Archive for the ‘Les Lothringer’ Category

China: Less Than You Thought

July 30, 2007

By Les Lothringer, ShangHai
Special to Peace and Freedom
July 30, 2006 

The Chinese Administration is now well placed with overwhelming FX reserves to pursue strategic asset purchases globally.  Rather than commit more funds for domestic wealth creation, they will seek to control sources of production and mining, rather than buy outputs.
 
By not investing more in China’s internal domestic growth, personal wealth and consumption here will not keep pace with the overwhelming production capacity that China now has built, courtesy of massive foreign investment and know-how which could have been directed to home country capital growth.
 
As Chinese automobile factory output far exceeds domestic consumption, or the road capacity to soak up that output – and, by the way, the roads in large Chinese cities are already saturated and you save more time, a lot more time by taking the subway – those car factories will send their motor cars offshore for sale to Western buyers.
 
Superficially compelling they are.  Seductive in their bargain basement breaking pricing and ostensibly modern designs, it is an almost irresistible dream come true for families seeking to upgrade to a motorcar they might not otherwise afford.
 
Yet, like so many products here in China, they are the result of the same production psychology where quality and branding are absent in a culture that competes largely on price alone and uses the tools of “down gauging” and copying to lower production costs – and none too well either.
 
Chinese motor cars may look similar to certain Western models but the similarities end when one considers engineering design and the structural integrity of that motorcar, as revealed in crash tests conducted in the West.  Whereas, say, a Japanese family sized Lexus will maintain passenger compartment integrity, similar looking Chinese marques can experience passenger shell collapse, with both front seat and back seat “occupants” suffering catastrophic injuries.  This is true of both sedans and four wheel drivers.
 
Yet, there is another side to this which is the loss of quality standards enforcement by Western states on whatever is shipped to their borders.  The safety advances and standards that evolved over many years are not adequately applied to prevent the import of Chinese cars and motorcycles into Europe and the United States, the UK and Australia.
 
Consider, say, the electric motorcycle which we are seeing more of in the West, in the desire by consumers towards a lower carbon footprint.  Electric motorcycles here may sell for as little as US$130, including a battery that will convey you about 40 miles between charges.  But the quality standard cannot be up to Western expectations, not at that price.  We see electric bikes like this in the West.  Close inspection reveals brake handles with the pivot screw working itself loose, bike frames with lower safe working loads, inferior metallurgy and welds and, overall, a machine with a much shorter “mean time between failure”, an engineer’s way of saying that the machine is going to break down more often and, for a bike, possibly while being ridden.
 
That these products can be imported cannot be entirely the fault of the Chinese and there remains, as always, no substitute to owning and controlling one’s own factories.  The concept of the “virtual factory” or “the virtual brand manager” and contracted outsourcing, as was widely written up in the last ten years or so was always a short-sighted and flawed growth strategy.
 
Les Lothringer – ShangHai
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Tim Johnson covers China for McClatchy Newspapers. On June 26 he wrote a piece on automobile safety for China’s newly minted cars.

“The Brilliance BS6 sedan was hoping to enter the European market this year as a premium-style sedan. But the 40 mph crash test left damage on the automobile that the blogger described as catastrophic.

Most Europeans now won’t be caught, er, dead in one of these vehicles.

Back in 2005, China’s Jiangling Motors tried to market its Landwind SUV in Europe. But sales evaporated after the SUV failed this kind of crash test miserably.

Senate Panel Indicates Readiness to “Squeeze China” Over Currency

July 27, 2007

A country builds its military strength on the back of its economic development.  The West has dealt China a hand with all aces.”

By John E. Carey
Peace and Freedom
July 27, 2007

On the eve of a landmark visit to China by U.S. Treasury Secretary Henry Paulson, the U.S. Senate’s Finance Committee voted 20-1 to force China to raise the value of its currency.

The Bush Administration opposes the legislation.

But that is no matter.

The president is weak, with some of the lowest approval ratings for any president, and the 20-1 committee vote indicates that the Senate may be able to offer currency legislation aimed at China that would survive any presidential veto.

On Tuesday and Wednesday we wrote about Treasury Secretary Henry Paulson’s trip to China next week under the headline, “To The U.S. Treasury Secretary: China Is Your Worst Nightmare, Sir” (see link below).

One would have to conclude that Secretary Paulson’s nightmare just got longer, scarier, and more convoluted.

“It is time to pass legislation that will have a real effect, and this bill will. A vote of 20-to-1 signals veto-proof support and shows the Chinese it is time to start playing by the rules,” said New York Democrat Senator Charles Schumer.

Senate Finance Committee Max Baucus, a Montana Democrat, said that China’s currency has been undervalued for some time, making Chinese goods very affordable in the U.S. while U.S. goods are overpriced and often go unsold in China.

The net impact of China’s undervalued currency is a trade deficit for the U.S. with China of a record $232.5 billion in 2006. That deficit will certainly be larger this year.

According to Reuters, “The bill would repeal current law requiring the Treasury Department to determine every six months whether a foreign country is manipulating its currency for a trade advantage, and replace it with a new semi-annual report identifying countries with ‘fundamentally misaligned currencies.’”

Politically, the Senate committee action on Thursday is a blow to the Bush Administration which has given China opportunities to act on its own before. Presumably, Treasury Secretary Paulson’s trip to China next week was meant to send the message to China that time was running out for it to act on its own.

Now Secretary Paulson will arrive among some of China’s leadership that undoubtedly will be insulted by Thursday’s Senate committee action.

A Treasury Department insider that asked not to be identified said to Peace and Freedom, “Why don’t they just make Treasury Secretary Paulson walk the plank? Why don’t they just shoot him? He is prepared, well prepared, for some rather tricky diplomatic activity, and now the U.S. Senate annoys the Chinese on the eve of the trip? Incredible. I don’t even know why we are going any more.”

Secretary Paulson may now be put in the position of smoothing ruffled Chinese feathers. China will believe it is being forced to raise the value of its currency by the U.S. Congress.

China would much prefer to be asked by America’s Chief Executive or act on its own.

A consultant in China told us, “The Chinese are very proud. It was not necessary to make a scene in order to achieve the U.S. goal. Now there is potentially bad blood between the two nations without reason.”

I asked my friend Les Lothringer in ShangHai to commment on the situation. Les is a veteran business consultant with over 30 years of commercial experience. He is president of West/Asia Strategy.

Les said, “Regrettably the US has been losing manufacturing capability for some two decades now, driven by short term policies. The danger is just not a misaligned currency but the loss of industrial capabilities, to the advantage of non-democratic regimes, among others. You might say that the West is indulging in riotous living.”

He ended with, “Any country that has no control over its manufacturing is under the control of any other country that supplies its essentials.  A country builds its military strength on the back of its economic development.  The West has dealt China a hand with all aces.

Again we wish all the best to Secretary of the U.S. Treasury Paulson on his mission to China.

Related:
To The U.S. Treasury Secretary: China Is Your Worst Nightmare, Sir

China: No More Mister Nice Guy