But some of this help may not be intentional. The State Dept. informed the Commission that a large number of Chinese students, scholars, and researchers present in U.S. academic and industrial establishments are a principal means used by China to acquire U.S. science and technology. The majority of them study mathematics, science, and technology. The U.S. government has limited knowledge of their number, backgrounds, and activities. The U.S. Embassy in Beijing reportedly issued over 9,000 visas to Chinese in 2001 for working in high-tech U.S. firms.

Nevertheless, it is difficult to forecast whether the jobs-to-China phenomenon is something that has trickle or floodgate proportions. Economists say the data relating to the trend is subject to a wide range of error. And interest in China isn't exactly new. IBM, for example, says it began employing Chinese residents in 1979. (And 57% of all IBM jobs are now somewhere overseas, the company says.) But the motivating factor for many U.S. companies to establish roots in China today is simple: economics. China has low labor costs. For example, a typical worker in China is paid approximately a dollar a day and forty-two cents in benefits. That stacks up favorably not just against U.S. wages, but also to those in Nafta countries.

A sobering fact from the Commission states that from 1990 to 2000, the U.S. goods trade deficit with China grew from $11.5 to $87 billion and surpassed Japan as our largest deficit-trading partner. Such an imbalanced relationship, economists say, has disturbing implications for U.S. jobs and wages, as well as for the overall economic health of the U.S. manufacturing sector.

Trying to make a buck

The State Dept.'s Economic and Trade Commission reports that China, in accordance with the WTO, will lower taxes on auto parts and accessories to 10% from 25% over five years. This is one reason the U.S. auto industry is stepping up operations in China. For example, General Motors Corp. and Ford Motor Co. are urging their suppliers to either match the price of components made in China or build manufacturing facilities there. GM claims its purchases of Chinese parts will hit $10 billion in as little as three to five years. Last year, GM spent $1.1 billion on parts from that country. Not to be outdone, Ford claims it will hit the 10-billion mark by 2010. The company's 2002 purchases of Chinese parts totaled less than $100 million. Parts made by Chinese suppliers include sensors, actuators, door locks, seats, air bags, brake assemblies, engine blocks and heads, batteries, and piston rings.

However, the process of manufacturing parts in China is not exactly a turn-it-on-and-go proposition. Reports of outdated manufacturing equipment and lack of experience in mass-producing parts may cost automakers more than they expect. One source reports this is such a concern that Ford is building receiving centers in the U.S. just to check part quality from China. Another maker of motor parts explains the difficulties this way: Though the Chinese are by and large smart and committed workers, quality problems there don't get resolved quickly. The reason is that old hierarchical management beliefs from the days of communism are still ingrained. So those who spot problems during production don't raise their hands. They wait for bosses to tell them what to do.

While parts manufacturing in China is still ramping up, automakers are already turning out more new vehicles in China. For example, Ford introduced this July its first sport-utility vehicle in Beijing, called the Maverick, a four-wheel-drive SUV. In 2001, Ford Motor Co. joined forces with Changan Group in China to form Changan Ford Automobile Co. Ltd. This January, the Chongquin Ford plant in Southwestern China rolled out its first passenger car, the Fiesta, to be built in China for the Chinese market. Auto financing began in 1998 in China and remains a relatively new concept. Changan Ford can now offer buyers in-house auto loans at rates between 1 and 2%, thanks to the cooperation of Chinese banks.

GM has five joint ventures; two wholly owned foreign enterprises, and approximately 9,000 employees in China. Twenty-five vehicles are built in China under Chevrolet, Buick, Cadillac, Saab, Opel, and Wuling brands.

GM also invests in the future engineers of China. In 2002, GM, Sun Microsystems, and EDS donated CAD/CAM/CAE software, hardware, and training to the Shanghai Jiao Tong University (SJTU). Each participating corporation formed the alliance, called "Partners for the Advancement of CAD/CAM/CAE Education (PACE)," in 1999 to give future engineers from select institutions the background required. "This gift is a critical investment in the intellectual capital of China's youth and the success of tomorrow's Chinese-educated engineers," says Phil Murtaugh, Chairman and CEO of GM China group.

Manufacturing woes

Though manufacturers profess concern about jobs permanently going overseas to China, many feel as though they have no choice but to go with the trend. Severe price competition is the real culprit, they say. For example, a load-cell manufacturer who declined to be named, is transferring the bulk of its manufacturing to China from the U.S. To be competitive in the load-cell market, they say, the components must come from China, whether from a supplier or captive source. To lower costs and boost profits, the company recently built its own manufacturing facility in China after outgrowing two leased factories.

Amidst the media feeding-frenzy reporting loss of manufacturing jobs, Minnesota Technology Inc., an economic development group, produces cold, hard facts in a recent report. Half of the companies surveyed claim that competition from China has hurt their business as customers buy their goods from Chinese suppliers or move factory work there. Also according to the survey, this trend will continue with a reported 35% loss over the next three to five years. Hardest hit are the electronics and metalworking industries, which are reportedly the highest paying jobs in the Minnesota manufacturing sector. Manufacturers there believe lawmakers should aid them with tax breaks and tariffs. The report concludes that manufacturers don't completely understand the full extent of the threat.

A report from the Federal Reserve Bank in Cleveland states that China is a "significant challenge for producers of labor-intensive manufactured goods." To counter this, many Asian manufacturers are now investing in China, with a loss of jobs at home. For example, according to the report, Taiwan and South Korea are trying to move up the technology ladder by producing more technologically sophisticated, capital-intensive goods. And, although China is displacing some production in the U.S., the threat is less than in Asian markets. As an example, shoes, toys, and sporting goods moved out of the U.S. to other Asian locations before production of these goods migrated to China. This fact, according to the report, let the U.S. economy adjust to the loss of these jobs long ago. This rings true with regard to information-technology hardware, much of which has not been produced in the U.S. in large numbers for a long time.

The Security Review Commission report states that there remains considerable debate over the impact of China on wages and employment levels in the U.S. Economic concerns aside, there are also mixed emotions about transactions with a nonmarket economy that is a conspicuous abuser of human, political, and labor rights, as well as the environment.

The Fiesta is the first passenger vehicle from the Changan Ford plant in Western China.

Announced at the 2000 Geneva Motor Show, the Ford Maverick is now being sold in Beijing.

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