Accenture Academy Blog

The last two years the trade imbalance between the United States and China has been measured in hundreds of billions of dollars. When I started business almost 50 years ago the total amount of trade between the United States and China was zero. It was prohibited to buy products made in China.

It's difficult to buy any consumer-based product that isn't made in China. China is now the third largest economy poised to overtake Japan as the second largest economy in the next few years. It is the world’s workshop; the manufacturer of most goods with the possible exception of avionics and automotive. The World Bank estimates that the number of mid-level consumers in China will approach 700 million by 2015. In all aspects, China is an economy to be reckoned with.

In the early ‘70s, my first international assignment was to open up a far Eastern buying office for a conglomeration of U.S. TV manufacturers—RCA, Motorola, Zenith, GE, and Sylvania. We opened the office in a low-cost country and a low-cost city—Tokyo. We started developing a local supplier, Panasonic. Panasonic exceeded our expectations—expanding from labor-intensive piecework to subassemblies, then major assemblies, and finally private branding finished products. To our dismay, Panasonic entered the market as a competitor. The rest was history.

While the average consumer certainly benefitted from the Japanese dominance of consumer electronic, it falls on deaf ears if you happen to be one of our workers in the Carolinas or upstate New York who lost their jobs.

Forty years later it is déjà vu all over again. This time it is with China. Not too long ago Wal*Marts accounted for over 20 percent of all shipments from China to the United States. The cost consciousness of Wal*Mart shoppers for inexpensive shoes, T-shirts, appliances shifted those products from U.S.-based manufacture to China. Yes, indeed, Wal*Mart shoppers saved money. That transfer of wealth to China has created a tremendous imbalance of trade with the U.S. China ended up with over $300 billion to invest as they saw fit.

What were those investments? First, they were in US securities and treasuries; second, in developing their domestic infrastructure; and, third, in developing their competitive industries. All manufacturers who wish to open manufacturing facilities in China must present to the Chinese government all intellectual properties and manufacturing processes. What did we think China would do with these intellectual assets? The answer is clear; they develop competitive industries that allow them to now be the workshop of the world.

We, in the United States, are advocates of free trade. Recently, the U.S. invested over $2 billion in wind power technology that created over 200 jobs in the United States, but over 2,000 jobs in China—over 80 percent of the investment went to Chinese companies. China, however, has instituted policy procedures that all investments from the government, especially defense industry and infrastructure, must be purchased from Chinese companies. Does this sound fair to you?

Yes, the Wal*Mart shoppers took advantage of inexpensive short-term buying decisions at the expense of long-term economic stability. Are we, the professional commercial industrial shoppers, also short-sighted? Have we taken advantage of inexpensive short-term buying decisions at the expense of long-term economic sustainability?

Is it now time to use a total cost of ownership computation that includes the quantification of associated risks of losing our industrial manufacturing base for short-term advantage? Lately, many chief procurement officers (when they discover the real cost of the initial decision and the decreasing cost advantage of ongoing operations) wish they had the option to reverse their original decision to go offshore.

I am not advocating a return to protectionism. I am advocating a return to reality. We must include in our total cost of ownership analyses the quantification of all decision factors including the real total cost of moving product off a domestic industrial base to a global base to create a realistic economic commerce in the global environment.

Otherwise, I would recommend you start training your employees and children so they will be able to say in perfect Mandarin, “…would you like fries with that burger?”

 

Comments:
  1. You Present a Dilemma
    By Anonymous on Wednesday, March 31, 2010 at 9:47 AM
    This is a tough one ... I agree with quantifying the risks you talk about, but in the meantime if your competitors are opting for the short term, low cost approach, it becomes increasingly difficult to stay competetive and perhaps even survive. You are right that everyone complains about moving manufacturing jobs out of the US, but most consumers aren't willing or able to pay the high costs for it being "Made in the USA". And most corporate leadership will default to doing what it takes to make the numbers in the short term .... there's certainly no easy way out of this mess.
  2. Be better at it, than doing TCoO
    By Anonymous on Wednesday, June 16, 2010 at 1:21 AM
    Chinese can do it cheaper, beacause they have cheap labor and lax rules. Will that go away in short term- Probably not till 2050 when China becomes the biggest GDP (as people are predicting) and standard of living will give up and people will find a new China (in Vietnam, etc). So the question is how do companies capitalize on overall quality output, lean etc to deliver true cheaper products, while government continuing to push China on Yuan pegging, etc. There is no good answer, but people have to start finding the solution the American ("innovative") way
  3. China May be Losing the Tag of "Cheap Labor"
    By Jack Barry Jack Barry on Friday, August 6, 2010 at 4:53 PM
    In 1972 I started a buying office in a low cost city and country -- Tokyo. The recent articles regarding labor unrest in China may be the primary cause to accelerate China eventual loss of low cost country status before 2050. In the meantime, the two comments above address two key challenges: how do we properly include the real and future costs of doing business in China against the unrealistic comparions based solely on purchase price; and, more importantly, drive our competitive advantage with innovative technology. The US should be "selling" both its quality image and innovative products to China -- creating demand in the eventually largest consumer marketplace.