Look Before You Leap

The reality of an increasingly flat global market becomes more apparent with nearly every conversation we have about industrial automation and its associated digital networks. Some of that discussion almost invariably comes to include China. It’s lately been about our great concern about the quality and even safety of Chinese imports of all types. Behind that has been a smoldering concern about counterfeit automation parts finding their way into North American and European process control and machine control systems.

But, if your business reality is that you compete with or in that marketplace, you’d better be paying careful attention. China moves with exceptional quickness, and it’s not all troubling headline news.

As part of my assignment  to report on a few Automation Fair 2007 events for the electronic show daily we produce, I covered a speech by Cliff Waldman, global economist for the Manufacturers Alliance/MAPI, a business research group based in Arlington, Va. He offered his take on China’s economic prospects with a short-term outlook and current issues, and then took a speculative look at the country’s longer-term dynamic.

His analysis: the high-reward, high-risk scenario remains firmly in place for American companies making business decisions about their level of engagement in China.

Waldman said the impact of increasing wages in China, as a result of rising education levels and continued migration of younger workers to the more developed regions of the country, means that the original, sometimes obsessive, attraction of foreign investment to the country’s cheap labor is officially over. “Wage acceleration is a big part of a broader trend that suggests that China will no longer be the low-cost competitor in Asia,” he stated.

Waldman frets about an investment bubble in China that’s unlikely to sustain itself, given a clearly noticeable reduction in new construction. Waldman said spending on the 2009 Olympic Games actually is masking weaknesses in overall investment, and that Chinese consumers play a larger role in the economic engine than most analysts previously thought.

But, he said, “Declining savings rates and labor supply likely will have a negative impact on capital flows and foreign direct investment.”

Waldman pointed out that China’s continuing large trade surplus has much more of an impact on economic growth in the rest of Asia than it does in threatening North American and European manufacturers, although, he clearly showed that there’s real growth in the export of machinery and transport equipment to those regions from China.

With that surplus clearly tied to currency valuations, Waldman said that fair value in exchange rates has a long way to go yet. But he believes that, “Asia finally is participating in appropriate movement towards a more stable currency environment.”

For American companies, Waldman said opportunities are greatest in environmental technology development and implementation, and in medical technology development to support what is becoming a fast-aging society. “China might actually grow old before it grows rich,” speculated Waldman.

The other opportunities he noted for American companies included investment in R&D on sophisticated infrastructure such as computers and energy as China’s middle class and consumer base continue to grow.
But there are those risks, cautioned Waldman. Those environmental and health issues involve an aging society and, I inferred from Waldman’s remarks, a governmental structure that might resist those changes. Costs are rising everywhere, and intellectual property concerns are still very real. “China has the appropriate laws to control the intellectual property problem,” said Waldman. “Enforcement is quite something else.”

Finally Waldman reminded the audience that with the type of rapid societal change that defines China today, the risk and concerns about social and political issues are not to be taken lightly.

“The Chinese consumer has the potential to be a major force in the global economy,” concluded Waldman. “But the full potential of the household sector will not be realized until China rebalances away from excessive investment growth, which will occur during a period of slower economic growth. Thus, China’s long-term economic growth potential likely will slow.”