Busting the Beijing myth – It’s China after all!

William Fung, Li & Fung’s managing director of Li & Fung Ltd., a century-old Hong Kong–based sourcing company which manages a 40-economy sourcing network, calls his company’s recent record “flat-world success”. Excerpts from his interview –

“The existing measurements of trade are very much antiquated. When the president of the United States says, “We’re running a trade deficit with China,” he’s working off an erroneous base for measurement. The way we determine a product’s country of origin is based on something called “major transformation,” rather than value-added processes. If the major transformation is final assembly, and that occurs in China, the product will be said to be made in China and exported back to the U.S. — even if most of the value of that product is actually manufactured in the United States. In other words, under that system of measurement, the country that gets credit for making the item may not be the one that gets the majority of the economic benefits.

For example, look at a laptop today. Chances are that the monitor is made in Taiwan, the memory is from some plant in Penang, the assembly might be in China, but “Intel Inside” is the most expensive component. Because it’s assembled in China, they slap “Made in China” on it, and it becomes part of the U.S. trade deficit with China.”

I’ve often wondered why Chinese consumers make do with quality that sucks. The fact if one were to believe Mr.Fung goes like this.

“In China, there has always been a dichotomy between the industry that supplies the domestic markets and the industry that supplies exports, world-class products. If you were setting up a world-class factory in China, for example, you could set it up tax-free, but you couldn’t do so if it were for domestic products. Also, the export sector has been whipped into shape by companies like ours and customers around the world who demand compliance with rules or standards involving technology, speed of response, quality, health and safety, the environment, and other issues. The domestic side is not faced with the same compliance issues. So the hundreds of thousands of factories supplying the domestic market are generally of lower quality…. The big thing in China that will provide its next growth is to satisfy the local consumer by merging these two sectors…. Chinese consumers are like any other consumers; they just want the best product their money can buy, whether it’s from India or China or anyplace else.”

On its artificially depreciated currency –

“Everyone thinks China is such a juggernaut, but it has a serious weakness, one that reminds me of Japan in the 1970s and ’80s: a lot of production capacity, but no raw materials. China has some cotton but is still importing a lot from Pakistan and the United States. It has almost no wood. All the metals are imported. The only energy source China has in abundance is coal, which is highly polluting. China is very vulnerable, because it is subject to worldwide fluctuations in the prices of raw materials.”

“When the RMB [renminbi] appreciated [in 2005–07], China fell into a fairly uncompetitive situation. Now, China believes that it can be competitive if its industrial base, especially for exported goods, moves away from the high-cost coastal regions and into the interior. Until that happens, China is unlikely to let the renminbi appreciate, because doing so would put the country in a position of being vulnerable to changes in materials prices.”

Well, it may not be the complete picture. I can think of Chinese military might that’s quite formidable. No country would settle for cheap ammo for its armed forces. So it’s not all bad quality after all. But Mr. Fung’s contention seems plausible. I whisper “Trust, but verify”. It’s China, after all…!!!

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