Phil Biggs covers the automotive industry for NewsTalk 1340 WJRW
May 6, 2013 – 10:30 am ET
GRAND RAPIDS, MI – Last decade scores of Michigan manufacturers traveled the road to China in hopes of economic opportunity. Some companies were successful if not lucky, others are still trying to find a business model that works in this country of many and complex regional markets. This business pilgrimage has resulted in massive investment, systemic growth, and enormous structural change across nearly all Chinese provinces.
Thanks to years of knowledge-sharing from the world’s technology leaders in the U.S. and Germany, China manufacturing is becoming more tech-enabled, and more sophisticated. A strong course of landed investment coming from all major industrial countries has raised the standard of living across most of China. Slowly but surely, average Chinese families are becoming wealthier and adopting an urban lifestyle. Jamie Kramer of JP Morgan Chase told Forbes last week “China in 20 years has gone from around 20% urban to 50% urban and in another decade it will be 75% urban. Well, that is like moving the entire population of the 30 most populous U.S. states into cities around the country. (So there will likely be) slower growth. But our thinking is that 7.5% growth is a good thing for China.”
Kramer explains, “China’s economic recovery post-2009 is more tortoise than hare, and there is a Henry Ford model taking shape in China these days. The government and industry – often run by the government anyway – want to make sure that people making the cars can buy the cars; that people building the houses can afford to live in one.”
According to Gordon Orr, a director in McKinsey’s Shanghai office, “China’s economy is starting its historic shift to a more consumption and service-driven model that should help sustain the country’s growth, albeit at a slower rate, over the next decade and beyond.” Orr maintains that China’s massive economic growth has caused patterns of consumption to change as its people realize greater wealth.
Everything from consumer goods to food to energy prices now face shortages and the threat of inflation, as China’s ruling cabinet tries to strike a balance between supply and demand in the precarious space where state-run industries meet free markets. In the first five decades of the People’s Republic of China, environmental issues such as water quality, land degradation, and pollution control plagued this primarily agrarian country. However, over the past decade, as commercial growth has reached a fever pace, these issues along with spiking energy requirements have now become major economic and cultural concerns. The transformation to urbanization is expected to cause significant land, food and energy shortages.
These shortages in turn could result in unrest and dissatisfaction, at a time when China shifts from growth at all costs (10% GDP growth in 2010) to a slower more managed rate of 7.4% today. And with retail growth slowing from a 14% rate to a range of 11% to 12%, that’s a fantastic economic performance in any world market…other than China. Orr says we could see China’s growing middle class face a dramatic number of bankruptcies as interest rates rise and inflation spikes. The result would likely cause a downturn in house prices – just as mortgage payments rise.
Neither China’s meteoric progress nor current slowdown can be taken lightly. The economic and socio-political issues created by the decisions they make now are generating uncertainty as they affect global markets. The complexity worsens because we have no idea how China’s leadership will behave as they migrate between the push of state-run industries and the pull of free markets.
This churning dichotomy of conflicting ideology makes predicting the future of China a pipe dream. It’s nearly impossible to see what’s ahead. Will privatization ever truly come…or will manufacturers and business entrepreneurs from outside the country be unable to build plants or launch new operations without a Chinese partner owning half the enterprise? Will the Chinese raise tough regulatory, safety, and environmental standards and enforce them on a par with those of us in Western countries? What will be the government response if a slowdown results in shortages and any resultant unrest is chronicled on You Tube? How will China’s monetary policies and the wider acceptance of the Chinese renminbi currency transform global financial markets in the coming years?
Given the evolving interdependence between China and most of the rest of the world, we must pay attention to their socio-political patterns and the impact of their economic policies. How fast will they continue to grow their markets? It may depend on whether they heed the words of the Chinese proverb, “Be not afraid of growing slowly, be afraid only of standing still.”
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