In China’s ShadowHow Americans Can Respond to Asian CompetitionReed Hundt

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The challenge …

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China: The world’s manufacturer

•Largest exporter of apparel

•In 2006 China will manufacture 400 million mobile handsets (more than 60% increase from 2005)

•China is the Number 1 producer of pork

•Global center of consumer electronics and telecom equipment

•China is producing three times as much as it did 10 years ago; losing manufacturing jobs as it increases manufacturing productivity

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China the technology innovator

•Mobile Internet (China Mobile, Tom Online, Super Girl)

•Online gaming (Netease)

•Comprehensive messaging (Tencent)

•Clicks plus bricks (Ctrip)

•Bridging old media and new media (Hunan Satellite TV)

•3G (TD-SCDMA) (Datang, ZTE, TD Tech, Putian)

•IPTV (UTStarcom, ZTE)

•PC monitor manufacturing (TPV)Source: Morgan Stanley Research

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China the information society

•No. 1 in mobile users

•No. 1 in Internet users under the age of 30 (70% of Chinese Internet users under the age of 30)

•Urban areas have 5x more Internet users than rural areas

•60% of them are the only children of family

•30% of Chinese Internet users have college degrees

Source: CNNIC; World Bank; Morgan Stanley Research

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China the consumer market

Source: CNNIC; Morgan Stanley Research

•Internet users:

•Broadband users:

•Mobile users:

•Mobile services:

•Online gaming:

•Online brand advertising:

111 m

64.3 m

393 m

$963 m

$570 m

$281 m

Size

18%

50%

17%

24%

46%

28%

Annual

growth

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Urban Chinese consumers will grow from 42% of the total

population today to more than 69% by 2025

Source: McKinsey Global Institute

China the urban consumer market

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China the hotbed of firm creation

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Firms out of China will compete like Japan in 80s

But China does not need:

--- to place manufacturing facilities in the United States--or maintain security protection from the United States

--or export into the United States to obtain access to a large market for economies of scale

Chinese firms

--Will obtain economies of scale in China--Compete vigorously in Chinese growth

markets to become strong--And challenge American firms for global

leadership--China is more important as a source of

firm rivalry than worker competition

China: 12 million firms, vs.America: 6 million firms

but 1/10th of 1% are the big winners in each country…they generate a third of national income

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Source: U.S. Census Bureau

Employment size Employment

Employer firms covered in Statistics of U.S. Business

115,061,184

2,500 employees or more

Firms

5,657,774

3,634 43,877,243

Employers (firms with payroll) – 5,541,918

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World Trade: A contact sport

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Every American firm in trade will have one or many competitors from China

The CD from Chinese carmaker Geely

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Advantages for Chinese firms

•High skills

•Low wages

•Favorable currency for export

•Access to savings

•Huge foreign investment

•Vigorous local competition

•Ineffective regulation

•Few barriers to starting firms

•Wide open markets

•No litigation

•Little taxation

•Culture of entrepreneurship

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Source: Duke University “Framing the Engineering Outsourcing Debate”

China produces about 350,000

engineers with a bachelor’s degree per year, while the

United States annually produces

135,000

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Source: Intel

Increasingly competitive: 2.25

million more companies in

China will buy a PC in next two

years

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Source: Morgan Stanley

Average hourly compensation for the

overall Chinese manufacturing sector in 2002 was $0.57 –

compared to U.S. hourly pay rate of

$21.40 that same year

The cost advantage

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China’s state-owned enterprise sector has reduced headcount by over 60 million

workers since 1997, creating an

enormous pool of unemployed workers

that are seeking gainful re-

employment in China’s new

economy Source: Morgan Stanley

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Source: Wall Street Journal

Foreign investment produced nearly 90% of China’s high-tech

exports in 2005

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Back in the USA…

While American firms investing abroad, they are

investing less in their homeland

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If firms don’t invest in America, they may invest in job creation in other

countries

“In the United States, nonresidential fixed investment as a percentage of GDP fell to 11.56% in 2005 from 12.55%

in 2000”

Source: New York Times

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For 50 years, Americans have made 20% of the world’s

goods

While numbering only 5% of the world’s workforce

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As a result, as the world economy grew

Americans created and captured more wealth

Employees make more money only if their firms win in domestic and global competition

You can’t earn a rising income at a falling firm

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The more you makeThe more you take

The 5:20 slice of a bigger pie

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0

5,000

10,000

15,000

20,000

25,000

30,000

1500 1600 1700 1800 1900 2000

China

United States

1990 international dollars

Source: Maddison (2001)

American per capita GDP has soared for nearly 200 years

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Americans did especially well in the 90’s:

Between the beginning of 1995 and the semi-official NBER

business cycle peak in March 2001, U.S. real GDP grew at a pace

of 4.21% per year

Source: Brad DeLong

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Those were golden years

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At the end of the Golden 90’s American growth peaked: from

1998 to 2003 United States provided 98% of global economic

growth

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And so what if the 21st century

belonged to China?

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China’s growth need not be America’s loss …

•Rising tide lifts all boats

•Bigger pie means more can eat at same table

•More money in China means more sales to Chinese

•More competition means more productivity

•More productivity means more wealth

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China came up with many inventions before Europe: Power-driving

spinning, wheelbarrow, stirrup, rigid horse collar, compass, paper,

printing, gunpowder

But “Chinese technology stopped progressing”

(David Landes)

Yet nations can lose for centuries

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Qianlong Emperor, 1793

"We have never valued ingenious articles, nor do we have the slightest need of your country's

manufactures."

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What to do?

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If Americans retain their 20% share of the world’s production China’s

growth makes Americans better off

But if Americans’ share of global product drops fast enough

Americans will earn less even if the global economy grows

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Americans should Aim to keep

keep the 5:20 proportion going

for another 50 years

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The citizens of any country need to work at firms that win in global markets

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Americans will be better off if the firms they work for win in 6 or 7 out

of every 10 global markets

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For American workers to earn more

Americans need American firms to win big in global markets

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Americans want existing American firms to invest overseas, but

they also need new firms to create new jobs and new markets at home

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The big winners have to come from competition …

America needs existing firms to face competitive challenge

America needs open markets in all goods and services

Open to homegrown competition as well as Chinese competition

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“Innovation in Schumpeter’s famous phrase is also

‘creative destruction’. It makes obsolete yesterday’s

capital equipment and capital investment.”

Source: Peter Drucker

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“Long-run growth requires…creative destruction, in which new corporate

giants continually rise up to overthrow old leviathans.”

Source: Fogel, Morck, Yeung

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“Economies with less persistently dominant large businesses grow

faster …This reflects faster productivity growth…the waning of

large old private sector businesses drives the result.”

Source: Fogel, Morck, Yeung

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Americans need to work in global

winners that are about to be born

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In the U.S., 10% of firms are born and 10% die every year

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In the 90s, births > deaths by 1-2% ...

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…and not surprisingly

Before the Golden 90s and the Distraught 00s

The death rate exceeded the birth rate

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A positive birth rate is a measure of healthy entrepreneurship

Where do new firms come from?

Open markets, new markets, new technology

Antitrust, finance, research and development

A new economic strategy for the nation: don’t pick winning firms, do

open new markets

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To increase new firm creation and

success, make the architecture of law open old markets to new

entrants

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Write a 21st century antitrust law

•We need an antitrust law for increasing returns with increasing scale instead of a 19th century law for declining returns to scale

•Reward winners in competition, tolerating high market share,

where there is:- Divided technical leadership,- Epochal (10x) change,- Adjacent market entry

•Where necessary, open closed markets by force of law (share essential facilities among rivals)

•Deregulate retail pricing; don’t regulate quality of service

•Regulate environmental, labor and energy use much more than economic arrangements

Source: Tim Bresnahan

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Best example: Open vertically and horizontally consolidated markets

in energy generation and distribution

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Create many new firms

Just as Americans started a 100,000 new firms in information technology in the 90s, we need to start a 100,000 new firms

in generation and distribution of energy

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People start firms, so help each person be

an entrepreneur:

•Portable pension plans

•Guaranteed health care

•Free college education

•Individual savings accounts

•Wage insurance

•Power to get and send all information and all points of view all the time anywhere

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Make public goods…

…not a safety net, but a trampoline, so that every American bounces as high as

they can from job to job

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Source: The New York Times

Employer-to-employer mobility rates are 40% higher in Silicon Valley than the U.S.

average

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Education: no two are alike

Instead of teaching every child to a common test

Test every child for uncommon talents

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Make the technology choices that encourage start-up’s and entrepreneurship

Open systems

Open software

Limited intellectual property rights

Expanded individual liberty rights

Collaborative production

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China’s growth suggests that the whole world can live the

American Dream

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The future of the American Dream

That every generation willBe better off than the previous

generation

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But even if China did not exist

Americans would be better off with a culture of entrepreneurship

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But because Chinese

competition is coming…there’s not

a moment to lose

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For Americans the future could be lived…

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Or, Americans can live the American Dream forever

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Or let it die like a dream dies at the opening of the

day