Should We Worry?

One of my professors made a statement about two weeks ago in class that really intrigued me. He said when he was in college studying business back in the late 1980s, his professors used to relate any problems that U.S. companies faced to surging Japanese companies, but now that he is teaching, he feels that problems that U.S. companies face are all about Chinese companies.

Japanese companies clearly were not able to dethrone U.S. companies from their domination, which contributes to a huge GDP for the nation. Chinese companies have been outstanding recently and helped the country to keep its economic growth going during the most recent recession. This situation has really made many people (including my professor and I) think that Chinese companies could seize some market share from the U.S. companies.

Well, with all the tensions – started from the application of high tariffs for China tires to Google’s withdrawal from the China market – the relationship between American companies and Chinese companies has been awkward. However, aside from all of the disputes, the U.S. and China still respect each other; part of the reason is because China holds a high fraction of the U.S. national debt so that the relationship between the two powerful countries is just too important to be broken.

Most the facts and statistics seem to favor Chinese companies, but are Chinese companies really that dangerous to American companies’ supremacy?

Here’s a list of some of the reasons why American companies should worry about the growth in China
1. Chinese companies are trying to produce virtually all goods and services.
2. The stock price has been growing against the gravity of the world financial crisis.
3. China is not that welcoming anymore to foreign companies.
4. Chinese companies are attempting to overtake some of the major businesses in the world, especially in Auto and computer industry.

China has been known as the heaven of outsourcing by many multinational companies around the world, mainly because of its cheap labor and ability to mass-produce so many goods to help companies reach economies of scale to maximize their efficiencies and thus profit. Last year, China's outsourcing market grew by 25% to reach $25 billion in revenues. Believe it or not? Almost all of the goods we consume today are made in China. Sure, there are some predictions that labor costs in China could increase rapidly, which would result in some companies pulling their production out of China. However, I am sure that there is still plenty of room to grow in China’s outsourcing market too given the unemployment rate and the infrastructure development that the country is having now.

The stock market is one of the best measurements of how optimistic are investors to industries or businesses in a certain region. The number has shown that investors around the world have been investing heavily in China market in the recent years. While Hong Kong exchange market was sensational last year with a record of number of IPOs (Initial Public Offering) in one year period; Shenzhen stock market performed as well as Hong Kong stock market in terms of the growth; and Shanghai stock market is being predicted to surpass Hong Kong stock market’s record in this year. The number and growth that have been generated are just showing the optimism that people have for the economy in general.

The optimism, perhaps, is also the motive behind immodest receptions to the investors recently. In early 2010, some of multinational companies’ representatives in China experienced a series of unwelcoming manners by the Chinese officials in Wuhan province – where local industry is emerging. This is contradictory to what happened 5-15 years ago when China officials are ordered to give their warmest welcome to the multinational companies in order to draw investors in. Last year, China government put a lot of regulations for hundreds of products (e.g. PC, cell phones, and cars) in favor of domestic producers. The parliament of China also revised the patent law so that foreign companies are “forced” to pass over their key technologies to the Chinese bureaucrats. The U.S. chamber of commerce had sent a letter to the white house regarding this situation. Getting support from the large companies like Microsoft, Boeing, and Caterpillar, it alerted the U.S. government that China was developing policies to establish her domestic enterprises in expense of U.S. firms. China is trying hard to expunge her bad reputation in making global brands—something that China has not been able to do successfully. After successfully drawing investors into their house, China is now asking for some return. And because of the growth and the optimism toward the economy, Chinese officials start to show some arrogance to the investors coming in.

One method that Chinese companies have been doing in order to get global recognition is by buying or imitating global brands. China government banned global social-networking website such as YouTube and Facebook and promoted similar local websites on YouKu and RenRen to make sure the 400 million internet users in the nation do not give the business out to the foreign websites. Another attempt of taking a major business is the fight against Google. China regulation ‘persuaded’ Google to pull its operation out of the country – giving the local search engine giant, Baidu, a very good opportunity to dominate the web-advertising market. Moreover, China is trying to take a big chunk in the PC market. Lenovo acquired IBM’s PC department in a blockbuster acquirement worth $1.75 Billion. Outside the computer-related industry, as I reported on my previous post, Chinese auto companies are attempting to make their presence known globally. Now that Volvo deal went through, Chinese auto companies have a good chance to keep increasing its auto sales – and their products’ quality – which had been the world’s largest since the year 2009 (surpassing the United States in the category). All industries (the Internet, computer and auto) are the industries in which U.S. companies have been showing their dominations, but now Chinese companies are trying to keep the money flow within their own people and the government has been successfully helping them.

All the aforementioned facts are true and encouraging for Chinese companies’ supporters. But, I think that Chinese companies still need to fix some fundamental issues if they wish to, at least, provide some serious threats to U.S. companies.

First, I think Chinese companies have not been able to create products that are ‘cultural-free’ in order to compete in the global market. One of the key success U.S. companies have had over the years is that their products are not affiliated with any culture, but they sort of created their own culture with their products. This make their products easily used or adapted by consumers around the world. Meanwhile, Chinese culture has 5000 years of history and it is not a secret that Chinese people are so loyal to their culture and language, which, I think, is one of the main obstacles for Chinese companies to create global brands.

Secondly, the education system in China is arguably not as good as the education system in the United States. One of the main complaints from executives in China to the younger workers is that they do not think analytically enough. This phenomenon happens because in school, students in China learn more through theoretical approach rather than practical approach. This is also one of the reasons some companies choose India over China when it comes to manufacturing products that are skill –intensive such as pharmaceuticals. This may also be the reason why Chinese companies are so good in imitating products but not genuinely creating one.

So I think U.S. companies do not have to be too worry, just yet, about their Chinese counterparts, but of course they need to keep their composure in producing great products so they can keep their reputation as the leading global brands maker OR maybe work together with Chinese companies to make the world a better place. Peace.